-----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, D2C/yudu7ciX80jqiG/vXj8Icf0/yYXT6DJIXYjAP3iQ3LRJW9le0U3TRZu4D2Lq cfRbYOw1BPhUTgg+JyUO+g== 0000950123-98-003182.txt : 19980401 0000950123-98-003182.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950123-98-003182 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COHERENT COMMUNICATIONS SYSTEMS CORP CENTRAL INDEX KEY: 0000921147 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 112162982 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24308 FILM NUMBER: 98581511 BUSINESS ADDRESS: STREET 1: 44084 RIVERSIDE PRKWY STREET 2: LANDSDOWNE BUSINESS CENTER CITY: LEESBURG STATE: VA ZIP: 22075 BUSINESS PHONE: 7037296400 MAIL ADDRESS: STREET 1: 60 COMMERCE DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 COHERENT COMMUNICATIONS SYSTEMS CORP. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION NUMBER 0-24303 COHERENT COMMUNICATIONS SYSTEMS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 11-2162982 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
45085 UNIVERSITY DRIVE ASHBURN, VIRGINIA 20147-2745 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (703) 729-6400 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- NONE NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE 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. [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the registrant as of March 20, 1998, was approximately $425,020,623 based on the sale price of the Common Stock on March 20, 1998, of $45.31 as reported by the NASDAQ National Market System. As of March 20, 1998, the registrant had outstanding 15,542,444 shares of its Common Stock, par value $.01 per share. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ 2 COHERENT COMMUNICATIONS SYSTEMS CORPORATION INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
ITEM PAGE NO. NO. - ---- ---- PART I 1 Business.................................................... 2 2 Properties.................................................. 9 3 Legal Proceedings........................................... 10 4 Submission of Matters to a Vote of Security Holders......... 10 PART II 5 Market for Registrant's Common Equity and Related 10 Stockholder Matters......................................... 6 Selected Financial Data..................................... 11 7 Management's Discussion and Analysis of Financial Condition 11 and Results of Operations................................... 7A Quantitative and Qualitative Disclosures About Market 13 Risk........................................................ 8 Financial Statements and Supplementary Data................. 13 9 Changes in and Disagreements With Accountants on Accounting 26 and Financial Disclosure.................................... PART III 10 Directors and Executive Officers of the Registrant.......... 26 11 Executive Compensation...................................... 28 12 Security Ownership of Certain Beneficial Owners and 30 Management.................................................. 13 Certain Relationships and Related Transactions.............. 31 PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 32 8-K.........................................................
1 3 COHERENT COMMUNICATIONS SYSTEMS CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 ITEM 1. BUSINESS Coherent Communications Systems Corporation, a Delaware corporation ("Coherent" or "the Company"), develops, manufactures and markets voice quality enhancement products for wireless (including digital cellular and personal communication systems ("PCS")), satellite-based, cable communication systems, and wireline telecommunications systems throughout the world. The Company's products utilize proprietary, high-speed, reduced instruction set ("RISC") microprocessor coupled with proprietary software to enhance the quality of voice communications during a telephone call. The Company's products are compatible with domestic and foreign telecommunications systems. On February 16, 1998, the Company announced a merger agreement, under which the Company will become a subsidiary of Tellabs, Inc.("Tellabs"). Under the terms of this Agreement, all outstanding shares of the Company stock will be exchanged at the ratio of .72 share of Tellabs common stock for each share of Coherent common stock. Based on the closing price of Tellabs common stock on February 13, 1998, the transaction is valued at approximately $670 million. The transaction is expected to be accounted for as a pooling of interests and to qualify as a tax-free reorganization. This transaction is subject to various conditions and approval by appropriate government agencies and the Company's stockholders. The Company's Board of Directors unanimously approved the transaction and recommended its approval by stockholders. Safeguard Scientifics, Inc. ("Safeguard") the Company's largest stockholder, has agreed to vote in favor of the transaction. Prior to the closing of the merger, the Company has agreed to certain restrictions including limitations on capital expenditures and dividends, among others. Coherent Communications Systems Corporation is a worldwide leader in state-of-the-art voice enhancement technology, spanning transmission products and conference products. These products are sold to customers worldwide either under the Coherent label, under private label for Other Equipment Manufacturer (OEM) partners, or integrated into OEMs transmission equipment for wireless and wireline infrastructure. The Company's transmission products include echo cancellation platforms and associated network software including standalone echo cancellers and integrated echo cancellers. These products enhance voice quality in several ways including eliminating electrical and acoustic echoes inherent in telecommunications systems. The technological advances incorporated into telecommunications systems, such as wireless and digital transmission technology, speech compression, fiber optic transmission lines and, satellite links, make echo canceller products an essential component of most digital telecommunications network. The Company's transmission products are designed to support a variety of speech enhancement functions in addition to echo cancellation. Sculptured Sound(R) is designed to automatically optimize speech levels in a variety of local, long distance and cellular networks. Enhanced Audio Plus(TM), Netreach(R) and other software products may be incorporated into new transmission products or marketed to existing transmission product customers of the Company that desire enhanced audio quality and functionality. The Company sells its transmission products to network operators and other end-users through its direct sales force and third-party distributors, and also to other telecommunications equipment manufacturers through its direct sales force. The Company's products are used globally by major wireless and wireline telecommunications companies and network operators, including AT&T Wireless, British Telecom, Cable & Wireless, Cellular One, Cisco Systems, Deutsche Telekom, France Telecom, Motorola, Nokia, NORTEL, Telia Mobitel, and Telefonos de Mexico, among others. The Company's conference products include equipment and related software used in teleconferencing and in videoconferencing applications, such as distance learning and business television. These products include the Consortium(R) 3.0 Conferencing System(TM), ConferenceMaster(R) and Voicecrafter(TM) lines of audio systems. ConferenceMaster provides group teleconferencing facilities for meeting rooms, and Voicecrafter provides full-duplex, high quality audio for videoconference systems. The Company utilizes an indirect distribution strategy in marketing conference products to end users through a network of more than 100 2 4 independent dealers and distributors throughout the world. The Company also directly markets conference products to OEMs and systems integrators, such as Intel, Lucent Technologies, AT&T, British Telecom, CBCI Telecom and others. Coherent is a fully accredited ISO 9001 company, dedicated to maintaining the highest quality standards at every level. The Company's headquarters are in Ashburn, Virginia, USA. STRATEGY The Company's objective is to be a leading provider of software configurable products that improve the voice quality and efficiency of telecommunications systems throughout the world. The Company's strategy for achieving this goal includes the following: Expanding Alliances with Telecommunications Network Operators and OEMs. In the course of developing and marketing its echo canceller and conference products, the Company has established strategic relationships with major telecommunications network operators, large OEMs, and telecommunications equipment distributors. The Company intends to continue developing these relationships to identify additional product and market opportunities using its proprietary technology. The Company believes that the numerous strategic alliances that it enjoys with OEMs and network operators will further support its growth in all of its marketplaces and provide a basis for expansion into new markets. For example, OEM relationships has led to inclusion of the Company's products and technology in large telecommunication systems project bids that the Company might not have been able to bid upon independently. The Company has entered into supply agreements with certain OEMs for customized products. Supporting Wireless Telecommunication Systems. Speech compression performed in digital wireless networks delays speech to such degree that echo cancellation equipment is required on all calls, both local and long distance. As wireless telecommunications systems expand and convert to digital wireless systems and as PCS and low earth orbit satellite systems are implemented, greater delays are introduced. The Company intends to continue introducing software products aimed at correcting echo problems inherent to these new technologies. An example of the Company's efforts in this area is the 1995 introduction of Enhanced Audio Plus(TM) software, designed specifically for speech enhancement by controlling noise, gain and echo in digital wireless telephone systems. The EC Duo(TM) Bi-directional Echo Canceller, along with the family of software options, was introduced in early 1997. The Company intends to continue focusing on providing leading-edge wireless solutions to the exploding wireless industry worldwide. Introducing New Products and Value Added Product Offerings. The Company continues its product strategy to introduce new product platforms every three to five years and to develop new software products that run on these echo canceller platforms and conference products. Throughout the years, the Company successfully launched new products as well as performance and feature enhancements for its existing product platforms. For example, a second generation EC6000 digital echo canceller and a series of software products including Enhanced Audio Plus(TM), Sculptured Sound(R) and Netreach(TM) were introduced in 1995 and 1996. In 1997, the Company focused its development, sales, and marketing efforts on the voice enhancement requirement of digital wireless carriers. EC Duo, introduced to the market in the first quarter of 1997, was the industry's first bi-directional echo canceller. This product, built on the successful experience of the EC-6000 platform, economically addresses both traditional echoes from the PSTN as well as acoustic echo coming from the mobile side, all on one board. Also in the first quarter of 1997, the Company launched the industry's first echo canceller network management product, c/mor(TM). This product launch was the result of a significant development effort within the Company and enables a network operator to both control and manage the echo canceller element and also have access to valuable network performance data to ensure optimum performance. The Company believes that c/mor(TM) can result in cost reduction of network maintenance personnel. Expanding Sales Presence in Worldwide Markets. In 1996 and 1997, the Company added sales personnel throughout its sales regions and opened additional sales offices to serve growing markets in China, India, Eastern Europe, Singapore and Japan. In 1997, sales from Europe, North America, Asia and Latin America were 47%, 27%, 18% and 8% of total sales, respectively. Recent concerns over business conditions in 3 5 the Asia Pacific region have not affected the Company in that Asian sales are derived mainly from Australia, Japan and China. Pursuing Acquisitions in Related Telecommunication Products and Technology that Accrete to Earnings. In October 1995, the Company purchased the technology, and related assets for the Consortium(R) Conference Bridge(TM) and teleconferencing product line. Consortium is a modestly priced, user friendly teleconferencing bridge targeted to the corporate customer and other organizations that require multiparty teleconferencing for 24 - 96 participants. In August 1997, the Company introduced the Consortium 3.0 Conferencing System(TM) that includes numerous architectural and feature upgrades. MARKETS The Company expects that its transmission product sales will increase in five main markets: digital wireless telephony, long distance telephony, network management, speech enhancement, and coaxial cable communications. The Company believes that a majority of digital wireless networks, including networks utilizing present technology and the developing PCS and low earth orbit systems technologies, will need to employ echo cancellers due to their use of digital speech compression, which causes delay and resultant echo. Potential customers requiring echo cancellers in these five markets include all telephone operating companies and are not limited to the cellular or long distance operators to whom the Company currently sells its transmission products. It is difficult to forecast demand for the speech enhancement and network management markets because these markets are new and no historical information is available. However, independent forecasts estimate an increase in the total number of digital wireless subscribers to grow from one million in 1993, to 100 million in the year 2000. Even in the face of declining transmission product prices due to technological advances, the Company believes it may experience significant sales growth if the size of the digital cellular telephony market alone grows as projected. The market for conference products and services has grown significantly in the past three years due to changing business practices that increasingly require accurate and timely exchange of information by individuals and groups often separated by significant distances. The Company's products are used to provide the audio portion of a videoconferencing system. The key components of the Company's conference products consist of telephone conference bridge equipment, acoustic echo cancellation and noise cancellation equipment, microphones, loudspeakers, an amplifier and dialing/signaling equipment. The Company's conference products eliminate echo electronically and allow participants to engage in natural conversation. PRODUCTS The Company offers a broad range of echo canceller products to satisfy the needs of public and private telecommunications networks, satellite networks, digital wireless for digital wireless networks and a whole family of networks, international gateway switches and terrestrial networks. The Company's principal products are its EC-6000/7000 Series II Digital Echo Canceller, its EC-6000 in both T-1 and E-1 formats, its EC-7000 in E-1 format, and its related software products. The EC6000/7000 Series II Digital Echo Canceller provides the most advanced level of echo control available for both wireline telephony and wireless digital cellular applications in compliance with relevant ITU-T recommendations. The EC-6000 is designed to provide echo canceller capabilities in a variety of digital formats. The EC-6000 T-1 is designed for use in telecommunications systems using the United States T-1 carrier line standard. The EC-6000 E-1 is designed for use in telecommunications systems using the international CEPT carrier line standard prevalent outside the United States. The EC-6000 Dual Di-Group Digital Echo Canceller is a compact and low cost echo canceller designed to support one or two T-1 or CEPT lines for remote and private earth station applications. The EC-7000 is specifically designed for echo cancellation in digital transmissions using the international CEPT standard, including modifications to the CEPT standard proposed by the European Telecommunications Standard Institute, and is sized for a particular European cabinet configuration. The EC-6000 and EC-7000 utilize the Company's proprietary echo cancellation software and proprietary high-speed RISC microprocessors. These products contain substantial speech processing power, of up to 132 million instructions per second ("MIPs") per line, compared to the less than 20 MIPs processing power 4 6 of competitors' that do not use RISC technology. As a result of this processing power and speed, the Company believes that its echo canceller products are able to react more quickly and comprehensively to network system echo problems than those of competitors', and are more suited as a platform for additional software speech enhancement products. NetReach(TM) far end echo cancellation software overcomes the limitations of conventional echo cancellers, in that a single international service provider can provide echo cancellation for both ends of the connection from a single location. By allowing the local network operator to control both the local and far-end call in this way, the entire process can be monitored and the incoming call can be adjusted to ensure optimum quality. Enhanced Audio Plus(TM) voice enhancement software eliminates the complex combination of echo experienced on hands-free mobile applications on GSM and digital wireless networks. The software, which integrates with the EC-6000/7000 digital echo canceller platforms, effectively reduces or eliminates audible echo, swirl, or other voice processing artificats. The Company believes that Enhanced Audio Plus is the only available product that truly cancels acoustic echo in the wireless network. c/mor(TM) network management software capitalizes on the EC-6000/7000 Series II Echo Canceller's central location within a network, acting as the access point for essential network monitoring information. It provides a single data access point for essential network performance traffic monitoring information. With c/mor(TM), the user has complete control of the digital echo canceller, including configuration per channel or di-group and alarm configuration and reporting. c/mor(TM) has a simple, user-friendly graphical user interface that allow both local and remote control and monitoring of echo canceller functions. The interface is Windows-based, thereby permitting it to be used on the same workstation as other Windows-based network management programs. Sculptured Sound(R) is a voice and data enhancement software installed in the EC-6000/7000 echo canceller platform to provide an effective, non-obtrusive means of improving quality of a call caused by varying speech levels. It automatically optimizes active speech levels. Speech levels in both the international telephone network and digital wireless networks vary considerably and extreme variations can cause degradation in call quality. This software reacts intelligently to varying speech levels, adjusting the appropriate parameters in real time to an optimal operating level. Netwise(R) is ISDN signaling software that removes the need for dedicated voice circuits on ISDN. It is available for both CEPT and T1 lines. Consortium(TM) Conference Bridge is an automated teleconferencing bridge for multipoint meetings. The Consortium can link from 2 to 96 meeting participants, calling in from anywhere in the world, on the same audio conference. The Consortium delivers excellent audio quality, echo cancellation and call progress monitoring on every port ensuring that free-flowing speech is maintained in all directions for truly natural conversation and efficient interaction. Voicecrafter(TM) 3000 Echo Canceller provides audio for integrated conferencing solutions. This product is designed for use with roll-about videoconferencing systems, permanent conferencing installations, plus PC-based video and audiographics products. Voicecrafter uses Coherent's echo cancellation technology . ConferenceMaster(R) Audioconferencing System is designed for use in offices and conference rooms while ConferenceMaster(R) is a desktop speakerphone that enables interactive conversations where each side of the conversation is heard by all meeting participants without echo or clipping of words. ConferenceMaster(R) is engineered with Coherent's patented acoustic echo cancellation technology. DISTRIBUTION AND MARKETING The Company has established a global sales and distribution network for its products based upon projected worldwide growth of the global telecommunications market. Key employees of the Company are assigned to, or located in these regions and are familiar with the requirements for transacting business in the various local markets. In addition, key alliances have been formed around the world with other companies and 5 7 individuals that have broad technological expertise and significant distribution capabilities to supplement our direct sales force. The Company's sales staff of 37 employees, as of March 20, 1998, markets its transmission products directly to telecommunications network operators, telecommunications equipment manufacturers and distributors. The Company also indirectly markets echo canceller products to network operators and other end-users through distributors who receives marketing and technical support from the Company's direct sales staff. The Company's distributors are generally responsible for sales to telephone companies in specific countries. The Company does not usually grant distributors the exclusive right to distribute selected echo canceller products in their respective territories. The Company believes that there are opportunities to integrate its technology in OEM products. The Company entered into product development and sales agreements with Nokia Telecommunications Oy, of Finland ("Nokia"), pursuant to which the Company has custom designed echo canceller products that are incorporated into Nokia's telecommunications switches. The agreement continues through 1999. The Company also entered into a five-year renewable supply and license agreement with NEC Australia in 1994 and in 1992, a ten-year supply and licensing agreement with TRT Telecommunications Radioelectriques et Telephoniques ("TRT"), a French affiliate of Lucent. Under these agreements, the Company granted a license of its echo canceller designs and agreed to supply key components for both companies to manufacture and market their own echo canceller products in Australia for NEC Australia and in France, Switzerland, Scandinavia and French-speaking Africa for TRT. In January 1997, Coherent entered into a partnership with EastCom Communications Company Limited ("EastCom") to manufacture under license Coherent's EC-6000 digital echo cancellers in China. Likewise, the Company plans to grow its teleconferencing business by partnering with strategic OEMs. For example, in 1997, the Company and Lucent Technologies jointly announced the launch of the Lucent Conference Server, a fully automated audio conferencing platform that allows businesses to schedule conferences with up to 96 participants. PRODUCT DEVELOPMENT During the last three fiscal years, the Company's total annual product development expenditures amounted to $4.6 million in 1995, $6.2 million in 1996 and $9.8 million in 1997. This increased spending reflects the Company's commitment to new product development and, in particular, the Company's focus on the development of new software products running on the echo canceller platforms and new conference products. The Company's transmission products currently use several enhancement technologies designed to improve the intelligibility of speech and lower background noise during a telephone call. The Company intends to employ technologies such as advanced echo cancellation algorithms and noise cancellation to develop dedicated speech enhancement products that will provide noticeable improvements in speech quality in both the wireline and wireless networks. This improvement is possible without requiring major upgrades to switches, telephone instruments, or transmission lines by use of the Company's existing echo canceller equipment as a platform. This provides the Company with an immediate installed base of products. The Company has considerable expertise in both the hybrid and acoustic echo canceller technology area, which gives it a very unique position in the market. Likewise by employing ASIA (Application Specific Integrated Circuit) technology, the Company is well positioned to develop low power, compact high performance return to solutions. COMPETITION Both the echo canceller and conference product markets are intensely competitive and are characterized by rapid rates of technological change, product obsolescence, price competition and product features. The Company experiences competition from a number of domestic and foreign companies, some of whom have substantially greater financial, manufacturing and marketing resources than the Company and offer a more 6 8 complete product line of telecommunications equipment than that offered by the Company. The Company believes, however, that its focus on developing products with superior echo cancellation and advanced noise cancellation technology and related software products, and its alliances with other participants in the telecommunications industry, will enable it to compete effectively in its markets, combined with market agility. In the conference product market, indirect competition also comes from telecommunications equipment manufacturers that integrate internally developed audio products in place of components previously sold to them by the Company. Given the competitive nature of the conference product market and constant new product introductions, no assurance can be given that the Company will be able to maintain a competitive price advantage over its competitors for any given product for any certain period of time. Intense competition within the conference product market has given rise to rapid rates of technological change, short product life cycles, product obsolescence, and price competition, and such competition is expected to intensify as product prices decline further. TELECOMMUNICATION STANDARDS Echo cancellers are critical components in a telecom carrier's high-revenue long distance circuits, and the quality of their performance is critical to customer satisfaction. International standards have been developed to ensure that these products provide a certified level of performance and that they do not interact in an adverse manner with other network equipment. The International Telecommunication Union, a division of the United Nations based in Geneva, Switzerland, is responsible for developing these global standards. In 1994, Coherent joined the ITU, and is now an active member of this organization. In 1996, with the Company's encouragement and participation, the ITU released a new echo canceller standard that raises the quality level requirements for canceller equipment. Coherent's membership in the ITU will help ensure not only that its products are fully compliant with evolving standards, but also that new standards will require rising standards and telecommunications technology like those delivered by the Company. MANUFACTURING AND OPERATING CAPABILITIES The Company purchases components for its products from a number of suppliers and is not materially dependent on any single supplier. Company designed proprietary RISC microprocessors are manufactured on behalf of the Company by two sources, one of which maintains a 90-day supply of such microprocessors in inventory for the Company. The Company incorporates its software into the RISC microchips and DSPs, assembles and tests its products at the Company's manufacturing facility in Hauppauge, New York before shipment to its customers. During 1996, the Company invested in several capital improvements to its manufacturing product testing process that significantly reduced manufacturing time. The Company's in-house manufacturing capability allows the Company to adjust production to meet customer delivery schedules, to make production design changes quickly to respond to market needs, and to closely monitor production quality. This capability is particularly advantageous since the Company competes in product markets defined by short product life cycles. The Company maintains a 24 hour customer service organization that provides its customers with a wide range of services that include installation, training, technical support and network maintenance. The Company has been ISO-9001 registered since 1994. ISO-9001 is an international quality standard relating to the design, manufacture and servicing of products. In order to obtain registration to this standard, a company must submit to regular independent audits of its processes and procedures. ISO-9001 ensures a higher standard of quality, and is required by many international customers as a condition to commencing and maintaining a business relationship. CAPITAL RESOURCES AND EXPENDITURES The Company continues to generate sufficient cash from operations to fund its working capital needs and capital expenditures. The Company will continue to expend capital in product development, management information systems and improvements related to its growth. 7 9 The Company has and will continue to make certain investments in its software and applications in response to the Year 2000 issue. The Company has taken a proactive approach and on January 5, 1998, implemented Oracle's Enterprise Resource Planning System, a Year 2000 compliant, financial, manufacturing, and operations systems. The Company does not believe it will have any material impact from the Year 2000 issue. BACKLOG AND CANCELLATION POLICY The Company typically fills orders for its products within 7 to 60 days of the receipt of the purchase order. Customers usually purchase products on an as-needed basis, and, accordingly, the Company generally has less than two-month's net sales in backlog. Backlog consists of purchase orders received by the Company with a schedule of deliveries within twelve months of the purchase order date. Written commitments without delivery schedules are not considered in calculating backlog. The Company's total backlog of product orders as of December 31, 1997 was approximately $4.7 million. The Company expects that all of this backlog will be filled within 12 months. The Company has a policy to charge a 20% restocking fee for a purchase order cancellation, except in cases in which the cancellation request was received more than 30 days prior to the scheduled delivery date and no prior cancellation request had been previously delivered by the prospective customer. INTELLECTUAL PROPERTY The Company relies upon its intellectual property to develop and maintain its competitive position. Although the Company believes its patents, trademarks, copyrights, and trade secrets are valuable, it also believes its future success depends primarily on its technical and engineering competence and the creative skills of its employees. The Company attempts to protect its proprietary information through the use of confidentiality agreements with employees and third parties and through other security measures though there can be no assurance that these measures will adequately protect the Company's interests. The Company owns or holds rights under a total of twelve patents granted by the United States Patent Office. These include "Residual Echo Eliminator with Proportionate Noise Injection", "Transceiver Module for a Table Top Teleconferencing System", "Full-Duplex Adapter for PBX Telephone System", "Method for Remote Power Fail Detection and Maintaining Continuous Operation for Data and Voice Devices Operating over Local Loops", "Self-Balancing Hybrid Using Digitally Programmable Attenuator for Variable Impedance Elements", "Housing for Electronic Audio Communication Device", "Self-synchronizing Communications Systems" and, "Automatic Echo Cancellation for an Integrated Services Digital Interface". As appropriate, the Company seeks patent protection outside the United States, including the European Union, Canada, China, Mexico, Russia, and Israel. In mid-1995 the Company entered into a non-exclusive license agreement to acquire the rights to 50 patents in basic noise cancellation technology. There can be no assurance that the Company's current patents or those licensed from third parties will be upheld as valid. Others, including competitors of the Company hold numerous patents on various communications technologies. Such patents could inhibit or restrict the Company's ability to develop new products. There could be conflicts between products of the Company and its competitors' patents or between its competitors' products and the Company's patents. It could be very costly for the Company to enforce its rights in an infringement action or defend itself in an infringement action brought by another party against the Company. No assurance can be given that in the future the Company will not be subject to actions by competitors or others claiming that the Company's products infringe upon their patents. The Company strives to protect tradenames and marks through registration. The Company owns ten United States registered trademarks. These include "Audio Plus", "Call Port", "ConferenceMaster", "ConferenceMaster Elite", "Consortium", "Enhancing the Way the World Communicates", "Linemate", "Netwise" and "Sculptured Sound". The Company claims rights to other trademarks, including "c/map", "c/mor", "Coherent", "ConferenceCaller", "EC Duo", "Enhanced Audio Plus", "Enhancing the Way the World Conferences", "Netreach", "Signature Sound", "VFAX" and "VoiceCrafter". No assurance can be 8 10 given that in the future the Company will not be subject to actions by competitors or others claiming that the Company's products infringe upon their trademarks. Finally, the Company has registered copyrights in the "c/mor" computer program and in the EC5D mask work. Again, no assurance can be given that in the future the Company will not be subject to actions by competitors or others claiming that the Company's products infringe upon their copyrights. EMPLOYEES As of March 20, 1998 the Company has 253 full-time employees, 69 of whom were engaged in product development, 74 in sales and marketing, 22 engaged in finance and administration, 70 in operations and 18 in multiple disciplines of the Company's operations. The Company's employees are not represented by any collective bargaining agreements, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. WARRANTY POLICY The Company's transmission products are backed by a warranty, which generally provides that the Company will repair or replace any defective product prior to the passage of the earlier of 18 months from the mailing date of the product invoice or 12 months from the date of product installation. Conference products provide for repair or replacement of defective parts for up to 3 years from date of purchase. The Company does not have any significant warranty claims outstanding. CUSTOMERS One customer accounted for 16%, 12% and 18% of net sales for 1997, 1996 and 1995, respectively. A different customer accounted for approximately 12% of 1995 net sales. EXPORT SALES Marketing in foreign countries is accomplished through independent sales representatives paid on a commission basis and through a sales office in England, Japan, China, Dubai and Singapore. Export sales accounted for 73%, 69% and 75% of the Company's net sales in 1997, 1996 and 1995, respectively. Sales are principally denominated in U.S. dollars. During 1997, 1996 and 1995, net sales into Europe, Africa and the Middle East contributed 47%, 42% and 51%; net sales into Asia/Pacific contributed 18%, 18% and 20%; and net sales into other foreign countries accounted for 8%, 9% and 4%, respectively. SAFE HARBOR Except for the historical information contained herein, this discussion contains forward-looking statements regarding the marketability of new products and the gaining of new customers. The risks and uncertainties associated with the continued acceptance of products, the timely availability and pricing of new products, competition, market growth and, as well as other risks detailed in the Company's SEC reports could cause actual results to differ from those in the forward looking statements. ITEM 2. PROPERTIES The Company's world headquarters, located in Ashburn, Virginia, consists of approximately 73,000 square feet of office space, is used for sales, administrative and product development functions and is leased pursuant to an agreement which was effective September 1997 and expires in the year 2012. The Company's approximately 30,000 square feet of space in Hauppauge, New York houses its manufacturing facility and is leased pursuant to a lease expiring in 2000. The Company also maintains sales offices in Abingdon, England; Scottsdale, Arizona; Beijing, China; Tokyo, Japan; Dubai, Saudi Arabia and Singapore. 9 11 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock has been listed on the NASDAQ National Market System since June 16, 1994 under the symbol "CCSC". The table below sets forth for the periods indicated the high and low sales prices for the Common Stock as compiled from published sources.
1997 1996 ----------- ----------- HIGH LOW HIGH LOW ---- --- ---- --- First Quarter................................... 23 3/4 16 1/2 25 3/4 17 1/4 Second Quarter.................................. 25 1/4 15 3/8 28 1/4 18 Third Quarter................................... 28 3/8 20 3/4 22 13 1/8 Fourth Quarter.................................. 31 3/4 25 1/2 24 18
As of March 20, 1998, there were approximately 4,000 beneficial holders of the Company's Common Stock. On March 25, 1998, the closing Market price was 47 1/8. DIVIDEND POLICY To date, the Company has not paid any dividends on its Common Stock. The Company currently intends to retain future earnings for use in its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Future dividends, if any, will depend, among other things, on the Company's results of operations, capital requirements and financial condition and on such other factors as the Company's Board of Directors may, in its discretion, consider relevant. 10 12 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial information relating to the financial condition and results of operations of the Company and should be read in conjunction with the consolidated financial statements and notes included elsewhere. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Net sales................................ $73,695 $54,431 $43,829 $30,516 $22,944 Gross profit............................. 47,310 34,238 26,804 17,883 12,902 Net income............................... 13,979 9,748 7,590 3,801 423* Net income per common share Basic.................................. .92 .65 .52 .27 .01 Diluted................................ .90 .63 .49 .26 .01 Cash and short term investments.......... 26,180 16,769 3,352 2,473 423 Working capital.......................... 38,356 25,652 15,993 9,694 4,044 Total assets............................. 55,467 37,558 28,616 17,278 9,306 Long-term debt including current portion................................ -- -- 2,949 3,000 461 Total stockholders' equity............... $47,414 $31,799 $20,448 $10,391 $ 2,467
- --------------- * After a non-recurring goodwill write-off of $1,087. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROPOSED MERGER On February 16, 1998, the Company announced a merger agreement under which the Company will become a subsidiary of Tellabs, Inc. All outstanding shares of the Company stock will be exchanged at the ratio of .72 share of Tellabs common stock for each share of Coherent common stock. Based on the closing price of Tellabs common stock on February 13, 1998, the transaction is valued at approximately $670 million. The transaction is expected to be accounted for as a pooling of interests and to qualify as a tax-free reorganization. This transaction is subject to various conditions and approval by appropriate government agencies and the Company stockholders. The Company's Board of Directors unanimously approved the transaction and recommended its approval by stockholders. Safeguard Scientifics, the Company's largest stockholder, has agreed to vote in favor of the transaction. Prior to the closing of the merger, the Company has agreed to certain restrictions including limitations on capital expenditures and dividends, among others. RESULTS OF OPERATIONS In 1997, the Company achieved record sales and profits, for the fourth consecutive year since becoming public in 1994. Sales increased 35% in 1997 to $73.7 million resulting in net income of $14.0 million, a 43% increase over 1996. Net sales increased by 35% and 24% in 1997 and 1996, respectively. Transmission products increased by $22.2 million or 50% in 1997 and $9.1 million or 24% in 1996 while teleconferencing products decreased by $2.9 million or 38% in 1997 and increased $1.5 million in 1996. The company's continuing growth in sales and profits is being driven by a world-wide growth in telecommunications infrastructure. With current sales in over 70 countries, the company benefits from this global trend. In 1997, Asian sales were 18% of total sales, while Europe, North America and Latin America were 47%, 27% and 8%, respectively. All regions showed positive growth. New customers, installation expansions within existing customers, software upgrades and sales from new products all contributed to the record revenue in 1997. 11 13 Backlog as of December 31, 1997 was $4.7 million compared to $5.7 million at December 31, 1996. Backlog may fluctuate since transmission products represent capital purchases for the Company's customers and may be affected by the scheduling of large orders by customers. The Company typically fills orders for its products within 60 days of the receipt of the purchase order. Customers usually purchase products on an as-needed basis and, accordingly, the Company generally has less than two months' net sales in backlog. Backlog currently consists of purchase orders received by the Company with a schedule of deliveries within twelve months of the purchase order date. Written commitments without delivery schedules are not considered in calculating backlog. Gross profit as a percentage of net sales was 64% in 1997, 63% in 1996 and 61% in 1995. The increase in sales volumes and the reduction of product cost resulting from new technology offset the impact of price competition in both new and existing markets. In response to the anticipated development of new wireless service markets, the Company plans to increase its operating expenses to position the Company for future growth, especially in the United States, Latin America and Asia. Selling and marketing expenses increased by $3.8 million in 1997 as compared to an increase of $1.9 million in 1996. As a percentage of net sales, selling and marketing expenses increased to 17% from 16% in 1996 and 1995. This increase was primarily a result of building sales infrastructure in the Asia Pacific Region and expansion of corporate-wide sales support and product management. Product development expenses increased by $3.5 million or 57% and $1.7 million or 36% in 1997 and 1996, respectively. The Company continues to increase product development efforts as a percentage of net sales from 11% in 1996 to 13% in 1997. Product development expenditures relate to development of new features of existing products, new products and the Company's next generation of technology. General and administrative expenses decreased from 8% to 7% of net sales, but increased $.6 million as a result of one time expenses related to the Company's move to its new headquarters and the installation of an integrated, Oracle-based, manufacturing and financial system in 1997. Income taxes reflect an effective tax rate of 34% in 1997, 36% in 1996 and 40% in 1995, respectively. The continued reduction in effective tax rate results from higher foreign tax credits and the impact of change in distribution of income among various tax jurisdictions. The Company has and will continue to make certain investments in its software and applications in response to the Year 2000 issue. Coherent has taken a proactive approach and, on January 5, 1998, implemented Oracle's Enterprise Resource Planning System, a Year 2000 compliant, financial, manufacturing, and operations systems. The Company does not believe it will be materially impacted by the Year 2000 issue. LIQUIDITY AND CAPITAL RESOURCES The Company has cash and short-term investments totaling $26.2 million. The Company continues to generate sufficient cash from operations to fund its working capital needs and capital expenditures. The Company generated $9.1 million during 1997 as compared to generating cash of $5.9 million during 1996. The increase in net income was partially offset by increases in working capital and capital expenditures related to the growth of the business. Capital expenditures were $4.9 million and $2.0 million in 1997 and 1996, respectively. Management anticipates that the company will continue to expend capital in product development, management information systems and improvements related to its growth. The Company currently anticipates that cash generated from operations, existing cash balances and amounts available under an unused, uncommitted $10 million bank line of credit will be sufficient to satisfy its operating cash needs in the near future. Should the business progress more rapidly than as expected, the Company believe that additional bank credit would be available to fund operating and capital requirements. In addition, the Company could consider additional public or private debt or equity financing to fund future growth opportunities. In August 1997, the Company moved to a new leased facility for its worldwide headquarters in Ashburn, Virginia. The Company's lease will be for a term of 15 years. The Company has terminated the lease of the existing Virginia headquarters in accordance with the lease provision. 12 14 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 128, Earnings Per Share (Statement 128). Statement 128 supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share (APB 15), and specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. Statement 128 replaces the presentation of primary and fully diluted EPS with a presentation of basic and diluted EPS, respectively. Statement 128, which is effective for financial statements for both interim and annual periods ending after December 15, 1997, was adopted in the financial statements of the Company the year ended December 31, 1997. Also during 1997, the FASB issued pronouncements relating to the presentation and disclosure of information related to the Company's capital structure, comprehensive income and segment data. The Company has adopted the provisions relating to capital structure for the year ending December 31, 1997. Provisions of the other pronouncements, if applicable, are required to be adopted for the year ending December 31, 1998. The adoption of these pronouncements will not have an impact on the Company's financial position and results of operations, but may change the presentation of certain of the Company's financial statements and related notes and data thereto. In October 1997, the Accounting Standards Executive Committee issued Statement of Position No. 97-2, "Software Revenue Recognition ("SOP 97-2") that supersedes Statement of Position No. 91-1, "Software Revenue Recognition." SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company believes the adoption of this statement will not have a material effect on the Company's financial position or results of operations. Except for the historical information contained herein, this discussion contains forward-looking statements regarding the marketability of new products and the gaining of new customers. The risks and uncertainties associated with the continued acceptance of products, the timely availability and pricing of new products, competition, market growth and, as well as other risks detailed in the Company's SEC reports could cause actual results to differ from those in the forward looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable pursuant to General Instruction 1 to Item 305 of Regulation S:K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................ 14 Consolidated Balance Sheets as of December 31, 1997 and 1996...................................................... 15 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.......................... 16 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.......................... 17 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.............. 18 Notes to Consolidated Financial Statements.................. 19-25 Schedule II -- Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995.............. 26
- --------------- Schedules not listed above have been omitted because they are either not applicable or the required information has been given elsewhere in the consolidated financial statements. 13 15 INDEPENDENT AUDITORS' REPORT The Board of Directors Coherent Communications Systems Corporation: We have audited the accompanying consolidated financial statements of Coherent Communications Systems Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements we also have audited the related financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Coherent Communications Systems Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP McLean, VA. January 23, 1998 14 16 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (AMOUNTS IN THOUSANDS EXCEPT SHARES)
1997 1996 ------- ------- ASSETS Current assets Cash and cash equivalents................................. $18,331 $ 9,251 Short-term investments.................................... 7,849 7,518 Accounts receivable -- trade, less allowances ($547 in 1997 and $684 in 1996)................................. 15,826 10,065 Inventories............................................... 2,846 3,301 Other current assets...................................... 679 562 Deferred taxes............................................ 636 547 ------- ------- Total current assets.............................. 46,167 31,244 Property, plant and equipment Building and leasehold improvements....................... 328 314 Machinery and equipment................................... 9,406 5,115 Furniture and fixtures.................................... 1,582 970 ------- ------- 11,316 6,399 Less accumulated depreciation............................. 4,392 2,577 ------- ------- Net property, plant and equipment................. 6,924 3,822 Goodwill (net of amortization).............................. 1,133 1,359 Other assets................................................ 1,243 1,133 ------- ------- Total assets...................................... $55,467 $37,558 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 1,002 $ 733 Accrued expenses.......................................... 4,494 2,675 Income taxes payable...................................... 2,315 2,184 ------- ------- Total current liabilities......................... 7,811 5,592 Deferred taxes.............................................. 242 167 ------- ------- Total liabilities................................. 8,053 5,759 ------- ------- Stockholders' equity Common stock, par value $.01 per share; authorized -- 30,000,000 shares; issued and outstanding, 15,332,000 in 1997 and 15,128,000 in 1996................................................... 153 151 Additional paid-in capital................................ 12,291 10,657 Retained earnings (from December 31, 1993)................ 34,970 20,991 ------- ------- Total stockholders' equity........................ 47,414 31,799 ------- ------- Total liabilities and stockholders' equity........ $55,467 $37,558 ======= =======
See accompanying notes to consolidated financial statements. 15 17 CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 ------- ------- ------- Net sales................................................... $73,695 $54,431 $43,829 Cost of sales............................................... 26,385 20,193 17,025 ------- ------- ------- Gross profit.............................................. 47,310 34,238 26,804 ------- ------- ------- Operating expenses: Selling................................................... 12,555 8,764 6,823 Product development and engineering....................... 9,758 6,226 4,563 General and administrative................................ 5,012 4,439 3,355 ------- ------- ------- Total operating expenses.................................... 27,325 19,429 14,741 ------- ------- ------- Operating income............................................ 19,985 14,809 12,063 Interest income-net....................................... (1,195) (443) (587) ------- ------- ------- Income before income taxes.................................. 21,180 15,252 12,650 Income tax expense........................................ 7,201 5,504 5,060 ------- ------- ------- Net income................................................ $13,979 $ 9,748 $ 7,590 ======= ======= ======= Net income per common share Basic..................................................... $.92 $.65 $.52 Diluted................................................... $.90 $.63 $.49 Weighted average common and dilutive potential common shares Basic..................................................... 15,229 14,969 14,554 Diluted................................................... 15,563 15,480 15,440
See accompanying notes to consolidated financial statements. 16 18 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
1997 1996 1995 ------- ------- ------- OPERATING ACTIVITIES Net income................................................ $13,979 $ 9,748 $ 7,590 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization.......................... 2,041 1,332 792 Increase in deferred income taxes...................... (14) (182) (92) Changes in working capital items: Receivables............................................ (5,761) (1,997) (3,826) Inventories............................................ 455 (532) (441) Other current assets................................... (227) 716 -- Accounts payable....................................... 269 (129) 242 Accrued expenses....................................... 1,819 (32) 488 Income taxes payable................................... 131 711 472 ------- ------- ------- CASH PROVIDED BY OPERATING ACTIVITIES..................... 12,692 9,635 5,225 ------- ------- ------- INVESTING ACTIVITIES Purchase of short-term investments..................... (331) (7,518) -- Purchase of TTI, net of cash........................... -- -- (1,400) Increases in notes receivable -- related parties....... -- -- (6,250) Payments received on notes receivable -- related parties.............................................. -- 7,125 4,270 Increase in long-term note receivable.................. -- -- (1,000) Expenditures for property, plant and equipment......... (4,917) (1,997) (1,433) ------- ------- ------- CASH USED IN INVESTING ACTIVITIES......................... (5,248) (2,390) (5,813) ------- ------- ------- FINANCING ACTIVITIES Exercise of stock options.............................. 1,636 1,603 2,467 Debt repayments to related party....................... -- (2,000) (1,000) Debt repayment related to TTI purchase................. -- (949) -- ------- ------- ------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........... 1,636 (1,346) 1,467 ------- ------- ------- Increase in cash.......................................... 9,080 5,899 879 CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.............. 9,251 3,352 2,473 ------- ------- ------- CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $18,331 $ 9,251 $ 3,352 ======= ======= =======
See accompanying notes to consolidated financial statements. 17 19 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL ---------------- PAID IN EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ------ ------ ---------- --------- ------------- BALANCE -- DECEMBER 31, 1994............ 13,746 $138 $ 6,600 $ 3,653 $10,391 Net income.............................. -- -- -- 7,590 7,590 Tax benefit of non-qualified options.... -- -- 1,540 -- 1,540 Exercise of employee stock options...... 987 9 918 -- 927 ------ ---- ------- ------- ------- BALANCE -- DECEMBER 31, 1995............ 14,733 147 9,058 11,243 20,448 Net income.............................. -- -- -- 9,748 9,748 Tax benefit of non-qualified options.... -- -- 984 -- 984 Exercise of employee stock options...... 395 4 615 -- 619 ------ ---- ------- ------- ------- BALANCE -- DECEMBER 31, 1996............ 15,128 151 10,657 20,991 31,799 Net income.............................. -- -- -- 13,979 13,979 Tax benefit of non-qualified options.... -- -- 987 -- 987 Exercise of employee stock options...... 204 2 647 -- 649 ------ ---- ------- ------- ------- BALANCE -- DECEMBER 31, 1997............ 15,332 $153 $12,291 $34,970 $47,414 ====== ==== ======= ======= =======
See accompanying notes to consolidated financial statements. 18 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 1. BUSINESS OF THE COMPANY Coherent Communications Systems Corporation, a Delaware corporation ("Coherent" or "the Company"), develops, manufactures and markets voice enhancement products for wireless (including digital cellular), satellite-based and wireline telecommunications systems throughout the world. The Company's principal products are transmission products and teleconference products. The Company's transmission and teleconference products utilize a proprietary highspeed RISC microchip along with its proprietary echo cancellation software to enhance the quality of voice communications during a telephone call. The Company's products are compatible with domestic and foreign telecommunications systems. The Company's products are marketed worldwide and its customers consist primarily of public telephone companies and large publicly held corporations. Two corporations accounted for 32% and 24% of the December 31, 1997 and 1996 accounts receivable balance, respectively. One customer accounted for 16%, 12% and 18% of net sales for 1997, 1996 and 1995, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Coherent Communications Systems Corporation and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of all financial instruments approximates fair value. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. INVENTORIES Inventories are stated at the lower of standard cost, which approximates actual cost (FIFO basis), or market. The components of inventory at December 31, 1997 and 1996 are as follows: raw materials of $2,160,000 and $2,263,000, work-in process of $510,000 and $786,000 and finished goods of $176,000 and $252,000, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are depreciated on a straight-line basis based on the estimated useful lives of the assets (building and leasehold improvements -- 5 to 15 years, machinery and equipment -- 3 to 7 years, and furniture and fixtures -- 8 years). GOODWILL The goodwill associated with the purchased assets and technology of Teleconferencing Technologies, Inc. (Note 3) is being amortized over a period of seven years. During 1997 and 1996, $224,000 was recorded as amortization on the purchase. The Company assesses the recoverability of such excess costs based upon the undiscounted anticipated future cash flows of the business acquired. 19 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION AND WARRANTY EXPENSES Sales revenue is generally recognized as products are shipped and invoiced which, in certain cases, requires prior customer acceptance of the product. Warranty expenses are accrued at the time of sale based upon the Company's estimated cost to repair expected returns of products. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers temporary cash investments with original terms of three months or less at the time of purchase to be cash equivalents. Short-term investments consist of U.S. Government Agency bonds due within one year. The market value of these securities at year-end approximates their amortized cost. The Company has classified its short-term investments as held-to-maturity and adjusts the carrying amount for the amortization or accretion of premiums or discounts. A decline in the market value of any held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. In 1997, 1996 and 1995, the Company paid $6,264,500, $3,975,000 and $3,136,000, respectively in income taxes and $0, $123,000 and $124,000 in interest, respectively. In 1995, the remaining balance of $949,000 due in connection with the purchase of assets and technology described in Note 3, was treated as a non-cash financing activity. The balance of this debt was paid during 1996. INCOME TAXES Income taxes are accounted for using the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Under this method, the effect on deferred taxes of a subsequent change in tax rates is recognized in income in the period that includes the enactment date. Income tax expense is reduced by allowable tax credits using the flow-through method. NET INCOME PER COMMON SHARE Effective December, 1997 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which simplifies the standards for computing earnings per share and requires presentation of two new amounts, basic and diluted earnings per share. Earnings per share information for all periods presented has been restated in accordance with the new standard. Basic earnings per share has been calculated as net earnings divided by average common shares outstanding; diluted earnings per share has been calculated as net earnings divided by average common and dilutive shares outstanding. A reconciliation of common shares outstanding to common and dilutive shares outstanding follows:
1997 1996 1995 ------ ------ ------ Average common shares outstanding................ 15,230 14,969 14,554 Stock options.................................... 333 510 886 ------ ------ ------ Average common and dilutive shares outstanding... 15,563 15,479 15,440 ====== ====== ======
STOCK BASED COMPENSATION In 1996, the Company adopted Financial Accounting Standards Board No. 123, "Accounting for Stock-Based Compensation", which gives companies the option to adopt the fair value method for expense recognition of employee stock options or to continue to account for stock options and stock based awards using the intrinsic value method as outlined under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB25") and to make pro forma disclosures of net income and net income per 20 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) share as if the fair value method had been applied. The Company has elected to continue to apply APB 25 for future stock options and stock-based awards and has disclosed pro forma net income and net income per share as if the fair value method had been applied. 3. ACQUISITION On October 25, 1995, the Company acquired substantially all of the assets, technology and certain liabilities of Teleconferencing Technologies, Inc. and its Canadian affiliate (collectively, "TTI"). In exchange, the Company agreed to pay $1.5 million in cash, of which $450,000 was paid at closing, $350,000 was paid upon the completion of the documentation of certain technology and $700,000 plus accrued interest was paid one year from the closing date. The assumed liabilities were paid at closing. The transaction was accounted for using the purchase method. Accordingly, the purchase price was allocated to assets acquired based on their estimated fair values resulting in approximately $1.5 million of goodwill. The results of operations of the business acquired prior to its acquisition are not material to the Company. The Company has agreed to pay TTI royalties on the sale of audio teleconferencing bridge products for the four years after the closing as follows: first year, 10%, second year 8%, third year, 6%, and fourth year, 4%. Royalty payments of $88,000, $22,000 and $0 were paid during 1997, 1996 and 1995, respectively, and are paid on cash receipts related to the sales. 4. RELATED PARTY TRANSACTIONS Safeguard Scientifics, Inc. owns a 32% interest in the Company at December 31, 1997. The Company is party to an administrative services agreement with Safeguard, which was renewed May 7, 1997 for five years, whereby Safeguard provides the Company with day-to-day business and organizational strategy, financial and investment management, and merchant and investment banking services. The agreement provides for the payment on a monthly basis of an administrative service fee, calculated at 1.5% of net revenues of the Company, not to exceed $660,000 for 1997, $480,000 for 1998, and $300,000, thereafter, until the termination of the agreement. For 1997, 1996 and 1995, the management fee incurred amounted to $660,000, $717,000, and $613,000, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of income. Management believes that the method used to allocate costs to the Company and the amount of such costs are reasonable based upon the services provided. In connection with the Company's initial public offering in 1994, 400,000 shares of the Company's Series A Redeemable Convertible Preferred Stock owned by Safeguard were redeemed by the Company, for a $4 million note payable, which was due in four $1 million installments. The offering proceeds of $1 million was used to pay the initial installment. The second installment was paid in June of 1995 and the remaining two installments were paid in full by September 1996. The Company invested $25,000 in an Australian-based distribution company for a 25% interest during 1994. This investment is included in Other Assets. The Company has granted the distributor exclusive distribution rights for teleconferencing products in Australia. Sales to the affiliate accounted for approximately $5,953,000, $1,190,000 and $572,000 of the Company's 1997, 1996 and 1995 net sales, respectively, and $226,300 and $62,000 of the Company's accounts receivable balance as of December 31, 1997 and 1996, respectively. 5. LEASES The Company occupies premises under long-term operating lease arrangements expiring at various dates through January 2012. The leases provide for escalation charges based upon changes in the consumer price index or a preset cost increase factor. Also, the Company is required to pay certain executory costs including taxes and insurance. The Company has terminated the lease agreement of the existing Virginia facility and was not subject to significant cancellation charges. The Company has completed a new lease agreement for a facility for which annual rent is expected to be about $970,000 per year. Future minimum lease payments 21 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under these and other operating leases for the succeeding five years are: $1,349,000- 1998; $1,280,000- 1999; $1,013,000- 2000; $970,000- 2001, $970,000- 2002. Rent expense was $1,349,000, $751,000 and $676,000 in 1997, 1996 and 1995, respectively. The Company is guarantor of the landlord's mortgage totaling $102,750 at December 31, 1997, on the space leased in Hauppauge, New York. 6. STOCKHOLDERS' EQUITY The Company has adopted the following stock option plans: the 1982 Amended and Restated Stock Option Plan ("the 1982 Plan") and the 1993 Equity Compensation Plan ("the 1993 Plan" and together with the 1982 Plan, "the Plans"). The 1982 Plan provides for the issuance of a maximum of 2,500,000 shares of Common Stock. Options to purchase approximately 224,000 shares remain outstanding under the 1982 Plan. No further awards may be made under the 1982 Plan. The 1993 Plan provides for the issuance of a maximum of 1,500,000 shares of Common Stock pursuant to the grant of ISOs, NQSOs, Stock Appreciation Rights (SARs), restricted stock awards and grants to employees, non employee directors and consultants of the Company and its subsidiaries. The Plans are administered by the Compensation Committee of the Board of Directors (the "Committee"). As of December 31, 1997, the Committee has only granted to its employees and directors ISOs and NQSOs under the Plans with terms that typically provide for vesting over a four or five year period, an expiration date seven years after the date of the grant and, a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant. The Company applies APB 25 and related interpretations in accounting for its various stock option plans. Had compensation cost been recognized consistent with SFAS 123, the Company's consolidated net income would have been reduced to $13,356,000, $9,538,000, $7,516,000, in 1997, 1996 and 1995, respectively. Pro forma basic earnings per share would have been $.88, $.64, and $.52, in 1997, 1996 and 1995, respectively, and pro forma diluted earnings per share would have been $.87, $.62, and $.49, in 1997, 1996 and 1995, respectively, had the Company recorded compensation expense under SFAS 123. The per share weighted-average value of stock options issues by the Company during 1997, 1996 and 1995 was $15.65, $12.27 and $12.50, respectively, on the date of grant. In 1997, 1996 and 1995, the assumptions of no dividends, expected volatility of 55%, and an average expected life of 6 years were used by the Company in determining the fair value of stock options granted using the Black-Scholes option pricing model. In addition, the calculations assumed a risk-free interest rate of 5.9% to 6.9% in 1997, and 5.9% to 6.6% in 1996 and 5.5% to 6.1% in 1995. Approximately 444,000 of the options outstanding range in exercise price from $.80 to $20.31 with a weighted average remaining contractual life of 3.7 years and a weighted average exercise price of $8.22. Options for 179,000 shares are currently exercisable with a weighted average exercise price of $4.44. The remaining 450,000 options outstanding range in exercise price from $20.38 to $33.50 with a weighted average remaining contractual life of 6.7 years and a weighted average exercise price of $26.91. Options for 15,000 shares are currently exercisable with a weighted average exercise price of $23.40. 22 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the stock options activity is as follows:
1997 1996 1995 ----------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ -------- (000'S OMITTED EXCEPT PER SHARE AMOUNTS) Outstanding at beginning of year...... 752 $ 8.79 950 $ 3.27 1,940 $ 1.36 Options granted....................... 424 26.83 227 20.84 76 21.38 Options exercised..................... (205) 3.26 (389) 1.57 (977) 0.94 Options canceled...................... (77) 20.22 (36) 19.37 (89) 2.57 ---- ------ ---- ------ ---- ------ Outstanding at end of year............ 894 $17.58 752 $ 8.79 950 $ 3.27 ---- ------ ---- ------ ---- ------ Options exercisable at year-end....... 194 148 274 Shares available for future grant..... 371 718 915
Pro forma net income reflects only options granted in 1997, 1996 and 1995. The full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and the compensation cost for options granted prior to January 1, 1995 is not considered. Under a separate option agreement, 25,000 non-qualified options were granted in 1991 to a consultant of the Company at $.60 per share of which 5,000 and 10,000 shares were exercised in 1996 and 1995, respectively. In addition, 5,000 non-qualified options were granted in 1996 to a consultant of the Company at $20.25 per share of which 1,000 shares were exercised in 1997 and the remaining shares were not exercisable at December 31, 1997. 7. FINANCING ARRANGEMENTS The Company has a $10 million uncommitted, unused line of credit with a bank that expires in June 1998. Borrowings under the line of credit bear interest at the LIBOR rate plus two percent and are secured by Accounts Receivable of the Company. In 1997 and 1996, no amounts were outstanding under the line of credit. 8. INCOME TAXES The provision for taxes on income at December 31 is comprised of:
1997 1996 1995 ------ ------ ------ (000'S OMITTED) Current Federal........................................ $6,788 $5,289 $4,546 State.......................................... 449 397 606 ------ ------ ------ 7,237 5,686 5,152 ------ ------ ------ Deferred Federal........................................ (34) (174) (74) State.......................................... (2) (8) (18) ------ ------ ------ (36) (182) (92) ------ ------ ------ $7,201 $5,504 $5,060 ====== ====== ======
23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the effective tax rate to the Federal statutory rate follows:
1997 1996 1995 ------ ------ ------ (000'S OMITTED) Statutory tax provision.......................... $7,413 $5,186 $4,301 Increase (decrease) in taxes resulting from: State taxes, net of federal benefits........... 292 262 387 Foreign sales corporation benefit.............. (755) -- -- Other.......................................... 251 56 372 ------ ------ ------ $7,201 $5,504 $5,060 ====== ====== ======
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997, 1996 and 1995 are presented below:
1997 1996 ------ ------ (000'S OMITTED) Deferred tax assets: Accounts receivable allowances.......................... $ 245 $ 258 Inventory............................................... 299 244 Goodwill amortization................................... 92 45 ----- ----- $ 636 $ 547 ===== ===== Deferred tax liabilities: Accelerated depreciation................................ (242) (167) ----- ----- $(242) $(167) ===== =====
Management of the Company believes that it is more likely than not that net deferred tax assets will be realized through future taxable earnings or alternative tax strategies. 9. SAVINGS PLAN The Company has a 401(k) Profit Sharing Plan for the benefit of eligible employees who may contribute up to 15% of eligible base compensation to the plan. During 1997 and 1996 the Company matched dollar for dollar the first 4% of employees' contributions and one-half of the next 2% of contributions. In 1995 the Company matched one-half of the first 6% of the employees' contributions. The Company contributed $726,000, $545,000 and $394,000 in 1997, 1996 and 1995, respectively. 10. OTHER ASSETS AND ACCRUED EXPENSES During 1995 and 1994, the Company loaned $1,400,000 to Seattle Silicon, Inc., a chip supplier to the Company. In June 1996, the Company exercised its Warrants to purchase 1,380,304 (as adjusted for stock split) shares of Seattle Silicon, using a $1,000,000 note due from Seattle Silicon to fund the purchase. This investment (included in other assets) is accounted for on the cost basis. The Company extended the payment of the remaining $400,000 note from Seattle Silicon (originally dated July 14, 1994) to June 30, 1998. The interest accruing on the $400,000 note, at 7%, is paid to the Company monthly. The Company owns approximately 12% of Seattle Silicon and may convert the remaining $400,000 note into an additional 10% interest in Seattle Silicon. 24 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accrued expenses at December 31, 1997 and 1996 include the following:
1997 1996 ------ ------ (000'S OMITTED) Employee benefits.......................................... $ 654 $ 242 Accrued bonus and profit sharing........................... 2,003 730 Accrued warranty reserves.................................. 310 337 Miscellaneous other........................................ 1,527 1,366 ------ ------ $4,494 $2,675 ====== ======
11. CONTINGENCIES The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these actions will have a material adverse affect on the Company's consolidated financial position. 12. EXPORT SALES Marketing in foreign countries is accomplished through independent sales representatives paid on a commission basis and through a sales office in England, Japan, China and Singapore. Export sales accounted for 73%, 69% and 75% of the Company's net sales in 1997, 1996 and 1995, respectively. Sales are principally denominated in U.S. dollars. During 1997, 1996 and 1995, net sales into Europe, Africa and the Middle East contributed 47%, 42% and 51%; net sales into Asia Pacific contributed 18%, 18% and 20%; and net sales into other foreign countries accounted for 8%, 9% and 4%, respectively. QUARTERLY INFORMATION (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 1997, QUARTER ENDED -------- ------- ------------ ----------- Net Sales..................................... $16,007 $17,768 $19,111 $20,809 Gross Profit.................................. 10,508 11,209 12,150 13,443 Net Income.................................... 2,905 3,130 3,578 4,366 EPS Basic....................................... $ 0.19 $ 0.21 $ 0.24 $ 0.29 Diluted..................................... $ 0.19 $ 0.20 $ 0.23 $ 0.28
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 1996, QUARTER ENDED -------- ------- ------------ ----------- Net Sales..................................... $11,109 $13,165 $14,102 $16,055 Gross Profit.................................. 7,022 8,361 8,874 9,981 Net Income.................................... 2,118 2,280 2,445 2,905 EPS Basic....................................... $ 0.14 $ 0.15 $ 0.16 $ 0.19 Diluted..................................... $ 0.14 $ 0.15 $ 0.16 $ 0.19
Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding in each period. Therefore, the sum of the quarters does not necessarily equal the year to date earnings per share. 25 27 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT DESCRIPTION YEAR EXPENSES DEDUCTIONS END OF YEAR - ----------- ------------ ---------- ---------- ----------- 1995: Allowance for doubtful accounts............... $342,300 $156,700 $(50,000) $449,000 1996: Allowance for doubtful accounts............... $449,000 $235,200 $ -- $684,200 1997: Allowance for doubtful accounts............... $684,200 $137,500 $ -- $546,700
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company as of March 27, 1998 are as follows:
PRINCIPAL OCCUPATION AND BUSINESS HAS BEEN A NAME EXPERIENCE DURING LAST FIVE YEARS DIRECTOR SINCE AGE - ---- --------------------------------- -------------- --- Charles A. Root................... Executive Vice President, Safeguard Scientifics, Inc., a strategic information systems company(1)(5) 1986 65 Daniel L. McGinnis................ Chief Executive Officer of the Company(1)(6)(10) 1988 59 Lawrence J. Gallick............... Senior Partner and Director, Saperston & Day, a Buffalo, New York law firm(2)(3)(7)(10) 1993 58 Warren V. Musser.................. Chairman of the Board and Chief Executive Officer, Safeguard Scientifics Inc.(2)(8) 1993 71 Charles M. Skibo.................. Chairman, Allied International Industries, Inc., a telecom, computer and high technology acquisitions firm, and Chairman, Strategic Enterprises and Communications, Inc., a communications consulting and acquisitions firm(2)(3)(9) 1994 59 Ernst Volgenau.................... President, Chief Executive Officer and founder, SRA International, Inc., a provider of computer, communications and management consulting services and software(11) 1996 64
- --------------- (1) Member of the Executive Committee. (2) Member of the Compensation Committee, of which Mr. Musser is Chairman. (3) Member of the Audit Committee, of which Mr. Gallick is Chairman. (4) Member of the Nominating Committee. (5) Mr. Root served as the Company's Chief Executive Officer from 1988 until he resigned from such position in March 1994. Mr. Root has served as an Executive Vice President of Safeguard since February 1986, when he was promoted from the position of Vice President of Operations. Mr. Root is Chairman of the Board of the Company, CompuCom Systems, Inc. ("CompuCom") and Tangram Enterprise Solutions, Inc. ("Tangram") and a director of ChromaVision Medical Systems, Inc. CompuCom and Tangram are majority owned subsidiaries of Safeguard. 26 28 (6) Mr. McGinnis has served as Chief Executive Officer of the Company since September 1994, when he was promoted from the position of President and Chief Operating Officer. (7) Mr. Gallick is a director of G.W. Plastics, Inc. and Saperston and Day, P.C. (8) Mr. Musser has been Chairman of the Board and Chief Executive Officer of Safeguard since 1953, and assumed the additional position of President of Safeguard from November 1993 through February 1996. Mr. Musser is Chairman of the Board of Cambridge Technology Partners (Massachusetts), Inc., a director of CompuCom Systems, Inc., DocuCorp International, Inc., National Media Corporation and Sanchez Computer Associates, Inc., and a trustee of Brandywine Realty Trust. Mr. Musser also serves on a variety of civic, educational and charitable boards of directors and serves as Vice President/Development, Cradle Liberty Council, Boy Scouts of America, as Vice Chairman of The Eastern Technology Council, and as Chairman of the Pennsylvania Partnership on Economic Education. (9) Prior to serving as Chairman of Allied International Industries, Inc. and Chairman of Strategic Enterprises and Communications, Inc., Mr. Skibo was Chairman and Chief Executive Officer of Cezar Industries, Inc., a company engaged in international telecommunications, from October 1991 to February 1992, and President and Chief Operating Officer of AT&E Corporation, a company engaged in the development of wireless personal communications messaging systems, from July 1988 through December 1990. Following his departure from AT&E Corporation, a Chapter 11 bankruptcy petition was filed, after which AT&E subsequently reorganized and sold its assets to a company to which it was indebted. (10) McGinnis and Mr. Gallick are first cousins. There are no other family relationships among the directors and executive officers of the Company. (11) Prior to founding SRA International, Inc., Dr. Volgenau was Director of Inspection and Enforcement in the Nuclear Regulatory Commission from 1976 to 1978. He also taught electrical engineering, computer systems and operations research at the University of California, American University and George Washington University. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers and persons who own more than ten percent of a registered class of the Company's equity securities ("10% Stockholders") to file reports of ownership and changes in ownership of Common Stock and other equity securities of the Company with the Securities and Exchange Commission ("SEC"). Officers, directors and 10% Stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. Based solely on its review of the copies of such forms received by it and written representations from certain reporting persons that no other reports were required for those persons, the Company believes that all Section 16(a) filing requirements were complied with during the period from January 1, 1997 through December 31, 1997, except as follows: One report on behalf of Mr. Powell was filed late, reporting two transactions. One report on behalf of Delbert W. Johnson, who resigned as a director in December 1997, was filed late, reporting one transaction. One report on behalf of Mr. Root was filed late, reporting one transaction. An initial statement of beneficial ownership on behalf of Mr. Volgenau was filed late. 27 29 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth information concerning compensation paid during the last three fiscal years to the Chief Executive Officer, each of the executive officers of the Company whose salary and bonus exceeded $100,000 in 1997. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------------------- AWARDS ------------------------- ANNUAL COMPENSATION SECURITIES ----------------------------------------------- RESTRICTED UNDERLYING OTHER ANNUAL STOCK OPTIONS/ NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) COMPENSATION($)(3) AWARD(S)($) SARS(#) - --------------------------- ---- ------------ ----------- ------------------ ------------ ---------- Daniel L. McGinnis...... 1997 $275,000 $235,000 -- 100,949 Chief Executive Officer 1996 234,327 117,000 -- 7,617 1995 200,000 140,000 -- 429 David L. Powell......... 1997 $185,000 $128,000 -- -- 50,000 President and Chief 1996 159,500 64,000 -- -- -- Operating Officer 1995 135,000 95,000 -- -- -- Miles R. Pratt.......... 1997 $120,000 $ 40,000 -- -- 20,000 Vice President 1996 102,885 19,000 -- -- 1,491 1995 162,800 34,000 -- -- 1,176 ALL OTHER NAME AND PRINCIPAL POSITION COMPENSATION($)(4) - --------------------------- ------------------ Daniel L. McGinnis...... $20,870 Chief Executive Officer 20,836 16,502 David L. Powell......... $20,870 President and Chief 19,212 Operating Officer 13,043 Miles R. Pratt.......... $18,455 Vice President 20,176 18,180
- --------------- (1) Includes annual compensation which has been deferred by Messrs. McGinnis, Powell and Pratt pursuant to the Company's 401(k) Profit Sharing Plan (the "401(k) Plan"). Amounts shown do not include amounts expended by Coherent pursuant to plans (including group, disability, life, health and international service insurance) that do not discriminate in scope, terms or operation in favor of executive officers or directors and that are generally available to all salaried employees. (2) Amounts have been listed for the year earned although actually paid in the following fiscal year. (3) Perquisites and other personal benefits for fiscal year 1997 did not exceed the lesser of $50,000 or 10% of any executive officer's salary and bonus. (4) The amounts reported include the matching contributions and profit sharing plan contributions, respectively, made by the Company pursuant to the 401(k) Plan for the benefit of the following named officers: Mr. McGinnis, $6,400 and $14,470; Mr. Powell, $6,400 and $14,470; and Mr. Pratt, $5,073 and $13,382. The 401(k) Plan is a defined contribution retirement plan sponsored by the Company, pursuant to which total Company contributions, if any, are determined at the discretion of the Company, subject to current and accumulated earnings of the Company. In addition, Company matching contributions pursuant to the 401(k) Plan are dependent upon participant contributions. 28 30 STOCK OPTIONS The following tables set forth information with respect to (i) individual grants of stock options during 1997 to each of the named executive officers, (ii) options exercised during fiscal year 1997, and (iii) the number of unexercised options and the value of unexercised in-the-money options at December 31, 1997. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ---------------------------------------------------- NUMBER OF SECURITIES % OF TOTAL POTENTIAL REALIZABLE VALUE UNDERLYING OPTIONS/ AT ASSUMED ANNUAL RATES OPTIONS/ SARS OF STOCK PRICE APPRECIATION SARS GRANTED TO EXERCISE OR FOR OPTION TERM(1) GRANTED EMPLOYEES IN BASE PRICE EXPIRATION --------------------------- NAME (#)(2) FISCAL YEAR ($/SH)(3) DATE 5%($) 10%($) ---- ---------- ------------ ----------- ---------- ------------ ------------ Daniel L. McGinnis........... 100,000 23.8095 $28.8125 12/04/04 $1,172,958 $2,733,491 949 .2260 $ 25.50 12/19/04 $ 9,851 $ 22,958 David L. Powell.............. 50,000 11.9048 $28.8125 12/04/04 $ 586,479 $1,366,745 Miles R. Pratt............... 20,000 4.7619 $28.8125 12/04/04 $ 234,592 $ 546,698
- --------------- (1) The potential realizable values are based on an assumption that the stock price of the shares of Common Stock of the Company appreciate at the annual rate shown (compounded annually) from the date of grant until the end of the option term. These values do not take into account amounts required to be paid as income taxes under the Code and any applicable state laws or option provisions providing for termination of an option following termination of employment, nontransferability or vesting over periods of up to five years. These amounts are calculated based on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth of the shares of Common Stock of the Company. (2) Each option vests 20% each year commencing on the first anniversary of the grant date, has a seven-year term and continues vesting and remains exercisable so long as employment with the Company or one of its subsidiaries continues. The option exercise price may be paid in cash or, in the discretion of the Compensation Committee, by (i) delivery of previously acquired shares or (ii) same day sales, i.e. cashless broker's exercises. (3) All options have an exercise price at least equal to the fair market value on the date of grant of the shares subject to each option. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS SHARES AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- Daniel L. McGinnis.... 70,336 $1,440,547 81,693 107,302 $1,464,330 $ 1,324 David L. Powell....... 13,000 $ 365,000 15,000 81,000 $ 255,000 $503,000 Miles R. Pratt........ 0 $ 0 25,768 21,899 $ 457,500 $ 0
- --------------- (1) The value of unexercised in-the-money options is calculated based upon (i) the fair market value per share of the stock at December 31, 1997 less the option exercise price, multiplied by (ii) the number of shares subject to an option. On December 31, 1997, the fair market value of a share of the Company's common stock was $19.50. This table is presented solely for the purpose of complying with Securities and Exchange Commission rules and does not necessarily reflect the amounts the optionees will actually receive upon any sale of the shares acquired upon the exercise of the options. 29 31 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS The Company has entered into a severance and non-competition agreement with Mr. McGinnis that provides for continued health benefits for up to a one-year period and severance payments equal to one year of his base salary upon the termination of his employment with the Company for reasons other than just cause or voluntary resignation. Pursuant to this agreement, Mr. McGinnis has agreed to refrain from competing with the Company for one year after the termination of his employment, and the Company's severance payments and benefits are conditioned upon adherence to such noncompetition provisions. The Company has entered into confidentiality agreements for a term of twelve months commencing upon termination of employment with each of its executive officers and key employees. DIRECTORS' COMPENSATION Directors are elected annually and hold office until their successors are elected and have qualified or until their earlier resignation or removal. In 1997, each director who was not an employee of the Company or Safeguard received an annual cash retainer of $6,000 and $500 for each Board meeting attended. Directors also were reimbursed for out-of-pocket expenses incurred in connection with attendance at meetings or other Company business. DIRECTORS' STOCK OPTIONS Directors who are not employees of the Company and its subsidiaries or Safeguard and its subsidiaries and affiliated companies ("Eligible Directors") participate in the 1993 Equity Compensation Plan (the "1993 Plan"). Pursuant to the terms of the 1993 Plan, each Eligible Director receives an option to purchase 20,000 shares of the Company's Common Stock upon his or her election to the Board. Thereafter, each Eligible Director will receive a grant to purchase 4,000 shares of Common Stock on the anniversary of his or her election following every two years' service thereafter. The exercise price of each option is equal to the fair market value of the shares on the date of grant. Options granted to Eligible Directors vest in 25% installments, commencing on the first anniversary of the grant date, and have a term of seven years. The maximum number of shares of Common Stock subject to options granted to an Eligible Director under the 1993 Plan cannot exceed 40,000 shares. In February 1996, Mr. Skibo received an option to purchase 4,000 shares of Common Stock at an exercise price of $21.50 per share and in December 1996, Dr. Volgenau, upon his election to the Board, received an option to purchase 20,000 shares at an exercise price of $20.375 per share. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 31, 1998, the Company's Common Stock beneficially owned by each person known to the Company to be the beneficial owner of more than 5% of the outstanding Shares, the Company's only class of equity securities outstanding. The table also shows the number of Shares owned beneficially by each director, by each named executive officer, and by all executive officers and directors as a group.
NUMBER OF SHARES PERCENT OF OWNED(1) CLASS ---------------- ---------- Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087(2)................... 4,843,342 31.2% Charles A. Root............................................. 124,911 * Daniel L. McGinnis(3)(7).................................... 874,522 5.6% David L. Powell............................................. 35,000 * Lawrence J. Gallick(4)...................................... 11,068 * Warren V. Musser(5)......................................... 230,022 1.5% Miles R. Pratt (3).......................................... 45,268 * Charles M. Skibo(3)......................................... 7,000 * Ernst Volgenau(3)........................................... 5,000 Executive officers and directors as a group (9 persons)(6)............................................... 1,332,791 8.6%
30 32 - --------------- * Less than 1% (1) Except as otherwise disclosed, the nature of beneficial ownership is the sole power to vote and to dispose of the Shares (except for Shares held jointly with spouse). (2) Safeguard Scientifics (Delaware), Inc. ("Safeguard Delaware"), a wholly owned subsidiary of Safeguard Scientifics, Inc. ("Safeguard"), is the record owner of the Shares set forth above. Consequently, such Shares are beneficially owned by Safeguard. All of the Shares beneficially owned by Safeguard have been pledged by Safeguard as collateral under its bank line of credit. (3) Includes for Messrs., McGinnis, Pratt, Skibo, and Volgenau, 502 Shares, 470 shares, 7,000 Shares, and 5,000 Shares, respectively, that may be acquired pursuant to stock options that are currently exercisable or that will become exercisable within 60 days. (4) Includes 600 Shares held by Mr. Gallick's spouse, 600 Shares held in trust for his children, and 1,000 Shares that may be acquired pursuant to stock options that are currently exercisable or that will become exercisable within 60 days. Mr. Gallick disclaims beneficial ownership of the Shares owned by his spouse and in trust for his children. (5) Excludes 4,843,342 Shares beneficially owned by Safeguard, for which Mr. Musser serves as Chairman of the Board and Chief Executive Officer. Mr. Musser disclaims beneficial ownership of the shares beneficially owned by Safeguard. (6) Includes 13,972 shares that may be acquired upon exercise of stock options that are currently exercisable or that will become exercisable within 60 days. (7) Includes 50,000 shares held by a charitable foundation, Mr. McGinnis shares voting and dispositive power over these shares. CHANGES IN CONTROL OF REGISTRANT On February 16, 1998, the Company announced a merger agreement, under which the Company will become a subsidiary of Tellabs, Inc. Under the terms of this Agreement, all outstanding shares of the Company stock will be exchanged at the ratio of .72 share of Tellabs common stock for each share of Coherent common stock. Based on the closing price of Tellabs common stock on February 13, 1998, the transaction is valued at approximately $670 million. The transaction is expected to be accounted for as a pooling of interests and to qualify as a tax-free reorganization. This transaction is subject to various conditions and approval by appropriate government agencies and the Company's stockholders. The Company's Board of Directors unanimously approved the transaction and recommended its approval by stockholders. Safeguard has agreed to vote in favor of the transaction. Prior to the closing of the merger, the Company has agreed to certain restrictions including limitations on capital expenditures and dividends, among others. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company and Safeguard are parties to an Administrative Services Agreement pursuant to which Safeguard provides the Company with administrative support services. The agreement provides for the payment on a monthly basis of an administrative service fee, calculated at one and one-half percent of the net sales of the Company, not to exceed $660,000 for 1997, $480,000 for 1998, and $300,000 thereafter, until the termination of the agreement. The administrative support services include consultation regarding the Company's general management, investor relations, financial management, certain legal services, insurance programs administration, audit administration and tax research and planning. The annual administrative services fee does not cover extraordinary services provided by Safeguard to the Company or services that are contracted out. The term of the agreement is from January 1, 1997 through December 31, 2001, with automatic annual renewals thereafter unless terminated by either party upon notice at least ninety days prior to the scheduled termination date. The Company expensed $660,000 during 1997 for these services. 31 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements: The consolidated financial statements filed as a part of this report are listed in the "Index to Consolidated Financial Statements and Financial Statement Schedule" at Item 8. 2. Consolidated Financial Statement Schedule: The consolidated financial statement schedule filed as part of this report is listed in the "Index to Consolidated Financial Statements and Financial Statement Schedule" at Item 8. Schedules other than those listed on the accompanying Index to Consolidated Financial Statements and Financial Statement Schedule are omitted for the reason that they are either not required, not applicable, or the required information is included in the consolidated financial statements or notes thereto. (b) REPORTS ON FORM 8-K: None. (c) Exhibits: The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this report. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. Exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. All other exhibits are being filed with this report.
EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 -- Agreement and Plan of Merger by and among Tellabs, Inc., Cardinal Merger Company and Coherent Communications Systems Corporation dated February 16, 1998(Exhibit 2.1) 2.2 -- Safeguard Scientifics, Inc. Stock Holder Agreement dated February 16, 1998(Exhibit 2.2) 3(i) -- Certificate of Incorporation of the Company, as amended by a Certificate of Amendment.(3)(Exhibit 3.1(i)) 3(ii) -- By-laws of the Company as amended.(5)(Exhibit 3(ii)) 4.1 -- Specimen stock certificate representing the Common Stock.(3)(Exhibit 4.1) 10.1 -- Administrative Services Agreement dated as of December 1, 1993, between the Company and Safeguard Scientifics, Inc.(3)(Exhibit 10.1) 10.2 -- Asset Purchase Agreement dated as of March 18, 1987 between COMSAT Telesystems, Inc. and the Company.(1)(Exhibit 10.2) *10.3 -- 1982 Stock Option Plan.(1)(Exhibit 10.3) *10.4 -- 1993 Equity Compensation Plan, as amended and restated.(6) *10.4.1 -- Stock Ownership Plan(5)(Exhibit 10.4.1). *10.5 -- Form of Non-Qualified Stock Option Agreement of the Company for Employees.(2)(Exhibit 10.5) *10.6 -- Form of Non-Qualified Stock Option Agreement of the Company for Directors.(2)(Exhibit 10.6) *10.7 -- Form of Incentive Stock Option Agreement of the Company for Employees.(2)(Exhibit 10.7) 10.8 -- Lease dated as of February 1, 1980, as amended, between LE-AX Corp. and the Company, for the property at 60 Commerce Drive, Hauppauge, New York.(1)(Exhibit 10.8) 10.9.1 -- Lease dated as of July 31, 1992 between Linpro Lansdowne Two Limited Partnership and the Company, for the property at 44084 Riverside Parkway, Leesburg, Virginia.(1)(Exhibit 10.9.1) 10.9.2 -- Sublease dated as of August 1993 between G.D. Searle & Co. and the Company, for the property at 44084 Riverside Parkway, Leesburg, Virginia.(1)(Exhibit 10.9.2)
32 34
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.9.3 -- Lease dated August 9, 1996 by and between Opus East,, L.L.C., Landlord, and the Company for the premises located in Loudon County, Virginia known as University Center.(5) 10.10 -- Lease dated as of October 15, 1990 between Kibswell Holdings Limited and the Company, for the property at Unit B The Quadrant, Barton Lane, Abingdon, England.(1)(Exchange 10.10) 10.11 -- Tax Agreement dated January 1, 1983 between Safeguard Scientifics, Inc. and the Company.(1)(Exhibit 10.11) *10.12 -- Severance and Non-Competition Agreement dated as of February 10, 1994 between Daniel McGinnis and the Company.(1)(Exhibit 10.12) 10.13 -- Form of Demand Promissory Note of Safeguard Scientifics, Inc., dated April 2, 1993, payable to the Company, as amended by letter Agreement dated January 12, 1994.(1)(Exhibit 10.13) 10.14 -- Form of Promissory Note of the Company payable to Safeguard Scientifics, Inc. with respect to the redemption of redeemable convertible preferred stock.(3)(Exhibit 10.14) 10.15 -- Supply and License Agreement dated February 7, 1992, between the Company and TRT Telecommunications Radioelectriques et Telephoniques.(1)(Exhibit 10.15) 10.16 -- International Distribution Agreement dated as of January 2, 1992 between the Company and Cohpac Communications Systems Pty Limited.(1)(Exhibit 10.16) 10.17 -- North America Value Added Reseller Agreement dated as of December 7, 1992 between the Company and Wandel & Goltermann Inc.(1)(Exhibit 10.17) *10.18 -- Management Incentive Compensation Plan, as adopted by the Company.(2)(Exhibit 10.18) 10.19 -- License Agreement, effective as of June 1, 1994, between the Company and Systems Technology Associates, Inc.(3)(Exhibit 10.19) 10.20 -- Value Added Reseller Agreement dated April 3, 1997 between the Company and Nokia Telecommunications Oy(7)(Exhibit 10.1)** 11.0 -- Computation of net income per share. 21.0 -- Subsidiaries of registrant. 23.0 -- Consent of KPMG Peat Marwick LLP 27.0 -- Financial Data Schedule.
- --------------- (1) Filed on March 31, 1994 as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-77160) and incorporated by reference. (2) Filed on May 24, 1994 as an exhibit to the Company's Registration Statement on Form S-1 Amendment #1 (No. 33-77160) and incorporated by reference. (3) Filed on June 10, 1994 as an exhibit to the Company's Registration Statement on Form S-1 Amendment #2 (No. 33-77160) and incorporated by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference. (5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference. (7) Filed on October 15, 1997 as an exhibit to the Company's Form 10Q for the quarter ended June 30, 1997. * Management contract or compensatory plan or arrangement. ** Confidential portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 33 35 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. COHERENT COMMUNICATIONS SYSTEMS CORPORATION By: /s/ CHARLES A. ROOT ------------------------------------ Charles A. Root, Chairman of the Board of Directors Date: March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE --------- -------- ---- /s/ CHARLES A. ROOT Chairman of the Board of March 30, 1998 - --------------------------------------------------- Directors Charles A. Root /s/ DANIEL L. MCGINNIS Chief Executive Officer and March 30, 1998 - --------------------------------------------------- Director Daniel L. McGinnis (Principal Executive Officer) /s/ DAVID L. POWELL President and Chief Operating March 30, 1998 - --------------------------------------------------- Officer David L. Powell /s/ MELBA G. CHAN Vice President, Chief Financial March 30, 1998 - --------------------------------------------------- Officer (Principal Financial Melba G. Chan and Accounting Officer) /s/ LAWRENCE J. GALLICK Director March 30, 1998 - --------------------------------------------------- Lawrence J. Gallick /s/ WARREN V. MUSSER Director March 30, 1998 - --------------------------------------------------- Warren V. Musser /s/ CHARLES M. SKIBO Director March 30, 1998 - --------------------------------------------------- Charles M. Skibo /s/ ERNST VOLGENAU Director March 30, 1998 - --------------------------------------------------- Ernst Volgenau
34 36 EXHIBIT INDEX The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this Report. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. The page numbers listed refer to the page numbers where such exhibits are located using the sequential numbering system specified by Rule 0-3.
EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 -- Agreement and Plan of Merger by and among Tellabs, Inc., Cardinal Merger Company and Coherent Communications Systems Corporation dated February 16, 1998(Exhibit 2.1) 2.2 -- Safeguard Scientifics, Inc. Stock Holder Agreement dated February 16, 1998(Exhibit 2.2) 3(i) -- Certificate of Incorporation of the Company, as amended by a Certificate of Amendment.(3)(Exhibit 3.1(i)) 3(ii) -- By-laws of the Company as amended. 4.1 -- Specimen stock certificate representing the Common Stock.(3)(Exhibit 4.1) 10.1 -- Administrative Services Agreement dated as of December 1, 1993, between the Company and Safeguard Scientifics, Inc.(3)(Exhibit 10.1) 10.2 -- Asset Purchase Agreement dated as of March 18, 1987 between COMSAT Telesystems, Inc. and the Company.(1)(Exhibit 10.2) *10.3 -- 1982 Stock Option Plan.(1)(Exhibit 10.3) *10.4 -- 1993 Equity Compensation Plan, as amended and restated.(6) *10.4.1 -- Stock Ownership Plan(5)(Exhibit 10.4.1) *10.5 -- Form of Non-Qualified Stock Option Agreement of the Company for Employees.(2) (Exhibit 10.5) *10.6 -- Form of Non-Qualified Stock Option Agreement of the Company for Directors.(2) (Exhibit 10.6) *10.7 -- Form of Incentive Stock Option Agreement of the Company for Employees.(2) (Exhibit 10.7) 10.8 -- Lease dated as of February 1, 1980, as amended, between LE-AX Corp. and the Company, for the property at 60 Commerce Drive, Hauppauge, New York.(1)(Exhibit 10.8) 10.9.1 -- Lease dated as of July 31, 1992 between Linpro Lansdowne Two Limited Partnership and the Company, for the property at 44084 Riverside Parkway, Leesburg, Virginia.(1) (Exhibit 10.9.1) 10.9.2 -- Sublease dated as of August 1993 between G.D. Searle & Co. and the Company, for the property at 44084 Riverside Parkway, Leesburg, Virginia.(1)(Exhibit 10.9.2) 10.9.3 -- Lease dated August 9, 1996 by and between Opus East, L.L.C., Landlord, and the Company, for the premises located in Loudon County, Virginia known as University Center. 10.10 -- Lease dated as of October 15, 1990 between Kibswell Holdings Limited and the Company, for the property at Unit B The Quadrant, Barton Lane, Abingdon, England.(1) (Exchange 10.10) 10.11 -- Tax Agreement dated January 1, 1983 between Safeguard Scientifics, Inc. and the Company.(1)(Exhibit 10.11) *10.12 -- Severance and Non-Competition Agreement dated as of February 10, 1994 between Daniel McGinnis and the Company.(1)(Exhibit 10.12) 10.13 -- Form of Demand Promissory Note of Safeguard Scientifics, Inc., dated April 2, 1993, payable to the Company, as amended by letter Agreement dated January 12, 1994.(1) (Exhibit 10.13)
35 37
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.14 -- Form of Promissory Note of the Company payable to Safeguard Scientifics, Inc. with respect to the redemption of redeemable convertible preferred stock.(3)(Exhibit 10.14) 10.15 -- Supply and License Agreement dated February 7, 1992, between the Company and TRT Telecommunications Radioelectriques et Telephoniques.(1)(Exhibit 10.15) 10.16 -- International Distribution Agreement dated as of January 2, 1992 between the Company and Cohpac Communications Systems Pty Limited.(1)(Exhibit 10.16) 10.17 -- North America Value Added Reseller Agreement dated as of December 7, 1992 between the Company and Wandel & Goltermann Inc.(1)(Exhibit 10.17) *10.18 -- Management Incentive Compensation Plan, as adopted by the Company.(2)(Exhibit 10.18) 10.19 -- License Agreement, effective as of June 1, 1994, between the Company and Systems Technology Associates, Inc. (3)(Exhibit 10.19) 10.20 -- Value Added Reseller Agreement dated April 3, 1997 between the Company and Nokia Telecommunications Oy.(7)(Exhibit 10.1)** 11.0 -- Computation of net income per share. 21.0 -- Subsidiaries of registrant. 23.0 -- Consent of KPMG Peat Marwick LLP 27.0 -- Financial Data Schedule
- --------------- (1) Filed on March 31, 1994 as an exhibit to the Company's Registration Statement on Form S-1 (No.33-77160) and incorporated by reference. (2) Filed on May 24, 1994 as an exhibit to the Company's Registration Statement on Form S-1 Amendment #1 (No.33-77160) and incorporated by reference. (3) Filed on June 10, 1994 as an exhibit to the Company's Registration Statement on Form S-1 Amendment #2 (No.33-77160) and incorporated by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference. (5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference. (7) Filed as an exhibit to the Company's Form 10Q for the quarter ended June 30, 1997. * Management contract or compensatory plan or arrangement. ** Confidential portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 36 EX-2.1 2 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER BY AND AMONG TELLABS, INC. A DELAWARE CORPORATION, CARDINAL MERGER CO. A DELAWARE CORPORATION AND WHOLLY OWNED SUBSIDIARY OF TELLABS, INC., AND COHERENT COMMUNICATIONS SYSTEMS CORPORATION A DELAWARE CORPORATION DATED AS OF FEBRUARY 16, 1998 2 TABLE OF CONTENTS
PAGE ARTICLE I THE MERGER............................................................................ 2 Section 1.1. Merger............................................................... 2 Section 1.2. Closing; Effective Time.............................................. 2 Section 1.3. Effects of the Merger................................................ 2 Section 1.4. Directors and Officers............................................... 3 ARTICLE II CONVERSION OF SECURITIES.............................................................. 3 Section 2.1. Conversion of Capital Stock.......................................... 3 Section 2.2. Exchange of Certificates............................................. 4 Section 2.3. No Dissenters Rights................................................. 6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................................... 7 Section 3.1. Organization......................................................... 7 Section 3.2. Company Subsidiaries and Joint Ventures.............................. 7 Section 3.3. Company Capital Structure............................................ 8 Section 3.4. Authority; No Conflict; Required Filings and Consents................ 9 Section 3.5. SEC Filings; Financial Statements.................................... 10 Section 3.6. Absence of Undisclosed Liabilities................................... 11 Section 3.7. Absence of Certain Changes or Events................................. 11 Section 3.8. Taxes................................................................ 11 Section 3.9. Properties........................................................... 13 Section 3.10. Intellectual Property................................................ 13 Section 3.11. Agreements, Contracts and Commitments................................ 14 Section 3.12. Litigation........................................................... 14 Section 3.13. Environmental Matters................................................ 15 Section 3.14. Employee Benefit Plans............................................... 16 Section 3.15. Compliance with Laws................................................. 17 Section 3.16. Pooling.............................................................. 17 Section 3.17. Affiliates........................................................... 17 Section 3.18. Interested Party Transactions........................................ 18 Section 3.19. Registration Statement; Proxy Statement/Prospectus................... 18 Section 3.20. No Excess Parachute Payments......................................... 18 Section 3.21. Opinion of Financial Advisor......................................... 19 Section 3.22. Section 203 of the DGCL Not Applicable............................... 19 Section 3.23. Voting Requirements.................................................. 19
-i- 3 Section 3.24. Brokers.............................................................. 19 Section 3.25. Additional Disclosure................................................ 19 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB...................................... 19 Section 4.1. Organization......................................................... 19 Section 4.2. Parent Subsidiaries.................................................. 20 Section 4.3. Parent Capital Structure............................................. 20 Section 4.4. Authority; No Conflict; Required Filings and Consents................ 20 Section 4.5. SEC Filings; Financial Statements.................................... 21 Section 4.6. Absence of Undisclosed Liabilities................................... 22 Section 4.7. Absence of Certain Changes or Events................................. 22 Section 4.8. Taxes................................................................ 23 Section 4.9. Properties........................................................... 24 Section 4.10. Intellectual Property................................................ 24 Section 4.11. Agreements, Contracts and Commitments................................ 24 Section 4.12. Litigation........................................................... 24 Section 4.13. Environmental Matters................................................ 25 Section 4.14. Pooling.............................................................. 25 Section 4.15. Affiliates........................................................... 26 Section 4.16. Compliance with Laws................................................. 26 Section 4.17. Registration Statement; Proxy Statement/Prospectus................... 26 Section 4.18. Interim Operations of Sub............................................ 26 Section 4.19. Voting Requirements.................................................. 27 Section 4.20. Brokers.............................................................. 27 ARTICLE V CONDUCT OF BUSINESS................................................................... 27 Section 5.1. Covenants of the Company............................................. 27 Section 5.2. Covenants of Parent.................................................. 30 Section 5.3. Employment Agreements................................................ 31 Section 5.4. Cooperation.......................................................... 31 Section 5.5. Material Adverse Effect.............................................. 31 ARTICLE VI ADDITIONAL AGREEMENTS................................................................. 32 Section 6.1. No Solicitation...................................................... 32 Section 6.2. Proxy Statement/Prospectus; Registration Statement................... 34 Section 6.3. Consents............................................................. 34 Section 6.4. Current Nasdaq Quotation............................................. 34 Section 6.5. Access to Information................................................ 34 Section 6.6. Stockholders Meeting................................................. 35
-ii- 4 Section 6.7. Legal Conditions to Merger........................................... 35 Section 6.8. Public Disclosure.................................................... 36 Section 6.9. Tax-Free Reorganization.............................................. 36 Section 6.10. Pooling Accounting................................................... 37 Section 6.11. Affiliate Letters.................................................... 37 Section 6.12. Nasdaq Quotation..................................................... 37 Section 6.13. Stock Plans and Options.............................................. 37 Section 6.14. Indemnification...................................................... 38 Section 6.15. Additional Agreements; Reasonable Efforts............................ 38 Section 6.16. Termination of Certain Agreements.................................... 39 Section 6.17. Real Estate Transfer Taxes........................................... 39 ARTICLE VII CONDITIONS TO MERGER.................................................................. 39 Section 7.1. Conditions to Each Party's Obligation to Effect the Merger.................................................... 39 Section 7.2. Additional Conditions to Obligations of Parent and Sub............... 40 Section 7.3. Additional Conditions to Obligations of the Company.................. 42 ARTICLE VIII TERMINATION AND AMENDMENT............................................................. 44 Section 8.1. Termination.......................................................... 44 Section 8.2. Effect of Termination................................................ 46 Section 8.3. Fees and Expenses.................................................... 46 Section 8.4. Amendment............................................................ 47 Section 8.5. Extension; Waiver.................................................... 47 ARTICLE IX MISCELLANEOUS......................................................................... 48 Section 9.1. Nonsurvival of Representations, Warranties and Agreements........................................................... 48 Section 9.2. Notices.............................................................. 48 Section 9.3. Interpretation....................................................... 49 Section 9.4. Counterparts......................................................... 49 Section 9.5. Entire Agreement; No Third Party Beneficiaries....................... 49 Section 9.6. Governing Law........................................................ 49 Section 9.7. Assignment........................................................... 50 EXHIBIT A - Form of Company Affiliate Letter........................................................... A-1 EXHIBIT B - Form of Parent Affiliate Letter............................................................ B-1
-iii- 5 TABLE OF DEFINED TERMS
SECTION Agreement .................................................. Forepart Acquisition Agreement ...................................... 8.3(b) Alternative Transaction .................................... 8.3(f) Approval ................................................... 6.7 Closing .................................................... 1.2 Closing Date ............................................... 1.2 Code ....................................................... Recitals Company .................................................... Forepart Company Affiliate Letter ................................... 6.11 Company Auditors ........................................... 3.16 Company Balance Sheet ...................................... 3.5(b) Company Certificate ........................................ 2.2(b) Company Certificates ....................................... 2.2(b) Company Common Stock ....................................... Recitals Company Employee Plans ..................................... 3.14(a) Company Financial Statements ............................... 3.5(b) Company Intellectual Property Rights ....................... 3.10(a) Company Letter ............................................. 3.2(a) Company Material Contracts ................................. 3.11 Company Preferred Stock .................................... 3.3(a) Company SEC Reports ........................................ 3.5(a) Company Stock Plans ........................................ 2.1(d) Company Stock Options ...................................... 3.3(b) Company Tax Certificate .................................... 6.9 Confidentiality Agreement .................................. 6.1(a) Constituent Corporations ................................... 1.3(a) DGCL ....................................................... Recitals Effective Time ............................................. 1.2 Environmental Permits ...................................... 3.13(c) ERISA ...................................................... 3.14(a) Exchange Act ............................................... 3.4(c) Exchange Agent ............................................. 2.2(a) Exchange Fund .............................................. 2.2(a) Exchange Ratio ............................................. 2.1(c) GAAP ....................................................... 3.5(b) Government Entity .......................................... 3.4(c) Hazardous Material ......................................... 3.13(a) Hazardous Materials Activities ............................. 3.13(b) HSR Act .................................................... 3.4(c)
-iv- 6
SECTION Joint Venture ............................................ 3.2(b) Material Adverse Effect .................................. 5.5 Merger ................................................... Recitals Parent ................................................... Forepart Parent Affiliate Letter .................................. 6.11 Parent Auditors .......................................... 4.14 Parent Balance Sheet ..................................... 4.5(b) Parent Common Stock ...................................... Recitals Parent Letter ............................................ 4.2 Parent Material Contracts ................................ 4.11 Parent Option Plans ...................................... 4.3(a) Parent Preferred Stock ................................... 4.3(a) Parent SEC Reports ....................................... 4.5(a) Parent Tax Certificate ................................... 6.9 Proxy Statement .......................................... 3.19 Registration Statement ................................... 3.19 Returns .................................................. 3.8(b) Rule 145 ................................................. 6.11 Safeguard ................................................ 6.16 Services Agreement ....................................... 6.16 SEC ...................................................... 3.4(c) Securities Act ........................................... 3.4(c) Senior Officers .......................................... 5.3 Stockholders Meeting ..................................... 3.19 Sub. ..................................................... Forepart Subsidiary ............................................... 3.2(b) Superior Proposal ........................................ 6.1(a) Surviving Corporation .................................... 1.3(a) Takeover Proposal ........................................ 6.1(a) Tax ...................................................... 3.8(a) Taxes .................................................... 3.8(a) Termination Fee .......................................... 8.3(b) Third Party .............................................. 8.3(f) Transfer Taxes ........................................... 6.17 1998 Bonus Plan .......................................... 3.14(b)
-v- 7 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of February 16, 1998, by and among Tellabs, Inc., a Delaware corporation ("Parent"), Cardinal Merger Co., a Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and Coherent Communications Systems Corporation, a Delaware corporation (the "Company"). RECITALS WHEREAS, Sub will merge with and into the Company (the "Merger"), pursuant to the General Corporation Law of the State of Delaware, as amended (the "DGCL") and upon the terms and subject to the conditions herein set forth, whereby each issued and outstanding share of Common Stock, $.01 par value per share, of the Company ("Company Common Stock"), not owned directly or indirectly by Parent or the Company, will be converted into shares of Common Stock, $.01 par value per share, of Parent ("Parent Common Stock"); WHEREAS, as a result of the Merger, the Company will become a wholly owned subsidiary of Parent and the stockholders of the Company will become stockholders of Parent; WHEREAS, the Board of Directors of the Company has determined that the Merger is consistent with and in furtherance of the long-term business strategy of the Company and is fair to, and in the best interests of, the Company and its stockholders, has approved and adopted this Agreement and the transactions contemplated hereby and has recommended adoption of this Agreement by the stockholders of the Company; WHEREAS, the Board of Directors of Parent has determined that the Merger is consistent with and in furtherance of the long-term business strategy of Parent and is in the best interests of Parent and its stockholders and has approved and adopted this Agreement and the transactions contemplated hereby; WHEREAS, the Board of Directors of Sub has approved and adopted this Agreement and Parent, as the sole stockholder of Sub, has adopted this Agreement; WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, for accounting purposes, it is intended that the Merger shall be accounted for as a pooling of interests; WHEREAS, Parent, Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger; and 8 WHEREAS, simultaneously with the execution and delivery of this Agreement, certain stockholders of the Company, including each of the directors of the Company, in order to induce Parent and Sub to enter into this Agreement, entered into stockholder agreements with Parent, agreeing, among other things, to vote in favor of this Agreement and the Merger and against any competing proposals. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties agree as follows: ARTICLE I THE MERGER Section 1.1. Merger. Subject to the provisions of this Agreement and in accordance with the DGCL, Sub shall be merged with and into the Company. As a result of the Merger, the outstanding shares of capital stock of Sub and the Company shall be converted or canceled in the manner provided in Article II of this Agreement, the separate corporate existence of Sub shall cease and the Company shall be the surviving corporation in the Merger and shall succeed to and assume all the rights and obligations of Sub in accordance with the DGCL. Section 1.2. Closing; Effective Time. The closing of the Merger (the "Closing") will take place at 10:00 a.m., local time, on a date to be specified by Parent and the Company, which shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Article VII (the "Closing Date"), at the offices of Sidley & Austin, One First National Plaza, Chicago, Illinois, unless another date or place is agreed to in writing by Parent and the Company. At or concurrently with the Closing, the parties hereto shall cause the Merger to become effective by filing a Certificate of Merger with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of the DGCL (the time of such filing being the "Effective Time") and shall make all other filings or recordings required under the DGCL. Section 1.3. Effects of the Merger. (a) At the Effective Time, (i) the separate existence of Sub shall cease and Sub shall be merged with and into the Company (Sub and the Company are sometimes referred to herein as the "Constituent Corporations" and the Company after the Effective Time is sometimes referred to herein as the "Surviving Corporation"), (ii) the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be amended as of the Effective Time so that Article Fourth of such Certificate of Incorporation reads in its entirety as follows: "The total number of shares of all classes of stock which the Corporation shall have authority to issue is 1,000 shares of Common Stock, $.01 par value per share" and, as so amended, such Certificate of Incorporation shall be the Certificate of Incorporation of the Surviving Corporation, and (iii) the Bylaws of Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation. -2- 9 (b) The Merger shall have the effects set forth in the DGCL. Section 1.4. Directors and Officers. The directors of Sub immediately prior to the Effective Time and the directors of the Company listed in Item 1.4 of the Company Letter (as defined below) shall be the directors of the Surviving Corporation until their resignation or removal or until their respective successors have been elected and qualified. The officers of the Company immediately prior to the Effective Time shall continue as officers of the Surviving Corporation until their resignation or removal or until their respective successors have been elected and qualified. ARTICLE II CONVERSION OF SECURITIES Section 2.1. Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of Company Common Stock or capital stock of Sub: (a) Capital Stock of Sub. Each issued and outstanding share of the capital stock of Sub shall be converted into and become one fully paid and nonassessable share of Common Stock, $.01 par value per share, of the Surviving Corporation. (b) Cancellation of Treasury Stock and Parent-Owned Stock. Any shares of the Company Common Stock owned by the Company or by any Subsidiary (as defined in Section 3.2(b)) of the Company and each share of Company Common Stock owned by Parent, Sub or any other wholly owned Subsidiary of Parent shall be canceled and retired and shall cease to exist, and no stock of Parent or other consideration shall be delivered in exchange therefor. (c) Exchange Ratio for Company Common Stock. Subject to Section 2.2, each issued and outstanding share of Company Common Stock (other than shares to be canceled in accordance with Section 2.1(b)) shall be converted into the right to receive seventy-two hundredths (.72) (the "Exchange Ratio") of a fully paid and nonassessable share of Parent Common Stock. All such shares of the Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the shares of Parent Common Stock and any cash in lieu of fractional shares of Parent Common Stock to be issued or paid in consideration therefor upon the surrender of such certificate in accordance with Section 2.2, without interest. (d) Company Stock Options. At the Effective Time, all then outstanding options to purchase shares of Company Common Stock issued under the Company's 1982 Stock Option Plan and 1993 Equity Compensation Plan, as amended and restated (collectively, the -3- 10 "Company Stock Plans"), not exercised as of the Effective Time will be assumed by Parent in accordance with Section 6.13. Section 2.2. Exchange of Certificates. The procedures for exchanging outstanding shares of Company Common Stock for Parent Common Stock upon consummation of the Merger are as follows: (a) Exchange Agent. As soon as practicable after the Effective Time, Parent shall deposit with a bank or trust company designated by Parent and reasonably acceptable to the Company (the "Exchange Agent"), for the benefit of the holders of shares of Company Common Stock, for exchange in accordance with this Section 2.2, through the Exchange Agent, certificates representing the shares of Parent Common Stock (such shares of Parent Common Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund") issuable pursuant to Section 2.1 in exchange for outstanding shares of Company Common Stock, which shares of Parent Common Stock shall be deemed to be issued at the Effective Time subject to the other provisions of this Section 2.2. (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (each a "Company Certificate" and, collectively, the "Company Certificates") whose shares were converted pursuant to Section 2.1 into the right to receive shares of Parent Common Stock (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Company Certificates shall pass, only upon delivery of the Company Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Company Certificates in exchange for certificates representing shares of Parent Common Stock. Upon surrender of a Company Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, and such other documents as may be reasonably required by the Exchange Agent or Parent, the holder of such Company Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Parent Common Stock which such holder has the right to receive pursuant to the provisions of this Article II, and the Company Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock that is not registered in the transfer records of the Company, a certificate representing the proper number of shares of Parent Common Stock may be issued to a transferee if the Company Certificate representing such Company Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.2, each Company Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the certificate representing shares of Parent Common Stock and cash in lieu of any fractional shares of Parent Common Stock as contemplated by this Section 2.2. Parent or the Exchange Agent shall be -4- 11 entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement such amounts as Parent or the Exchange Agent are required to deduct and withhold under the Code, or any provision of state, local or foreign tax law, with respect to the making of such payment. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the person in respect of whom such deduction and withholding was made by Parent or the Exchange Agent. (c) 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 shall be paid to the holder of any unsurrendered Company Certificate with respect to the shares of Parent Common Stock represented thereby, and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.2(e), until the holder of record of such Company Certificate shall surrender such Company Certificate. Subject to the effect of applicable laws, following surrender of any such Company 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, (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of Parent Common Stock to which such holder is entitled pursuant to Section 2.2(e) and the amount of dividends or other distributions with a record date after the Effective Time previously paid with respect to such whole shares of Parent Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Parent Common Stock. (d) No Further Ownership Rights in Company Common Stock. All shares of Parent Common Stock issued upon the surrender for exchange of shares of Company Common Stock in accordance with the terms hereof, including any cash paid pursuant to Sections 2.2(c) and 2.2(e), shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Company Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 2.2. (e) No Fractional Shares. No certificate or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of the Company Certificates, and such fractional share interests will not entitle the owner thereof to vote or to any rights of a stockholder of Parent. Notwithstanding any other provision of this Agreement, each holder of shares of Company Common Stock exchanged in connection with the Merger who would otherwise have been entitled to receive a fraction of a share of Parent Common Stock (after taking into account all Company Certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of Parent -5- 12 Common Stock multiplied by the average of the last reported sale prices of Parent Common Stock on The Nasdaq National Market on the ten (10) trading days immediately preceding the Effective Time. Parent shall make available to the Exchange Agent the cash necessary for this purpose. (f) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the stockholders of the Company for one year after the Effective Time shall be delivered to Parent, upon demand, and any stockholders of the Company who have not previously complied with this Section 2.2 shall thereafter look only to Parent for payment of their claim for Parent Common Stock, cash in lieu of fractional shares of Parent Common Stock and dividends or distributions with respect to Parent Common Stock. (g) No Liability. Neither Parent nor the Company, nor any of their respective directors, officers, employees or agents, shall be liable to any holder of shares of Company Common Stock or Parent Common Stock, as the case may be, for such shares (or dividends or distributions with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (h) Adjustment of Exchange Ratio. In the event of any reclassification, stock split or stock dividend with respect to Parent Common Stock between the date hereof and the Effective Time, appropriate adjustments, if any, shall be made by Parent to the Exchange Ratio, and all references to the Exchange Ratio in this Agreement shall be deemed to be to the Exchange Ratio as so adjusted. (i) Further Assurances. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title and interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of either of the Constituent Corporations or (ii) otherwise to carry out the purposes of this Agreement, the Surviving Corporation and its proper officers and directors or their designees shall be authorized to execute and deliver, in the name and on behalf of either Constituent Corporation, all such deeds, bills of sale, assignments and assurances and to do, in the name and on behalf of either Constituent Corporation, all such other acts and things as may be necessary, desirable or proper to vest, perfect or confirm the Surviving Corporation's right, title and interest in, to and under any of the rights, privileges, powers, franchises, properties or assets of such Constituent Corporation and otherwise to carry out the purposes of this Agreement. Section 2.3. No Dissenters Rights. The holders of shares of Company Common Stock shall not be entitled to appraisal rights with respect to the Merger. -6- 13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Sub as follows: Section 3.1. Organization. The Company and each of its Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has all requisite corporate power to own, lease and operate its property and to carry on its business as now being conducted and as proposed to be conducted, and (iii) is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of its activities requires it to be so qualified, except that, in the case of the clauses (i) and (ii), with respect to Subsidiaries that in the aggregate do not constitute a "significant subsidiary" within the meaning of Regulation S-X, Rule 1-02 (w), such representations are being made to the best knowledge of the Company, and except, in the case of clause (iii), where the failure to have such power or the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect on the Company (as defined below). Section 3.2. Company Subsidiaries and Joint Ventures. (a) Item 3.2 of the letter from the Company to Parent and Sub dated and delivered as of the date hereof (the "Company Letter"), which relates to this Agreement and is designated therein as being the Company Letter sets forth a list of all Subsidiaries and Joint Ventures (as defined below) of the Company, including the name of each Subsidiary and Joint Venture and the jurisdiction in which such Subsidiary or Joint Venture is organized. Except as set forth in Item 3.2 of the Company Letter, there are no outstanding subscriptions, options, calls, contracts, voting trusts, proxies or other commitments, understandings, restrictions, arrangements, rights or warrants with respect to any such Subsidiary's capital stock, including any right obligating any such Subsidiary to issue, deliver, or sell additional shares of its capital stock, and no obligations, contingent or otherwise, of the Company or any of its Subsidiaries to repurchase, redeem, or otherwise acquire any shares of the capital stock of any Subsidiary of the Company or make any investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity other than guarantees of bank obligations of such Subsidiaries entered into in the ordinary course of business. All of the outstanding shares of capital stock of each Subsidiary of the Company are duly authorized, validly issued, fully paid and nonassessable, and all such shares are owned by the Company or another Subsidiary of the Company free and clear of all security interests, liens, claims, pledges, agreements, limitations on the Company's voting rights, charges or other encumbrances of any nature. Item 3.2 of the Company Letter sets forth the nature and extent of the ownership and voting interests held by the Company in each such Joint Venture. The Company has no obligation to make any capital contributions, or otherwise provide assets or cash, to any Joint Venture. Except as set forth in Item 3.2 of the Company Letter, neither the Company nor any of its Subsidiaries directly or indirectly owns any material equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any such equity or similar interest in, any -7- 14 corporation, limited liability company, partnership, joint venture or other business association or entity. (b) As used in this Agreement, "Subsidiary" means, with respect to any party, any corporation, limited liability company, partnership, joint venture, or other business association or entity, at least a majority of the voting securities or economic interests of which is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries. As used in this Agreement, "Joint Venture" means, with respect to any party, any corporation, limited liability company, partnership, joint venture or other entity in which (i) such party, directly or indirectly, owns or controls more than five percent (5%) and less than a majority of any class of the outstanding voting securities or economic interests, or (ii) such party or a Subsidiary of such party is a general partner. Section 3.3. Company Capital Structure. (a) The authorized capital stock of the Company consists of 100,000,000 shares of Company Common Stock and 3,000,000 shares of Preferred Stock, $.01 par value per share ("Company Preferred Stock"). As of February 12, 1998: (i) 15,519,944 shares of Company Common Stock were issued and outstanding, all of which are validly issued, fully paid and nonassessable; (ii) no shares of Company Preferred Stock were issued or outstanding; (iii) no shares of Company Common Stock were held in the treasury of the Company or by Subsidiaries of the Company; and (iv) 1,082,284 shares of the Company Common Stock were reserved for issuance under Company Stock Plans (including (A) 6,925 shares reserved for issuance under the 1982 Stock Option Plan, of which 6,925 were subject to outstanding options and none of which were reserved for future option grants and (B) 1,075,359 shares of Company Common Stock reserved for issuance under the 1993 Equity Compensation Plan, as amended and restated, 755,114 of which were subject to outstanding options and 320,245 of which were reserved for future option grants. Since February 12, 1998, (i) no additional shares of capital stock have been reserved for issuance by the Company and (ii) the only issuances of shares of capital stock of the Company have been issuances of Company Common Stock upon the exercise of outstanding Company Stock Options (as defined below) listed in Item 3.3 of the Company Letter. All of the shares of Company Common Stock subject to issuance as specified above, upon issuance pursuant to the terms and conditions specified in the instruments pursuant to which they are issuable, shall be duly authorized, validly issued, fully paid and nonassessable. Except as provided in Item 3.3 of the Company Letter, there are no obligations, contingent or otherwise, of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of Company Common Stock. (b) Except as set forth in this Section 3.3, there are no equity securities of any class of the Company or any of its Subsidiaries, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Except for the stock options issued pursuant to the Company Stock Plans (the "Company Stock Options") as set forth in this Section 3.3, there are no options, warrants, equity securities, calls, rights, commitments or agreements of any character to which the Company or any of its Subsidiaries is a party or by which it is bound obligating the Company or any of its Subsidiaries to issue, deliver or sell, or -8- 15 cause to be issued, delivered or sold, additional shares of capital stock of the Company or any of its Subsidiaries or any security or other instrument convertible into shares of capital stock of the Company or any of its Subsidiaries or obligating the Company or any of its Subsidiaries to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, call, right, commitment or agreement, and, to the best knowledge of the Company, as of the date of this Agreement, there are no voting trusts, proxies or other agreements or understandings with respect to the shares of capital stock of the Company. Item 3.3 of the Company Letter sets forth for each of the Senior Officers (as defined below) by name, and for each other holder of options (i) the number of shares of Company Common Stock subject to each Company Stock Option held by such holder, (ii) the dates of grant of Company Stock Options to such holder, (iii) the vesting schedule for the Company Stock Options held by such holder, (iv) the exercise prices for the Company Stock Options held by such holder and (v) the expiration dates of Company Stock Options held by such holder. Item 3.3 of the Company Letter contains all forms of stock option agreements pursuant to which Company Stock Options have been issued. Section 3.4. Authority; No Conflict; Required Filings and Consents. (a) The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate and stockholder action on the part of the Company, subject only to the adoption of this Agreement and the approval of the Merger by the Company's stockholders under the DGCL. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally and general principles of equity, regardless of whether asserted in a proceeding in equity or at law. (b) The execution and delivery of this Agreement by the Company does not, and the consummation of the transactions contemplated by this Agreement will not, (i) conflict with, or result in any violation or breach of, any provision of the Certificate of Incorporation or Bylaws of the Company or the comparable charter or organizational documents of any of its Subsidiaries (in each case as heretofore amended), (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, any of the terms, conditions or provisions of any loan, credit agreement, note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound, or (iii) subject to the consents, approvals, orders, authorizations, filings, declarations and registrations specified in Section 3.4(c), conflict with or violate any judgment, order, decree, statute, law, ordinance, rule or regulation or any permit, concession, franchise or license applicable to the Company or any of its Subsidiaries or any of their properties or assets, except in the case of clause (ii) and (iii) for any such violations, breaches, defaults, terminations, cancellations or accelerations which in the aggregate could not reasonably be expected to have a -9- 16 Material Adverse Effect on the Company and do not impair the ability of the Company to perform its obligations under this Agreement or prevent the consummation of any of the transactions contemplated hereby. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency, commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of pre-merger notification reports under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the expiration or early termination of the waiting period thereunder; (ii) the filing of the Registration Statement (as defined in Section 3.19) with the Securities and Exchange Commission (the "SEC") in accordance with the Securities Act of 1933, as amended (the "Securities Act"), and the entry of an order by the SEC permitting such registration statement to become effective; (iii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware in accordance with the DGCL; (iv) the filing of the Proxy Statement (as defined in Section 3.19) and related proxy materials with the SEC in accordance with the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (v) such consents, approvals, orders, authorizations, filings, registrations, Returns (as defined in Section 3.8(b)) and declarations as may be required under applicable federal and state securities and Tax (as defined in Section 3.8(a)) laws and the laws of any foreign country; (vi) such other consents, orders, authorizations, filings, approvals, declarations and registrations which, individually or in the aggregate, if not obtained or made, could not reasonably be expected to have a Material Adverse Effect on the Company or impair the ability of the Company to perform its obligations under this Agreement. Section 3.5. SEC Filings; Financial Statements. (a) The Company has filed and made available to Parent or its legal counsel all forms, reports and documents required to be filed by the Company with the SEC (collectively, the "Company SEC Reports") since January 1, 1995. The Company SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a subsequent filing, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Company SEC Reports or necessary in order to make the statements in such the Company SEC Reports, in the light of the circumstances under which they were made, not misleading. None of the Company's Subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes) contained in the Company SEC Reports, including any Company SEC Reports filed from the date of this Agreement until the Closing (collectively, the "Company Financial Statements"), complied or will comply in all material respects with the applicable published rules and regulations of the SEC with respect thereto, was or will be prepared in accordance with -10- 17 United States generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q or 8-K promulgated by the SEC), and fairly presented or will fairly present the consolidated financial position of the Company and its Subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The unaudited consolidated balance sheet of the Company as of September 30, 1997 is referred to herein as the "Company Balance Sheet." Section 3.6. Absence of Undisclosed Liabilities. Except as disclosed in Item 3.6 of the Company Letter or as otherwise disclosed in the Company SEC Reports filed and publicly available prior to the date of this Agreement, the Company and its Subsidiaries do not have any liabilities, either accrued or contingent (whether or not required to be reflected in financial statements in accordance with United States generally accepted accounting principles), and whether due or to become due, which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect on the Company, other than liabilities reflected in the Company Balance Sheet and normal or recurring liabilities incurred since September 30, 1997 in the ordinary course of business consistent with past practices which would not individually or in the aggregate have a Material Adverse Effect on the Company. Section 3.7. Absence of Certain Changes or Events. Since the date of the Company Balance Sheet, the Company and its Subsidiaries have conducted their businesses only in the ordinary course in a manner consistent with past practice (except as disclosed in the Company SEC Reports filed and publicly available prior to the date of this Agreement), and since such date there has not been: (a) any Material Adverse Effect on the Company or any facts or circumstances that could reasonably be expected to result in a Material Adverse Effect on the Company; (b) any damage, destruction or loss (whether or not covered by insurance) with respect to the Company or any of its Subsidiaries having a Material Adverse Effect on the Company; (c) any material change by the Company or any of its Subsidiaries in its accounting methods, principles or practices; (d) any revaluation by the Company or any of its Subsidiaries of any of its assets having a Material Adverse Effect on the Company, including writing down the value of capitalized software or inventory or writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice; or (e) except as disclosed in Item 3.7 of the Company Letter, any other action or event that would have required the consent of Parent pursuant to clauses (a), (c) or (g) of Section 5.1 of this Agreement had such action or event occurred after the date of this Agreement. Section 3.8. Taxes. (a) For purposes of this Agreement, a "Tax" or, collectively, "Taxes" means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities of any kind whatsoever, including, without limitation, any of the foregoing based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, -11- 18 payroll, recapture, employment, excise and property taxes (in all cases, together with all interest, penalties and additions imposed with respect to such amounts) and including any liability for taxes of a predecessor entity. (b) Except as disclosed in Item 3.8 of the Company Letter, each of the Company and its Subsidiaries has prepared and timely filed (or will so file) all federal, state, local and foreign returns, estimates, information statements and reports ("Returns") required to be filed at or before the Effective Time relating to any and all Taxes concerning or attributable to the Company or any of its Subsidiaries or to their operations, and such Returns are true and correct in all material respects and have been completed in all material respects in accordance with applicable law. (c) Except as disclosed in Item 3.8 of the Company Letter, each of the Company and its Subsidiaries as of the Effective Time will have paid all Taxes it is required to pay prior to the Effective Time. (d) Except as disclosed in Item 3.8 of the Company Letter, there is no material Tax deficiency outstanding, proposed or assessed against the Company or any of its Subsidiaries that has not been paid in full or fully reflected as a liability on the Company Balance Sheet nor has the Company or any of its Subsidiaries executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any material Tax. (e) Except as disclosed in Item 3.8 of the Company Letter, neither the Company nor any of its Subsidiaries has any material liability for unpaid federal, state, local or foreign Taxes that has not been accrued for or reserved on the Company Balance Sheet, whether asserted or unasserted, contingent or otherwise. (f) Except as disclosed in Item 3.8 of the Company Letter, the Returns referred to in clause (b) above, to the extent relating to federal and state income or franchise Taxes, have been examined by the appropriate taxing authority or the period for assessment of the Taxes in respect of which such Returns were required to be filed has expired. (g) Except as disclosed in Item 3.8 of the Company Letter, there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened in writing with respect to Taxes of the Company or any of its Subsidiaries. (h) Except as disclosed in Item 3.8 of the Company Letter, there are no liens for Taxes upon the assets of the Company or any of its Subsidiaries except liens relating to current Taxes not yet due. (i) Except as disclosed in Item 3.8 of the Company Letter, all Taxes which the Company or any of its Subsidiaries are required by law to withhold or to collect for payment have -12- 19 been duly withheld and collected, and have been paid or accrued, reserved against and entered on the books of the Company. (j) Except as disclosed in Item 3.8 of the Company Letter, none of the Company or any of its Subsidiaries has been a member of any group of corporations filing Returns on a consolidated, combined, unitary or similar basis other than each such group of which it is currently a member. (k) Except as disclosed in Item 3.8 of the Company Letter, no transaction contemplated by this Agreement is subject to withholding under Section 1445 of the Code (relating to "FIRPTA"). (l) Neither the Company nor any of its Subsidiaries, nor any of its other affiliates (i) has taken any action, agreed to take any action, or failed to take any action, or (ii) has knowledge of any fact or circumstance that (without regard to any action taken or agreed to be taken by Parent or any of its affiliates), in each case, the Company, such Subsidiary or such other affiliate has actual knowledge could reasonably be expected to cause the Merger to fail to qualify as a "reorganization" within the meaning of Section 368(a) of the Code. Section 3.9. Properties. The Company and its Subsidiaries own or have valid leasehold interests in all real property necessary for the conduct of their businesses in all material respects as presently conducted. All material leases to which the Company or any of its Subsidiaries is a party are in good standing, valid and effective in accordance with their respective terms, and neither the Company nor its Subsidiaries is in default under any of such leases, except where the lack of such good standing, validity and effectiveness or the existence of such default could not reasonably be expected to have a Material Adverse Effect on the Company. Section 3.10. Intellectual Property. (a) Except as disclosed in Item 3.10(a) of the Company Letter, the Company and its Subsidiaries own, or are licensed or otherwise possess, legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights and mask works, any applications for and registrations of such patents, trademarks, trade names, service marks, copyrights and mask works, and all processes, formulae, methods, schematics, technology, know how, computer software programs or applications and tangible or intangible proprietary information or material that are necessary to conduct the business of the Company and its Subsidiaries as currently conducted or planned to be conducted by the Company and its Subsidiaries (the "Company Intellectual Property Rights"). (b) Except as disclosed in Item 3.10(b) of the Company Letter, neither the Company nor any of its Subsidiaries is, or will be as a result of the execution and delivery of this Agreement or the performance of its obligations under this Agreement, in breach of any material license, sublicense or other agreement relating to the Company Intellectual Property Rights or any material license, sublicense or other agreement pursuant to which the Company or any of its Subsidiaries is authorized to use any third party patents, trademarks or copyrights, including -13- 20 software, which are incorporated in or form a part of any product of the Company or any of its Subsidiaries that is material to the business of the Company and its Subsidiaries taken as a whole. (c) Except as disclosed in Item 3.10(c) of the Company Letter, (i) all patents, registered trademarks, service marks and copyrights which are held by the Company or any of its Subsidiaries, and which are material to the business of the Company and its Subsidiaries, taken as a whole, are to the best knowledge of the Company valid and subsisting; (ii) the Company has not been sued in any suit, action or proceeding which involves a claim of infringement of any patents, trademarks, service marks, copyrights or violation of any trade secret or other proprietary right of any third party; and (iii) to the best knowledge of the Company the manufacturing, marketing, licensing or sale of the Company's products does not infringe any patent, trademark, service mark, copyright, trade secret or other proprietary right of any third party, which infringement, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect on the Company. (d) Item 3.10(d) of the Company Letter contains a list of (i) all registered United States, state and foreign trademarks, service marks, logos, trade dress and trade names and pending applications to register the foregoing, (ii) all United States and foreign patents and patent applications and (iii) all registered United States and foreign copyrights and pending applications to register the same, in each case owned by the Company and its Subsidiaries. Section 3.11. Agreements, Contracts and Commitments. Neither the Company nor any of its Subsidiaries has breached, or received in writing any claim or threat (for which there is a reasonable basis) that it has breached, any of the terms or conditions of any material agreement, contract or commitment to which it is a party or to which any of its assets and properties is subject ("Company Material Contracts") in such a manner as would permit any other party to cancel, modify the terms of or terminate the same or would permit any other party to collect material damages from the Company or any of its Subsidiaries under any Company Material Contract. Each Company Material Contract that has not expired or been terminated is in full force and effect and is not subject to any material default thereunder of which the Company is aware by any party obligated to the Company or any of its Subsidiaries pursuant to such Company Material Contract. All Company Material Contracts are filed as exhibits to the Company SEC Reports or are listed in Item 3.11 of the Company Letter. Except as set forth in Item 3.11 of the Company Letter, neither the Company nor any of its Subsidiaries is a party to or bound by any non-competition agreement or any other agreement or obligation which purports to limit in any material respect the manner in which, or the localities in which, the Company or any such Subsidiary is entitled to conduct all or any material portion of the business of the Company and its Subsidiaries taken as whole. Section 3.12. Litigation. There is no action, suit or proceeding, claim, arbitration or, to the knowledge of the Company, investigation against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened, or as to which the Company or any of its Subsidiaries has received any written notice of assertion, which, if decided -14- 21 adversely to the Company or such Subsidiary, could reasonably be expected to have a Material Adverse Effect on the Company or impair the ability of the Company to consummate the transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company or any of its Subsidiaries having or which, insofar as reasonably can be foreseen, in the future would have any such effect. Section 3.13. Environmental Matters. (a) Except as set forth in Item 3.13 of the Company Letter, the Company has no reason to believe (i) that any underground storage tanks are present under any property that the Company or any of its Subsidiaries has at any time owned, operated, occupied or leased or (ii) that 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 PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to the United States Resource Conservation and Recovery Act of 1976, as amended, and the regulations promulgated pursuant to said laws (a "Hazardous Material"), is present, as a result of actions of the Company or any of its Subsidiaries or actions of any third party or otherwise, in, on or under any property, including the land and the improvements, ground water and surface water, that the Company or any of its Subsidiaries has at any time owned, operated, occupied or leased, where the presence of such underground storage tanks or Hazardous Material would be reasonably likely to have a Material Adverse Effect on the Company; provided that the handling or use of a Hazardous Material in compliance with applicable standards or permits shall not be included in this representation. (b) At no time has the Company or any of its Subsidiaries transported, stored, used, manufactured, disposed of, released or exposed its employees or others to Hazardous Materials in violation of any law in effect on or before the Closing Date, nor has the Company or any of its Subsidiaries disposed of, transported, sold, or manufactured any product containing a Hazardous Material (collectively, "Hazardous Materials Activities") in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity, which violation has had or is reasonably likely to have a Material Adverse Effect on the Company. (c) The Company and its Subsidiaries currently hold all environmental approvals, permits, licenses, clearances and consents (the "Environmental Permits") necessary for the conduct of the Hazardous Material Activities and other businesses of the Company and its Subsidiaries as such activities and businesses are currently being conducted in all material respects. (d) 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 or any Hazardous Materials Activity of the Company or any of its -15- 22 Subsidiaries and the Company is not aware of any fact or circumstance which could (i) involve the Company or any of its Subsidiaries in any environmental litigation which, if decided adversely to the Company and its Subsidiaries, could have a Material Adverse Effect on the Company, or (ii) impose upon the Company or any of its Subsidiaries any environmental liability which would have a Material Adverse Effect on the Company. Section 3.14. Employee Benefit Plans. (a) The Company has made available to Parent all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all employment, termination and consulting agreements, all bonus, stock option, stock appreciation right, restricted stock, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar employee benefit plans and agreements, and all unexpired severance plans and agreements, written or otherwise, for the benefit of, or relating to, any current or former employee of the Company or any of its Subsidiaries or any trade or business (whether or not incorporated) or other organization that together with the Company is treated as a single employer under Section 414 of the Code (collectively, the "Company Employee Plans"). Neither the Company nor any of its Subsidiaries, nor any trade or business (whether or not incorporated) or other organization that together with the Company is treated as a single employer under Section 414 of the Code maintains or has ever in the past maintained or contributed to any employee benefit plan subject to Title IV of ERISA (including a multiemployer plan as defined in Section 3(37) of ERISA). Item 3.14 of the Company Letter contains a list of all of the Company Employee Plans. (b) With respect to each Company Employee Plan, the Company has made available to Parent, a true and correct copy of (i) the most recent annual report (Form 5500) filed with the Internal Revenue Service if such Company Employee Plan is subject to such filing requirement, (ii) such Company Employee Plan, (iii) any trust agreement or group annuity contract relating to such Company Employee Plan and (iv) the most recent determination letter issued with respect to any Company Employee Plan which is intended to be qualified under Section 401(a) of the Code. (c) With respect to the Company Employee Plans, no event has occurred, and to the knowledge of the Company there exists no condition or set of circumstances, in connection with which, individually or in the aggregate, the Company or any of its Subsidiaries could be subject to any material liability, including the loss of income Tax deductions under ERISA, the Code or any other applicable law. (d) With respect to the Company Employee Plans, individually and in the aggregate, there are no material funded benefit obligations for which contributions have not been made or properly accrued and there are no material unfunded benefit obligations that have not been accounted for by reserves, or otherwise properly footnoted in accordance with United States generally accepted accounting principles, on the Company Financial Statements. -16- 23 (e) Except as disclosed in Item 3.14 of the Company Letter, neither the Company nor any of its Subsidiaries is a party to any oral or written (i) union or collective bargaining agreement, (ii) agreement with any officer or other key employee of the Company or any of its Subsidiaries, the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of any of the transactions contemplated by this Agreement or upon such occurrence coupled with a subsequent event, (iii) agreement with any officer or key employee of the Company or any of its Subsidiaries providing any term of employment or compensation guarantee, or (iv) agreement or plan, including any Company Employee Plan, any of the benefits of which will be increased, or the vesting or exercisability of the 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. Except as set forth in Item 3.14 of the Company Letter, Section 162(m) of the Code does not limit the deductibility of any compensation payable to any officer of the Company, including compensation or benefits under any plan or agreement disclosed pursuant to the preceding sentence. Section 3.15. Compliance with Laws. The Company and its Subsidiaries have complied with, are not in violation of, and have not received any notices of violations with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of their business, or ownership or operation of their business, except for failures to comply or violations which could not reasonably be expected to have a Material Adverse Effect on the Company or impair the ability of the Company to consummate the transactions contemplated by this Agreement. There are no situations with respect to the Company which involved or involve (i) the use of any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (ii) the making of any direct or indirect unlawful payments to government officials or others from corporate funds or the establishment or maintenance of any unlawful or unrecorded funds, (iii) the violation of any of the provisions of The Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder, or (iv) the receipt of any illegal discounts or rebates or any other violation of the antitrust laws. Section 3.16. Pooling. Neither the Company nor any of its Subsidiaries, nor, to the knowledge of the Company, any of its affiliates, has taken or agreed to take any action that would prevent the Merger from being treated as a "pooling of interests" for financial accounting purposes in accordance with GAAP and applicable SEC regulations. The factual information to be provided by the Company to KPMG Peat Marwick LLP (the "Company Auditors"), in connection with their written opinion to be delivered pursuant to Section 7.1(f) will be correct in all material respects and will be provided to Parent. Section 3.17. Affiliates. Except for the persons listed on Item 3.17 of the Company Letter, there are no persons who, to the knowledge of the Company, may be deemed to be affiliates of the Company under Rule 1-02 of Regulation S-X of the SEC. -17- 24 Section 3.18. Interested Party Transactions. Except as set forth in the Company SEC Reports or by virtue of the Merger, since the date of the Company's last proxy statement to its stockholders, no event has occurred that would be required to be reported by the Company pursuant to paragraphs (a), (b) or (c) of Item 404 of Regulation S-K promulgated by the SEC. Other than the Services Agreement (as defined below) there are no agreements between the Company and any of its affiliates which are not required to be listed in Item 3.14 of the Company Letter. The loan agreement between the Company and Safeguard referenced in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders has terminated and is of no force or effect and there are no amounts outstanding thereunder. Section 3.19. Registration Statement; Proxy Statement/Prospectus. The information supplied by the Company for inclusion in the registration statement of Parent on Form S-4 pursuant to which shares of Parent Common Stock issued in the Merger will be registered with the SEC (the "Registration Statement") shall not contain, at the time the Registration Statement is declared effective by the SEC, any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement, in light of the circumstances under which they were made, not misleading. The information supplied by the Company for inclusion in the proxy statement/prospectus (the "Proxy Statement") to be sent to the stockholders of the Company in connection with the special meeting of the Company's stockholders to consider this Agreement and the Merger (the "Stockholders Meeting") shall not, on the date the Proxy Statement is first mailed to stockholders of the Company, at the time of the Stockholders Meeting or at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it was 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 made in the Proxy Statement not false or misleading or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event relating to the Company or any of its affiliates should be discovered by the Company which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, the Company shall promptly inform Parent. Section 3.20. No Excess Parachute Payments. Any amount that could be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of the Company or any of its affiliates who is a "disqualified individual" (as such term is defined in Proposed Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or Company Employee Plan currently in effect would not be characterized as an "excess parachute payment" (as such term is defined in Section 280G of the Code). -18- 25 Section 3.21. Opinion of Financial Advisor. The financial advisor to the Company, Robert W. Baird & Co., Inc., has delivered to the Company an opinion dated as of the date of this Agreement to the effect that the Exchange Ratio is fair from a financial point of view to the holders of the Company Common Stock and a copy of such opinion has been made available to Parent. Section 3.22. Section 203 of the DGCL Not Applicable. The restrictions contained in Section 203 of the DGCL applicable to a "business combination" (as defined in Section 203) will not apply to the execution, delivery or performance of this Agreement or the consummation of the Merger or the other transactions contemplated hereby. Section 3.23. Voting Requirements. The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock approving this Agreement is the only vote of holders of any class or series of the Company's capital stock necessary to approve this Agreement and the transactions contemplated hereby. Section 3.24. Brokers. No broker, investment banker, financial advisor or other person, other than Robert W. Baird & Co., Inc., the fees and expenses of which will be paid by the Company, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. A true and complete copy of the Company's engagement letter with Robert W. Baird & Co., Inc. has been made available to Parent. Section 3.25. Additional Disclosure. The information set forth in Item 3.25 of the Company Letter is complete and correct in all material respects as of the date hereof and the Company will use its reasonable best efforts to cause such information to continue to be so correct and complete as of the Closing Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Parent and Sub represent and warrant to the Company as follows: Section 4.1. Organization. Parent and each of its material Subsidiaries (i) is a corporation or other business entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) has all requisite corporate or similar power to own, lease and operate its property and to carry on its business as now being conducted and as proposed to be conducted, and (iii) is duly qualified to do business and is in good standing as a foreign corporation or other business entity in each jurisdiction in which the nature of its activities requires it to be so qualified, except where the failure to have such power or the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect on Parent. -19- 26 Section 4.2. Parent Subsidiaries. Except as set forth in Item 4.2 of the letter from Parent to the Company dated and delivered as of the date hereof (the "Parent Letter"), which relates to this Agreement and is designated therein as being the Parent Letter, there are no outstanding subscriptions, options, calls, voting trusts, proxies or warrants with respect to any capital stock of any of the material Subsidiaries of Parent, including any right obligating any such material Subsidiary to issue, deliver, or sell additional shares of its capital stock, in each case other than with Parent or one of its Subsidiaries. Except as required by applicable law and except for director or qualifying shares, all of the outstanding shares of capital stock of each material Subsidiary listed on Item 4.2 of the Parent Letter are duly authorized, validly issued, fully paid and nonassessable, and all such shares are owned by Parent or another Subsidiary of Parent. Section 4.3. Parent Capital Structure. (a) The authorized capital stock of Parent consists of 500,000,000 shares of Parent Common Stock and 5,000,000 shares of Preferred Stock, $.01 par value per share ("Parent Preferred Stock"). As of January 2, 1998: (i) 181,626,660 shares of Parent Common Stock were issued and outstanding, all of which are validly issued, fully paid and nonassessable; (ii) no shares of Parent Preferred Stock are issued or outstanding; (iii) no shares of Parent Common Stock or Parent Preferred Stock were held in the treasury of Parent or by Subsidiaries of Parent; and (iv) 10,903,494 shares of Parent Common Stock were reserved for issuance pursuant to stock options granted and outstanding under Parent's stock option plans (the "Parent Option Plans"). Between January 2, 1998 and the date hereof, (i) no additional shares of capital stock have been reserved for issuance by Parent and (ii) the only issuances of shares of capital stock of Parent Common Stock have been issuances of Parent Common Stock upon the exercise of outstanding stock options. All shares of Parent Common Stock subject to issuance as specified above, upon issuance pursuant to the terms and conditions specified in the instruments pursuant to which they are issuable, shall be duly authorized, validly issued, fully paid and nonassessable. There are no obligations, contingent or otherwise, of Parent or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of Parent Common Stock. (b) Except as set forth in this Section 4.2 or as reserved for future grants of options under the Parent Option Plans, there are no equity securities of any class of Parent, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Section 4.4. Authority; No Conflict; Required Filings and Consents. (a) Parent has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent. This Agreement has been duly executed and delivered by Parent and constitutes the valid and binding obligations of Parent, enforceable in accordance with the terms hereof, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally and general principles of equity, regardless of whether asserted in a proceeding in equity or at law. -20- 27 (b) The execution and delivery of this Agreement by Parent and Sub do not, and the consummation of the transactions contemplated by this Agreement will not, (i) conflict with, or result in any violation or breach of, any provision of the Certificate of Incorporation or Bylaws of Parent or Sub (in each case as heretofore amended), (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, any of the terms, conditions or provisions of any loan, credit agreement, note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which Parent or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound, or (iii) subject to the consents, approvals, orders, authorizations, filings, declarations and registrations specified in Section 4.3(c), conflict with or violate any judgment, order, decree, statute, law, ordinance, rule or regulation or any permit, concession, franchise or license applicable to Parent or any of its Subsidiaries or any of their properties or assets, except in the case of clause (ii) and (iii) for any such violations, breaches, defaults, terminations, cancellations or accelerations which in the aggregate could not reasonably be expected to have a Material Adverse Effect on Parent and do not impair the ability of Parent to perform its obligations under this Agreement or prevent the consummation of any of the transactions contemplated hereby. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Parent or any of its Subsidiaries in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of pre-merger notification reports under the HSR Act and the expiration or early termination of the waiting period thereunder; (ii) the filing of the Registration Statement with the SEC in accordance with the Securities Act and the entry of an order by the SEC permitting the Registration Statement to become effective; (iii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware in accordance with the DGCL; (iv) the filing of the Proxy Statement and related proxy materials with the SEC in accordance with the Exchange Act; (v) such consents, approvals, orders, authorizations, filings, registrations, Returns, and declarations as may be required under applicable federal and state securities and Tax laws and the laws of any foreign country; and (vi) such other consents, approvals, orders, authorizations, filings, declarations and registrations which, in the aggregate, if not obtained or made, could not reasonably be expected to have a Material Adverse Effect on Parent or impair the ability of Parent to perform its obligations under this Agreement. Section 4.5. SEC Filings; Financial Statements. (a) Parent has filed and made available to the Company or its legal counsel all forms, reports and documents required to be filed by Parent with the SEC (collectively, the "Parent SEC Reports") since January 1, 1995. The Parent SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a subsequent filing, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required -21- 28 to be stated in such Parent SEC Reports or necessary in order to make the statements in such Parent SEC Reports, in the light of the circumstances under which they were made, not misleading. None of Parent's Subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes) contained in the Parent SEC Reports, including any Parent SEC Reports filed from the date of this Agreement until the Closing, complied or will comply in all material respects with the applicable published rules and regulations of the SEC with respect thereto, was or will be prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q or 8-K promulgated by the SEC), and fairly presented or will fairly present the consolidated financial position of Parent and its Subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The unaudited consolidated balance sheet of Parent as of September 30, 1997 is referred to herein as the "Parent Balance Sheet." Section 4.6. Absence of Undisclosed Liabilities. Except as disclosed in Item 4.6 of the Parent Letter or as otherwise disclosed in the Parent SEC Reports filed and publicly available prior to the date of this Agreement, Parent and its Subsidiaries do not have any liabilities, either accrued or contingent (whether or not required to be reflected in financial statements in accordance with United States generally accepted accounting principles), and whether due or to become due, which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect on Parent, other than (i) liabilities reflected in the Parent Balance Sheet, and (ii) normal or recurring liabilities incurred since September 30, 1997 in the ordinary course of business consistent with past practices which would not individually or in the aggregate have a Material Adverse Effect on Parent. Section 4.7. Absence of Certain Changes or Events. Between the date of the Parent Balance Sheet and the date hereof, Parent and its Subsidiaries have conducted their businesses only in the ordinary course in a manner consistent with past practice (except as disclosed in the Parent SEC Reports filed and publicly available prior to the date of this Agreement). Except with respect to the matters set forth in Item 4.6 of the Parent Letter, since the Parent Balance Sheet Date there has not been: (a) any Material Adverse Effect on Parent or any facts or circumstances that could reasonably be expected to result in a Material Adverse Effect on Parent; (b) any damage, destruction or loss (whether or not covered by insurance) with respect to Parent or any of its Subsidiaries having a Material Adverse Effect on Parent; (c) any material change by Parent or any of its Subsidiaries in its accounting methods, principles or practices; or (d) any revaluation by Parent or any of its Subsidiaries of any of its assets having a Material Adverse Effect on Parent, including writing down the value of capitalized software or -22- 29 inventory or writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice. Section 4.8. Taxes. (a) Except as disclosed in Item 4.8 of the Parent Letter, each of Parent and its Subsidiaries has prepared and timely filed (or will so file) all United States federal, state and local Returns required to be filed at or before the Effective Time relating to any and all Taxes concerning or attributable to Parent or any of its Subsidiaries or to their operations, and such Returns are true and correct and have been completed in accordance with applicable law, except where any such failure to prepare or file timely or any such failure to be true and correct, or any such failure to be completed in accordance with applicable law would not individually, or in the aggregate, have a Material Adverse Effect on Parent. (b) Except as disclosed in Item 4.8 of the Parent Letter, each of Parent and its Subsidiaries as of the Effective Time will have paid all Taxes it is required to pay prior to the Effective Time, except where any such failure to pay would not have a Material Adverse Effect on Parent. (c) Except as disclosed in Item 4.8 of the Parent Letter, there is no material United States federal or state income Tax deficiency outstanding or assessed against Parent or any of its Subsidiaries that has not been paid in full or fully reflected as a liability on the Parent Balance Sheet nor has Parent or any of its Subsidiaries executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any material United States federal or state income Tax. (d) Except as disclosed in Item 4.8 of the Parent Letter, there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened in writing with respect to Taxes of Parent or any of its Subsidiaries that, if decided adversely to Parent, would have a Material Adverse Effect on Parent. (e) Except as disclosed in Item 4.8 of the Parent Letter, there are no liens for Taxes upon the assets of Parent or any of its Subsidiaries except liens relating to current Taxes not yet due and except where such liens would not have a Material Adverse Effect on Parent. (f) Except as disclosed in Item 4.8 of the Parent Letter, all Taxes which Parent or any of its Subsidiaries are required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued, reserved against and entered on the books of Parent, except where any such failure to withhold or collect or such failure to pay or accrue, reserve against and enter would not individually, or in the aggregate, have a Material Adverse Effect on Parent. (g) Except as disclosed in Item 4.8 of the Parent Letter, neither Parent nor any of its Subsidiaries has any material liability for unpaid federal, state, local or foreign Taxes that has not been accrued for or reserved on the Parent Balance Sheet, whether asserted or unasserted, -23- 30 contingent or otherwise, except where such liability would not have a Material Adverse Affect on Parent. (h) Neither Parent nor any of its Subsidiaries, nor any of its other affiliates (i) has taken any action, agreed to take any action, or failed to take any action, or (ii) has knowledge of any fact or circumstance that (without regard to any action taken or agreed to be taken by the Company or any of its affiliates), in each case, Parent, such Subsidiary or such other affiliate has actual knowledge could reasonably be expected to cause the Merger to fail to qualify as a "reorganization" within the meaning of Section 368(a) of the Code. Section 4.9. Properties. Parent and its Subsidiaries own or have valid leasehold interests in all real property necessary for the conduct of their businesses in all material respects as presently conducted. All material leases to which Parent or any of its Subsidiaries is a party are in good standing, valid and effective in accordance with their respective terms, and neither Parent nor its Subsidiaries is in default under any of such leases, except where the lack of such good standing, validity and effectiveness or the existence of such default could not reasonably be expected to have a Material Adverse Effect on Parent. Section 4.10. Intellectual Property. Except with respect to the matters set forth in Item 4.6 of the Parent Letter, Parent and its Subsidiaries own, or are licensed or otherwise possess, legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights and mask works, any applications for and registrations of such patents, trademarks, trade names, service marks, copyrights and mask works, and all processes, formulae, methods, schematics, technology, know how, computer software programs or applications and tangible or intangible proprietary information or material that are necessary to conduct the business of Parent and its Subsidiaries as currently conducted or planned to be conducted by Parent and its Subsidiaries except where the failure to have such ownership or possession could not reasonably be expected to have a Material Adverse Effect on Parent. Section 4.11. Agreements, Contracts and Commitments. Neither Parent nor any of its Subsidiaries has breached, or received in writing any claim or threat (for which there is a reasonable basis) that it has breached, any of the terms or conditions of any material agreement, contract or commitment to which it is a party or to which any of its assets is subject ("Parent Material Contracts") in such a manner as would permit any other party to cancel, modify the terms of or terminate the same or would permit any other party to collect material damages from Parent or any of its Subsidiaries under any Parent Material Contract. Each Parent Material Contract that has not expired or been terminated is in full force and effect and is not subject to any material default thereunder of which Parent is aware by any party obligated to Parent or any of its Subsidiaries pursuant to such Parent Material Contract. Section 4.12. Litigation. Except with respect to the matters set forth in Item 4.6 of the Parent Letter, there is no action, suit or proceeding, claim, arbitration or, to the knowledge of Parent, investigation against Parent or any of its Subsidiaries pending or, to the knowledge of -24- 31 Parent, threatened, or as to which Parent or any of its Subsidiaries has received any written notice of assertion, which, if decided adversely to Parent or such Subsidiary, could reasonably be expected to have a Material Adverse Effect on Parent or impair the ability of Parent to consummate the transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Parent or any of its Subsidiaries having or which, insofar as reasonably can be foreseen, in the future would have any such effect. Section 4.13. Environmental Matters. (a) Except as set forth in Item 4.13 of the Parent Letter, Parent has no reason to believe (i) that any underground storage tanks are present under any property that Parent or any of its Subsidiaries has at any time owned, operated, occupied or leased or (ii) that any Hazardous Material is present, as a result of actions of Parent or any of its Subsidiaries or actions of any third party or otherwise, in, on or under any property, including the land and the improvements, ground water and surface water, that Parent or any of its Subsidiaries has at any time owned, operated, occupied or leased, where the presence of such underground storage tanks or Hazardous Material would be reasonably likely to have a Material Adverse Effect on Parent; provided that the handling and use of a Hazardous Material in compliance with applicable standards or permits shall not be included in this representation. (b) At no time has Parent or any of its Subsidiaries transported, stored, used, manufactured, disposed of, released or exposed its employees or others to Hazardous Materials in violation of any law in effect on or before the Closing Date, nor has Parent or any of its Subsidiaries engaged in Hazardous Materials Activities in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity to prohibit, regulate or control Hazardous Materials or any Hazardous Materials Activity, which violation has had or is reasonably likely to have a Material Adverse Effect on Parent. (c) Parent and its Subsidiaries currently hold all Environmental Permits necessary for the conduct of the Hazardous Materials Activities and other businesses of Parent and its Subsidiaries as such activities and businesses are currently being conducted. (d) Parent is not aware of any fact or circumstance which could (i) involve Parent or any of its Subsidiaries in any environmental litigation which, if decided adversely to Parent and its Subsidiaries, could have a Material Adverse Effect on Parent, or (ii) impose upon Parent or any of its Subsidiaries any environmental liability which would have a Material Adverse Effect on Parent. Section 4.14. Pooling. Neither Parent nor any of its Subsidiaries, nor, to the knowledge of Parent, any of its affiliates has taken or agreed to take any action that would prevent the Merger from being treated as a "pooling of interests" for financial accounting purposes in accordance with GAAP and applicable SEC regulations. The factual information to be provided by Parent to the Ernst & Young LLP, ("Parent Auditors") in connection with their written opinion to be delivered pursuant to Section 7.1(f) will be correct in all material respects. -25- 32 Section 4.15. Affiliates. Except for the persons listed on Item 4.15 of the Parent Letter, there are no persons who, to the knowledge of Parent, may be deemed to be affiliates of Parent under Rule 1-02 of Regulation S-X of the SEC. Section 4.16. Compliance with Laws. Parent and its Subsidiaries have complied with, are not in violation of, and have not received any notices of violations with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of their business, or ownership or operation of their business, except for failures to comply or violations which could not reasonably be expected to have a Material Adverse Effect on Parent or impair the ability of Parent to consummate the transactions contemplated by this Agreement. There are no situations with respect to Parent which involved or involve (i) the use of any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (ii) the making of any direct or indirect unlawful payments to government officials or others from corporate funds or the establishment or maintenance of any unlawful or unrecorded funds, (iii) the violation of any of the provisions of The Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder, or (iv) the receipt of any illegal discounts or rebates or any other violation of the antitrust laws. Section 4.17. Registration Statement; Proxy Statement/Prospectus. The information supplied by Parent for inclusion in the Registration Statement shall not contain, at the time the Registration Statement is declared effective by the SEC, any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement, in light of the circumstances under which they were made, not misleading. The information supplied by Parent for inclusion in the Proxy Statement to be sent to the stockholders of the Company in connection with the Stockholders Meeting shall not, on the date the Proxy Statement is first mailed to stockholders of the Company, at the time of the Stockholders Meeting or at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it was 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 made in the Proxy Statement not false or misleading or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event relating to Parent or any of its affiliates should be discovered by Parent which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, Parent shall promptly inform the Company. Section 4.18. Interim Operations of Sub. Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, has engaged in no other business activities, and has conducted its operations only as contemplated by this Agreement. -26- 33 Section 4.19. Voting Requirements. No action by the stockholders of Parent is required to approve this Agreement and the transactions contemplated hereby. Section 4.20. Brokers. No broker, investment banker, financial advisor or other person, other than Goldman, Sachs & Co., the fees and expenses of which will be paid by Parent, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or Sub. ARTICLE V CONDUCT OF BUSINESS Section 5.1. Covenants of the Company. During the period from the date of this Agreement to the Effective Time, the Company agrees as to itself and its Subsidiaries (except to the extent that Parent shall otherwise consent in writing), to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and Taxes when due subject to good faith disputes over such debts or Taxes, to pay or perform its other obligations when due, and, to the extent consistent with the foregoing, to use all reasonable best efforts consistent with past practices and policies to (i) preserve intact its present business organization, (ii) keep available the services of its present officers and key employees, and (iii) preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it. The Company shall notify Parent promptly after becoming aware of any event or occurrence that would result in a material breach of any covenant or agreement of the Company set forth in this Agreement or cause any representation or warranty of the Company set forth in this Agreement to be untrue if made as of the date of, and giving effect to, such event or occurrence, which if uncured, could reasonably be expected to cause any condition set forth in Section 7.2(a) or 7.2(b) not to be satisfied. Except as expressly contemplated by this Agreement, the Company shall not (and shall not permit any of its Subsidiaries to), without the prior written consent of Parent: (a) accelerate, amend or change the period of exercisability of options or restricted stock granted under any of the Company Stock Plans or authorize cash payments in exchange for any options granted under any of such plans; (b) transfer or license to any person or entity or otherwise extend, amend or modify any rights to the Company Intellectual Property Rights other than licenses to customers in the ordinary course of business consistent with past practices on a non-exclusive basis; (c) declare or pay any dividends on or make any other distributions (whether in cash, stock or property, other than dividends or distributions by a direct or indirect wholly owned subsidiary of the Company to its parent) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in -27- 34 respect of, in lieu of or in substitution for shares of its capital stock, or purchase or otherwise acquire, directly or indirectly, any shares of its capital stock; (d) issue, deliver, sell, pledge or otherwise encumber, or authorize or propose the issuance, delivery, sale, pledge or encumbrance of, any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than the issuance of the Company Common Stock upon the exercise of Company Stock Options outstanding on the date of this Agreement and in accordance with their present terms, except for issuances of Company Stock Options pursuant to the Company Stock Plans relating to not more than one hundred fifty thousand (150,000) shares of Company Common Stock in the aggregate, in connection with the hiring of new employees or the promotion of officers and employees (other than Senior Officers), in each case in the ordinary course of business, consistent with past practice; (e) acquire or agree to acquire, by merging or consolidating with, by purchasing any equity interest in or the assets of, or by any other means, any business or any corporation, partnership, limited liability company or other business organization or division or any interest therein; (f) sell, lease, license, mortgage, encumber or otherwise dispose of any of its properties or assets, except for sales, leases or licenses of products or services in the ordinary course of business in accordance with past practices; (g) take any action to: (i) increase or agree to increase the compensation payable or to become payable to its officers or employees, except for regularly scheduled increases in salary or wages (not in excess of ten percent (10%) in the aggregate for each person) of employees (other than Senior Officers) in accordance with past practices, (ii) grant any severance or termination pay to, or enter into any employment or severance agreements with, directors or Senior Officers, (iii) grant any severance or termination pay to, or enter into any employment or severance agreement with, any other employees, except in the ordinary course of business consistent with past practice, provided that the aggregate of such payments shall not be in excess of one hundred thousand dollars ($100,000), (iv) enter into any collective bargaining agreement, or (v) establish, adopt or enter into any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees or amend any Company Employee Plan; (h) revalue any of its assets, including writing down the value of inventory or writing off notes or accounts receivable, other than in the ordinary course of business pursuant to arm's length transactions on commercially reasonable terms; -28- 35 (i) (y) incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities or guarantee any debt securities of others, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, or (z) make any loans, advances or capital contributions to, or investments in, any other person, other than to the Company or any of its wholly owned Subsidiaries; (j) amend or propose to amend its Certificate of Incorporation or Bylaws or other comparable charter or organizational documents; (k) incur or commit to incur capital expenditures in excess of five hundred thousand dollars ($500,000) individually, or four million dollars ($4,000,000) in the aggregate; (l) make any material amendments to any OEM agreement or enter into or make any amendments to any agreements pursuant to which any third party is granted exclusive marketing, manufacturing or other rights with respect to any Company product, process or technology, other than granting to specific customers non-territorial exclusive rights to physical packaging and related interfaces developed by the Company for such customer's equipment; (m) amend in any respect that, taken as a whole, is material and adverse to the Company or terminate any material contract, agreement or license to which it is a party; (n) (y) waive or release any material right or claim (except in connection with amendments that comply with clause (m) immediately above), or (z) pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent Company Financial Statements (or the notes thereto) filed prior to the date hereof, or incurred in the ordinary course of business consistent with past practice; (o) settle or compromise Tax liabilities in excess of five hundred thousand dollars ($500,000) in the aggregate, or prepare or file any Return inconsistent with past practice or, on any such Return, take any position, make any election, or adopt any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Returns in prior periods; (p) initiate any litigation or arbitration proceeding, other than litigation involving Parent relating to this Agreement and counterclaims or other proceedings responsive to litigation filed by a third party; or -29- 36 (q) take, or agree in writing or otherwise to take, any of the actions described in the foregoing clauses (a) through (p), or any action (other than actions of the type contemplated by clauses (a) through (p) above which are permitted thereby) which (i) would make any of the Company's representations or warranties in this Agreement, if made on and as of the date of such action or agreement, untrue or incorrect in any material respect, or (ii) could prevent it from performing, or cause it not to perform, its obligations under this Agreement. Section 5.2. Covenants of Parent. Parent shall notify the Company promptly after becoming aware of any event or occurrence that would result in a material breach of any covenant or agreement of Parent set forth in this Agreement or cause any representation or warranty of Parent set forth in this Agreement to be untrue if made as of the date of, and giving effect to, such event or occurrence, which if uncured, could reasonably be expected to cause any condition set forth in Section 7.2(a) or 7.2(b) not to be satisfied. Between the date hereof and April 16, 1998, except as expressly contemplated by this Agreement, Parent shall not (and shall not permit any of its Subsidiaries to), without the prior written consent of the Company: (a) declare or pay any dividends on or make any other distributions (whether in cash, stock or property, other than dividends or distributions by a direct or indirect wholly owned subsidiary of Parent to its parent) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or spend more than $50,000,000 to purchase or otherwise acquire, directly or indirectly, any shares of its capital stock; (b) issue or authorize the issuance or delivery of, any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than (i) the issuance of the Parent Common Stock upon the exercise of Parent stock options outstanding on the date of this Agreement and (ii) issuances not involving more than five percent (5%) of the currently issued and outstanding Parent Common Stock; (c) acquire or agree to acquire, by merging or consolidating with, by purchasing any equity interest in or the assets of, or by any other means, any business or any corporation, partnership, limited liability company or other business organization or division or any interest therein to the extent all such acquisitions together involve purchase prices in excess of five hundred million dollars ($500,000,000) in the aggregate, it being agreed that nothing in this Agreement shall prohibit Parent or any of its Subsidiaries from engaging in discussions or negotiations or from furnishing information in connection with any acquisitions or transactions; (d) sell, lease, license, mortgage, encumber or otherwise dispose of any of its properties or assets, except for sales, leases or licenses of products or services (i) in the ordinary -30- 37 course of business or (ii) to the extent involving sale prices of less than five hundred million dollars ($500,000,000) in the aggregate; (e) amend or propose to amend its Certificate of Incorporation or Bylaws or other comparable charter or organizational documents; (f) (x) incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities or guarantee any debt securities of others, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, or (y) make any loans, advances or capital contributions to, or investments in, any other person, other than to the Parent or any of its wholly owned Subsidiaries, to the extent involving in the case of all of the matters described in clauses (x) and (y) more than two hundred fifty million dollars ($250,000,000) in the aggregate; or (g) take, or agree in writing or otherwise to take, any of the actions described in the foregoing clauses (a) through (f), or any action (other than actions of the type contemplated by clauses (a) through (f) above which are permitted thereby) which (i) would make any of Parent's representations or warranties in this Agreement, if made on and as of the date of such action or agreement, untrue or incorrect in any material respect, or (ii) could prevent it from performing, or cause it not to perform, its obligations under this Agreement. Nothing contained in this Agreement shall prohibit Parent from adopting a stockholders rights plan or issuing securities pursuant thereto. Section 5.3. Employment Agreements. The Company may enter into employment agreements, effective as of the Effective Time, with the officers of the Company listed in Item 5.3(a) of the Parent Letter (the "Senior Officers"), which employment agreements shall be in the form attached as Item 5.3(b) of the Parent Letter and shall be subject to the terms specified in Item 5.3(c) of the Parent Letter. Section 5.4. Cooperation. Subject to compliance with applicable law, from the date hereof until the Effective Time, (i) the Company shall confer on a regular and frequent basis with one or more representatives of Parent to report operational matters of materiality and the general status of ongoing operations and (ii) each of Parent and the Company shall promptly provide the other party or its counsel with copies of all filings made by the Company with any Governmental Entity in connection with this Agreement, the Merger and the other transactions contemplated hereby. Section 5.5. Material Adverse Effect For purposes of this Agreement, "Material Adverse Effect" means, when used in connection with the Company or Parent, any change or effect that is materially adverse to the business, properties, assets, condition (financial or otherwise), or results of operations of such party and its Subsidiaries taken as a whole but excluding (i) any change resulting from general economic conditions or general industry -31- 38 conditions or (ii) any change caused by the transactions contemplated by this Agreement and the public announcement thereof. ARTICLE VI ADDITIONAL AGREEMENTS Section 6.1. No Solicitation. (a) The Company agrees that, from the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with Section 8.1, it shall not, directly or indirectly, and shall cause its officers, directors, employees, representatives, agents, and affiliates, to not (i) solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, sale or purchase of substantial assets or stock, tender or exchange offer, or other business combination or change in control or similar transaction involving the Company or any of its Subsidiaries, other than the transactions contemplated or permitted by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as a "Takeover Proposal"), (ii) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Takeover Proposal, or (iii) enter into any agreement with respect to, agree to, approve or recommend any Takeover Proposal; provided, however, that nothing contained in this Agreement shall prevent the Company or its Board of Directors, directly or through representatives or agents on behalf of the Board of Directors, from (A) furnishing non-public information to, or entering into discussions or negotiations with, any person or entity in connection with an unsolicited bona fide written Takeover Proposal by such person or entity, if and only to the extent that (1) such Takeover Proposal would, if consummated, result in a transaction that would, in the reasonable good faith judgment of the Board of Directors of the Company, after consultation with its financial advisors, result in a transaction more favorable to the Company's stockholders from a financial point of view than the Merger (any such more favorable Takeover Proposal being referred to in this Agreement as a "Superior Proposal") and, in the reasonable good faith judgment of the Board of Directors of the Company, after consultation with its financial advisors, the person or entity making such Superior Proposal has the financial means to conclude such transaction, (2) the failure to take such action would in the reasonable good faith judgment of the Board of Directors of the Company, on the basis of the advice of the outside corporate counsel of the Company, be contrary to the fiduciary duties of the Board of Directors of the Company to the Company's stockholders under applicable law; (3) prior to furnishing such non-public information to, or entering into discussions or negotiations with, such person or entity, such Board of Directors receives from such person or entity an executed confidentiality agreement with provisions not less favorable to the Company than those contained in the Confidentiality and Non Disclosure Agreement dated December 29, 1997 between Parent and the Company, except for the provision of Section 7 thereof (the "Confidentiality Agreement") and (4) the Company shall have fully complied with this Section 6.1; or (B) complying with Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act with regard to a Takeover Proposal. -32- 39 (b) The Company shall notify Parent no later than twenty-four (24) hours after receipt by the Company (or its advisors) of any Takeover Proposal or any request for nonpublic information in connection with a Takeover Proposal or for access to the properties, books or records of the Company by any person or entity that informs the Company that it is considering making, or has made, a Takeover Proposal. Such notice to Parent shall be made orally and in writing and shall indicate in reasonable detail the identity of the person or entity making the Takeover Proposal and the terms and conditions of such proposal, inquiry or contact. If the financial terms of such Takeover Proposal are modified, then the Company shall notify Parent of the terms and conditions of such modification within twenty-four (24) hours of the receipt of such modification. The Company shall also notify Parent simultaneously with the delivery of notice to the directors of the Company of, and in any event at least twenty-four (24) hours prior to (unless a longer period is required by Section 6.1(c)), each meeting of the Board of Directors at which the Company will consider taking definitive action with respect to withdrawing or modifying, in a manner adverse to Parent, its recommendation to the Company's stockholders in favor of approval of the Merger. (c) Notwithstanding the foregoing, in the event that there exists a Superior Proposal before the Board of Directors of the Company and in the reasonable good faith judgment of the Company, on the basis of the advice of the outside corporate counsel of the Company, the failure to accept such Superior Proposal would be contrary to the fiduciary duties of the Board of Directors of the Company to the Company's stockholders under applicable law, the Board of Directors of the Company may pursuant to Section 8.1(h) (subject to this and the following sentences) terminate this Agreement prior to the Stockholders Meeting (and concurrently with such termination, cause the Company to enter into an acquisition agreement with respect to such Superior Proposal), but only at a time that is (i) after the third day following Parent's receipt of written notice advising Parent that the Board of Directors of the Company is prepared to accept a Superior Proposal, specifying the material terms and conditions of such Superior Proposal and identifying the person making such Superior Proposal; (ii) after the payment by the Company to Parent of the Termination Fee in full and in immediately available funds; and (iii) after the Company shall have, and shall have caused its financial and legal advisors to, negotiate in good faith with Parent to make such changes to the terms and conditions of this Agreement as would enable the Company to proceed with the transactions contemplated hereby. (d) During the period from the date of this Agreement through the Effective Time, the Company shall not terminate, amend, modify or waive any provision of any confidentiality or standstill agreement (other than any entered into in the ordinary course of business not in connection with any possible Takeover Proposal) to which it or any of its Subsidiaries is a party (other than any between the Company and its Subsidiaries). During such period, the Company shall enforce, to the fullest extent permitted under applicable law, the provisions of any such agreement, including, but not limited to, by obtaining injunctions to prevent any breaches of such agreements and to enforce specifically the terms and provisions thereof in any court of the United States of America or of any state having jurisdiction. -33- 40 Section 6.2. Proxy Statement/Prospectus; Registration Statement. (a) As promptly as practicable after the execution of this Agreement, Parent and the Company shall prepare and file with the SEC the Proxy Statement, and Parent shall prepare and file with the SEC the Registration Statement, in which the Proxy Statement will be included. Parent and the Company shall use all reasonable best efforts to cause the Registration Statement to become effective as soon after such filing as reasonably practicable. The Proxy Statement shall include the recommendation of the Board of Directors of the Company to the stockholders of the Company in favor of approval and adoption of this Agreement and the Merger; provided, however, that such Board of Directors shall not be required to make, and shall be entitled to withdraw or modify, such recommendation if (i) the Company has complied with Section 6.1 and (ii) in the reasonable good faith judgment of such Board of Directors, on the basis of the advice of outside corporate counsel of the Company, the making of, or the failure to withdraw or modify, such recommendation would be contrary to the fiduciary duties of such Board of Directors to the Company's stockholders under applicable law. The Board of Directors of the Company shall not rescind its declaration that this Agreement and the Merger are advisable unless, in any such case, each of the conditions set forth in clauses (i) and (ii) immediately above is satisfied. (b) Each of Parent and the Company shall make all necessary filings with respect to the Merger under the Securities Act and the Exchange Act and applicable state securities laws and the rules and regulations thereunder, and shall use its reasonable best efforts to obtain all permits and other authorizations required under applicable state securities laws for the issuance of the shares of Parent Common Stock pursuant to the Merger. Section 6.3. Consents. Each of Parent and the Company shall use reasonable best efforts to obtain all necessary consents, waivers and approvals under its respective material agreements, contracts, licenses or leases required for the consummation of the Merger and the other transactions contemplated by this Agreement. Section 6.4. Current Nasdaq Quotation. Parent shall continue the quotation of Parent Common Stock, and the Company shall continue the quotation of the Company Common Stock, on The Nasdaq National Market during the term of this Agreement to the extent necessary so that appraisal rights will not be available to stockholders of the Company under Section 262 of the DGCL. Section 6.5. Access to Information. Upon reasonable notice, the Company shall (and shall cause each of its Subsidiaries to) afford to the officers, employees, accountants, financial advisors, counsel and other representatives of Parent, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments, Returns, and records and, during such period, the Company shall (and shall cause each of its Subsidiaries to) furnish promptly to Parent (i) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws and (ii) all other information concerning its business, properties and personnel as Parent may reasonably request; provided, however, that the -34- 41 Company's obligation to provide information pursuant to this Section 6.5 shall be subject to Item 6.5 of the Company Letter. During the period prior to the Effective Time, Parent shall provide the financial advisor of the Company identified in Section 3.24 and the Chief Executive Officer of the Company reasonable access to senior executive officers of Parent, as appropriate, in connection with the transactions contemplated by this Agreement. No information or knowledge obtained in any investigation pursuant to this Section 6.5 shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Merger. Unless otherwise required by law, Parent and the Company will hold, and will use its reasonable best efforts to cause their respective officers, employees, affiliates and representatives to hold, any nonpublic information received from the other party to this Agreement, any of their respective Subsidiaries or any of their respective representatives (other than information already in the possession of such party at the time of receipt of such information from the other party) in confidence until such time as such information becomes publicly available (otherwise than through the wrongful act of any such person) and shall use its reasonable best efforts to ensure that such officers, employees, affiliates and representatives do not disclose such information to others without the prior written consent of the Company or Parent, as the case may be. In the event of termination of this Agreement for any reason, Parent and the Company shall promptly return or destroy all documents containing nonpublic information so obtained from the Company, Parent or any of their Subsidiaries and any copies of such documents. Section 6.6. Stockholders Meeting. (a) The Company shall call and hold the Stockholders Meeting as promptly as practicable after the date hereof for the purpose of voting upon the adoption of this Agreement and the approval of the Merger. Subject to Section 6.1, the Company, through its Board of Directors, shall recommend that the Company's stockholders vote in favor of the adoption of this Agreement and the approval of the Merger (and shall not withdraw or modify such recommendation) and shall otherwise use its best efforts to solicit from its stockholders proxies in favor of such matters and to obtain the requisite approval of the Company's stockholders; provided, however, that such Board of Directors shall not be required to make, and shall be entitled to withdraw or modify, such recommendation if (i) the Company has complied with Section 6.1 and (ii) in the reasonable good faith judgment of such Board of Directors, on the basis of advice of outside corporate counsel of the Company, the making of, or the failure to withdraw or modify, such recommendation would be contrary to the fiduciary duties of such Board of Directors to the Company's stockholders under applicable law. Section 6.7. Legal Conditions to Merger. (a) Each of Parent and the Company shall take reasonable actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the Merger (which actions shall include, without limitation, furnishing all information required under the HSR Act and in connection with approvals of or filings with any other Governmental Entity) and shall promptly cooperate with and, subject to applicable law, furnish information to each other in connection with any such requirements imposed upon either of them or any of their Subsidiaries in connection with the Merger. Each of Parent and the Company shall, and shall cause its Subsidiaries to take reasonable -35- 42 actions necessary to obtain (and shall cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other third party, required to be obtained or made by the Company, Parent or any of their Subsidiaries for any of the conditions set forth in Article VII to be satisfied (any of the foregoing, an "Approval") or the taking of any action required in furtherance thereof or otherwise contemplated thereby or by this Agreement. (b) Notwithstanding anything to the contrary contained in this Agreement, neither Parent nor the Company shall have any obligation to oppose, challenge or appeal any suit, action or proceeding by any Governmental Entity before any court or governmental authority, agency or tribunal, domestic or foreign or any order or ruling by any such body, (i) seeking to restrain or prohibit or restraining or prohibiting the consummation of the Merger or any of the other transactions contemplated by this Agreement, (ii) seeking to prohibit or limit or prohibiting or limiting the ownership, operation or control by the Company, Parent or any of their respective Subsidiaries of any portion of the business or assets of the Company, Parent or any of their respective Subsidiaries, or (iii) seeking to compel or compelling the Company, Parent or any of their respective Subsidiaries to dispose of, grant rights in respect of, or hold separate any portion of the business or assets of the Company, Parent or any of their respective Subsidiaries. Further, notwithstanding anything to the contrary contained in this Agreement, Parent shall have no obligation to dispose of, grant rights in respect of, or hold separate any portion of the business or assets of the Company, Parent or any of their respective Subsidiaries or to agree to any of the foregoing. Neither the Company nor any of its Subsidiaries shall take any of the actions described in preceding sentences of this Section 6.7(b) without the prior written consent of Parent. Section 6.8. Public Disclosure. Except as otherwise required by applicable law or the rules or regulations of any securities exchange or market on which the securities of such party are listed or traded, no party or any of its affiliates shall issue or cause the publication of any press release or other public announcement or disclosure with respect to the transactions contemplated by this Agreement without the consent of each other party, and in any event, each party agrees that it shall give each other party reasonable opportunity to review and comment upon any such release or announcement prior to publication of the same. Section 6.9. Tax-Free Reorganization. Parent and the Company shall each use its reasonable best efforts to cause the Merger to be treated as a "reorganization" within the meaning of Section 368(a) of the Code, and to enable its respective counsel to render the opinions contemplated by Sections 7.2(e) and 7.3(d). Each party shall make (to the extent it can truthfully do so), and shall use all reasonable best efforts to cause those of its respective stockholders that counsel to the parties shall reasonably request to make, such representations and certifications as counsel to the parties shall reasonably request to enable them to render such opinions including, without limitation, the representations of Parent contained in a certificate of Parent (the "Parent Tax Certificate") substantially in the form of the Parent Tax Certificate attached as Item 6.9 of the Parent Letter and representations of the Company contained in a certificate of the Company (the -36- 43 "Company Tax Certificate") substantially in the form of the Company Tax Certificate attached as Item 6.9 of the Company Letter. Section 6.10. Pooling Accounting. Parent and the Company shall each use its reasonable best efforts to cause the business combination to be effected by the Merger to be accounted for as a pooling of interests. The Company shall use its reasonable best efforts to cause its affiliates not to take any action that would adversely affect the ability of Parent to account for the business combination to be effected by the Merger as a pooling of interests. Section 6.11. Affiliate Letters. Between the date of this Agreement and the Effective Time, the Company will use its reasonable best efforts to cause each of the persons listed on Item 3.17 of the Company Letter to execute and deliver to Parent an executed letter agreement, substantially in the form of Exhibit A hereto (the "Company Affiliate Letter"), and Parent will use its reasonable best efforts to cause each of the persons listed on Item 4.15 of the Parent Letter to execute and deliver to Parent an executed letter agreement, substantially in the form of Exhibit B hereto (the "Parent Affiliate Letter"). Between the date of this Agreement and the Effective Time, the Company shall, if requested, promptly provide Parent such information and documents as Parent shall reasonably request for purposes of determining the affiliates of the Company and upon the request of Parent use its reasonable best efforts to cause any person who may in the reasonable judgment of Parent be deemed an affiliate of the Company to execute and deliver to Parent the Company Affiliate Letter. Parent shall be entitled to place appropriate legends on the certificates evidencing any Parent Common Stock to be received by affiliates of the Company pursuant to this Agreement and to issue appropriate stop transfer instructions to the transfer agent for the Parent Common Stock, consistent with the terms of the Company Affiliate Letter. Section 6.12. Nasdaq Quotation. Parent shall use its reasonable best efforts to cause the shares of Parent Common Stock to be issued in the Merger to be approved for quotation on The Nasdaq National Market, subject to official notice of issuance, prior to the Closing Date. Section 6.13. Stock Plans and Options. (a) The Company shall provide to each holder of an outstanding Company Stock Option to purchase the Company Common Stock under the Company Stock Plans the notice (if any) required pursuant to such plans in connection with the Merger. (b) From and after the Effective Time, each outstanding Company Stock Option (including both vested and unvested Company Stock Options) shall be assumed by Parent and shall pursuant to the terms of such options, be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such Company Stock Option, the same number of shares of Parent Common Stock as the holder of such Company Stock Option would have been entitled to receive in the Merger pursuant to this Agreement had such holder exercised such option in full immediately prior to the Effective Time (rounded down to the nearest whole -37- 44 number), at a price per share (rounded up to the nearest whole cent) equal to the quotient of (i) the exercise price per share of Company Common Stock pursuant to such Company Stock Option divided by (ii) the Exchange Ratio. All other terms of such Company Stock Options shall remain in effect. (c) The Company shall take all actions necessary so that following the Effective Time no holder of a Company Stock Option or any participant in any Company Benefit Plan shall have any right thereunder to acquire capital stock of the Company, Sub, or the Surviving Corporation. The Company shall take all actions necessary so that, as of the Effective Time, none of Sub, the Company, the Surviving Corporation or any of their respective Subsidiaries is or will be bound by any Company Stock Options, other options, warrants, rights or agreements which would entitle any person, other than Parent, Sub or its affiliates, to own any capital stock of the Company, Sub, the Surviving Corporation or any of their respective subsidiaries or to receive any payment in respect thereof, except as otherwise provided in Article I and Section 6.13(b). Section 6.14. Indemnification. All rights to indemnification for acts or omissions occurring prior to the Effective Time now existing in favor of the current or former directors or officers of the Company provided in the Company's Certificate of Incorporation and Bylaws shall survive the Merger and shall continue in full force and effect in accordance with their terms for a period of not less than six (6) years from the Effective Time and to the extent the Surviving Corporation fails to perform its obligations with respect thereto, Parent shall perform such obligations. Parent and the Surviving Corporation will cause to be maintained for a period of not less than six (6) years from the Effective Time the Company's current directors and officers insurance and indemnification policy (a copy of which has been provided to Parent) to the extent that it provides coverage for events occurring prior to the Effective Time for all persons who are directors and officers of the Company on the date of this Agreement; provided, however, that in no event shall the Surviving Corporation be required to pay a premium in any one year in excess of one hundred fifty thousand dollars ($150,000), and provided, further, that if the annual premiums of such insurance coverage exceed such amount or if such existing directors' and officers' insurance and indemnification policy expires, is terminated or canceled during such six-year period, the Surviving Corporation shall be obligated to obtain a policy with the greatest coverage available for a cost not exceeding one hundred fifty thousand dollars ($150,000). Section 6.15. Additional Agreements; Reasonable Efforts. Subject to the terms and conditions of this Agreement, each of the parties agrees to use all reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, subject to the appropriate vote of the stockholders of the Company described in Section 6.6, including cooperating fully with the other party, providing information and making all necessary filings under the HSR Act. Section 6.16. Termination of Certain Agreements. The Company shall cause the Administrative Services Agreement (the "Services Agreement"), dated as of May 7, 1997 between the Company and Safeguard Scientifics, Inc. ("Safeguard"), to be terminated effective as of the Effective Time (or such later time thereafter as may be requested by Parent, not to exceed one -38- 45 hundred eighty (180) days following the Effective Time) on terms that are reasonably satisfactory to Parent, which terms shall include that the Company shall have no continuing obligations under such agreement following such termination and that Safeguard shall not be entitled to receive any consideration in connection with such termination other than a termination fee equal to the Services Fee (as defined in Section 3 of the Services Agreement) payable with respect to the period commencing on the date of such termination and ending on December 31, 1998. Section 6.17. Real Estate Transfer Taxes. Either the Company or the Surviving Corporation shall pay all state or local real property transfer, gains or similar Taxes, if any (collectively, the "Transfer Taxes"), attributable to the transfer of the beneficial ownership of the Company's and its Subsidiaries' real properties, and any penalties or interest with respect thereto, payable in connection with the consummation of the Merger. The Company shall cooperate with Parent in the filing of any returns with respect to the Transfer Taxes, including supplying in a timely manner a complete list of all real property interests held by the Company and its Subsidiaries and any information with respect to such properties that is reasonably necessary to complete such returns. The portion of the consideration allocable to the real properties of the Company and its Subsidiaries shall be determined by Parent and the Company in their reasonable discretion. The shareholders of the Company (who are intended third-party beneficiaries of this Section 6.17) shall be deemed to have agreed to be bound by the allocation established pursuant to this Section 6.17 in the preparation of any Return with respect to the Transfer Taxes. ARTICLE VII CONDITIONS TO MERGER Section 7.1. Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions: (a) Stockholder Approvals. This Agreement and the Merger shall have been adopted and approved by the requisite vote of holders of the Company Common Stock pursuant to the DGCL and the Certificate of Incorporation of the Company. (b) HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act and any other material waiting periods under applicable foreign laws (if any) shall have expired or been terminated, and no action by the Department of Justice or Federal Trade Commission or any foreign Governmental Entity challenging or seeking to enjoin the consummation of the Merger shall have been instituted and be pending. (c) Registration Statement. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order. -39- 46 (d) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition shall have been issued and be in effect (i) restraining or prohibiting the consummation of the Merger or any of the transactions contemplated hereby or (ii) prohibiting or limiting the ownership, operation or control by the Company, Parent or any of their respective Subsidiaries of any portion of the business or assets of the Company, Parent or any of their respective Subsidiaries, or compelling the Company, Parent or any of their respective Subsidiaries to dispose of, grant rights in respect of, or hold separate any portion of the business or assets of the Company, Parent or any of their respective Subsidiaries; nor shall any action have been taken or any statute, rule, regulation or order have been enacted, entered or enforced or be deemed applicable to the Merger which makes the consummation of the Merger illegal or prevents or prohibits the Merger. (e) Nasdaq. The shares of Parent Common Stock to be issued in the Merger shall have been approved for quotation on The Nasdaq National Market. (f) Pooling. The Company shall have received the written opinion, dated as of the Effective Time, of the Company Auditors that the Company Auditors concur with management's conclusion that the Company is eligible to be a party to a business combination accounted for as a pooling of interests in accordance with GAAP and applicable published rules and regulations of the SEC. Parent shall have received the written opinion, dated as of the Effective Time, of the Parent Auditors that the Parent Auditors concur with management's conclusion that Parent is eligible to be a party to a business combination accounted for as a pooling of interests in accordance with GAAP and applicable published rules and regulations of the SEC, and that the Merger will qualify for pooling of interests accounting. Each of such written opinions will be in form and substance reasonably satisfactory to the Company and Parent. Section 7.2. Additional Conditions to Obligations of Parent and Sub. The obligations of Parent and Sub to effect the Merger are subject to the satisfaction or waiver of each of the following conditions, any of which may be waived in writing exclusively by Parent and Sub: (a) Representations and Warranties. Each of the representations and warranties of the Company set forth in this Agreement that is qualified by materiality shall be true and correct at and as of the Closing Date as if made at and as of the Closing Date and each of such representations and warranties that is not so qualified shall be true and correct in all material respects at and as of the Closing Date as if made at and as of the Closing Date, in each case except as contemplated by this Agreement, and Parent shall have received a certificate signed on behalf of the Company by the chief executive officer or chief financial officer of the Company to such effect. (b) Performance of Obligations. The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to -40- 47 the Closing Date, and Parent shall have received a certificate signed on behalf of the Company by the chief executive officer or chief financial officer of the Company to such effect. (c) Certain Agreements. A Company Affiliate Letter shall have been executed and delivered to Parent by or on behalf of each director and executive officer of the Company, and each such Company Affiliate Letter shall be in full force and effect. (d) Absence of the Material Adverse Effect on the Company. No Material Adverse Effect with respect to the Company shall have occurred, and no fact or circumstance shall exist which could reasonably be expected to result in a Material Adverse Effect with respect to the Company; provided, that if the event resulting in such Material Adverse Effect was beyond the control of the Company, such event shall not be deemed to have occurred for purposes of this Section 7.2(d) unless Parent pays the Company two million dollars ($2,000,000) in immediately available funds. (e) Tax Opinion. Parent shall have received an opinion of Sidley & Austin, in form and substance reasonably satisfactory to Parent, dated the Effective Time, substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion that are consistent with the state of facts existing as of the Effective Time, for federal income tax purposes: (i) the Merger will constitute a "reorganization" within the meaning of Section 368(a) of the Code, and the Company, Sub and Parent will each be a party to such reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized by Parent, Sub or the Company as a result of the Merger; (iii) no gain or loss will be recognized by the stockholders of the Company upon the exchange of their Company Common Stock solely for shares of Parent Common Stock pursuant to the Merger, except with respect to cash, if any, received in lieu of fractional shares of Parent Common Stock; (iv) the aggregate tax basis of the shares of Parent Common Stock received solely in exchange for Company Common Stock pursuant to the Merger (including fractional shares of Parent Common Stock for which cash is received) will be the same as the aggregate tax basis of the Company Common Stock exchanged therefor; (v) the holding period for shares of Parent Common Stock received solely in exchange for Company Common Stock pursuant to the Merger will include the holding period of the Company Common Stock exchanged therefor, provided such Company Common Stock was held as a capital asset by the stockholder at the Effective Time; and -41- 48 (vi) a stockholder of the Company who receives cash in lieu of a fractional share of Parent Common Stock will recognize gain or loss equal to the difference, if any, between such stockholder's tax basis in such fractional share (as described in clause (iv) above) and the amount of cash received. In rendering such opinion, counsel may rely upon representations of Parent (including, without limitation, representations contained in the Parent Tax Certificate), representations of the Company (including, without limitation, representations contained in the Company Tax Certificate) and representations by others. (f) No Litigation. There shall not be pending or threatened any suit, action or proceeding by any Governmental Entity before any court or governmental authority, agency or tribunal, domestic or foreign, (i) seeking to restrain or prohibit the consummation of the Merger or any of the other transactions contemplated by this Agreement or seeking to obtain from the Company, Parent or Sub any damages in connection therewith, (ii) seeking to prohibit or limit the ownership, operation or control by the Company, Parent or any of their respective Subsidiaries of any portion of the business or assets of the Company, Parent or any of their respective Subsidiaries, or to compel the Company, Parent or any of their respective Subsidiaries to dispose of, grant rights in respect of, or hold separate any portion of the business or assets of the Company, Parent or any of their respective Subsidiaries, or (iii) which otherwise is reasonably likely to have a Material Adverse Effect on the Company. Section 7.3. Additional Conditions to Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction of each of the following conditions, any of which may be waived, in writing, exclusively by the Company: (a) Representations and Warranties. Each of the representations and warranties of Parent and Sub set forth in this Agreement that is qualified by materiality shall be true and correct at and as of the Closing Date and each of such representations and warranties that is not so qualified shall be true and correct in all material respects at and as of the Closing Date as if made at and as of the Closing Date, in each case except as contemplated by this Agreement, and the Company shall have received a certificate signed on behalf of Parent by the chief executive officer or chief financial officer of Parent to such effect. (b) Performance of Obligations. Parent and Sub shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed on behalf of Parent by the chief executive officer or chief financial officer of Parent to such effect. (c) Absence of the Material Adverse Effect on Parent. No Material Adverse Effect with respect to Parent shall have occurred, and no fact or circumstance shall exist which could reasonably be expected to result in a Material Adverse Effect with respect to Parent; provided, that, if the event resulting in such Material Adverse Effect was beyond the control of -42- 49 Parent, such event shall not be deemed to have occurred for purposes of this Section 7.3(c) unless the Company pays the Parent two million dollars ($2,000,000) in immediately available funds. (d) Tax Opinion. The Company shall have received an opinion of Morgan, Lewis & Bockius LLP, in form and substance reasonably satisfactory to the Company, dated the Effective Time, substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion that are consistent with the state of facts existing as of the Effective Time, for federal income tax purposes: (i) the Merger will constitute a "reorganization" within the meaning of Section 368(a) of the Code, and the Company, Sub and Parent will each be a party to such reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized by Parent, Sub or the Company as a result of the Merger; (iii) no gain or loss will be recognized by the stockholders of the Company upon the exchange of their Company Common Stock solely for shares of Parent Common Stock pursuant to the Merger, except with respect to cash, if any, received in lieu of fractional shares of Parent Common Stock; (iv) the aggregate tax basis of the shares of Parent Common Stock received solely in exchange for Company Common Stock pursuant to the Merger (including fractional shares of Parent Common Stock for which cash is received) will be the same as the aggregate tax basis of the Company Common Stock exchanged therefor; (v) the holding period for shares of Parent Common Stock received solely in exchange for Company Common Stock pursuant to the Merger will include the holding period of the Company Common Stock exchanged therefor, provided such Company Common Stock was held as a capital asset by the stockholder at the Effective Time; and (vi) a stockholder of the Company who receives cash in lieu of a fractional share of Parent Common Stock will recognize gain or loss equal to the difference, if any, between such stockholder's tax basis in such fractional share (as described in clause (iv) above) and the amount of cash received. In rendering such opinion, counsel may rely upon representations of Parent (including, without limitation, representations contained in the Parent Tax Certificate), representations of the Company (including, without limitation, representations contained in the Company Tax Certificate) and representations by others. -43- 50 ARTICLE VIII TERMINATION AND AMENDMENT Section 8.1. Termination. This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 8.1(b) through 8.1(g), by written notice by the terminating party to the other party), whether before or after approval of the matters presented in connection with the Merger by the stockholders of the Company: (a) by mutual written consent of Parent and the Company; or (b) by either Parent or the Company if the Merger shall not have been consummated by August 15, 1998 (provided, however, that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or (c) by either Parent or the Company if a court of competent jurisdiction or other Governmental Entity shall have issued a final order, decree or ruling, or taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger, and all appeals with respect to such order, decree, ruling or action have been exhausted or the time for appeal of such order, decree, ruling or action shall have expired (provided, however, that the right to terminate this Agreement under this Section 8.1(c) shall not be available to any party which has not complied with its obligations under Section 6.7); or (d) by either Parent or the Company if, at the Stockholders Meeting (including any adjournment or postponement thereof), the requisite vote of the Company stockholders in favor of this Agreement and approval of the Merger shall not have been obtained (provided, however, that the right to terminate this Agreement under this Section 8.1(d) shall not be available to the Company if it has not complied with its obligations under Sections 6.1, 6.2 and 6.6, and no termination shall be effective by the Company if it has not complied with its obligations under Section 8.3, if applicable, of this Agreement); or (e) by Parent if (i) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified its recommendation of this Agreement or the Merger to the Company's stockholders in a manner adverse to Parent; (ii) an Alternative Transaction (as defined in Section 8.3(f)) involving the Company shall have taken place or the Board of Directors of the Company or any committee thereof shall have recommended such an Alternative Transaction (or a proposal or offer therefor) to the stockholders of the Company or shall have publicly announced its intention to recommend such an Alternative Transaction (or a proposal or offer therefor) to the stockholders of the Company or to engage in an Alternative Transaction or -44- 51 shall have failed to recommend against such Takeover Proposal; or (iii) a tender offer or exchange offer for any of the outstanding shares of the Company Common Stock shall have been commenced or a registration statement with respect thereto shall have been filed (other than by Parent or an affiliate thereof) and the Board of Directors of the Company or any committee thereof shall have (A) recommended that the stockholders of the Company tender their shares in such tender or exchange offer or (B) publicly announced its intention to take no position with respect to such tender or exchange offer; or (f) by Parent if a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement shall have occurred which if uncured would cause any condition set forth in Sections 7.2(a) or 7.2(b) not to be satisfied, and such breach is incapable of being cured or, if capable of being cured, shall not have been cured within twenty (20) business days following receipt by the Company of written notice of such breach from Parent; or (g) by the Company if a breach of any representation, warranty, covenant or agreement on the part of Parent set forth in this Agreement shall have occurred which if uncured would cause any conditions set forth in Section 7.3(a) or 7.3(b) not to be satisfied, and such breach is incapable of being cured or, if capable of being cured, shall not have been cured within twenty (20) business days following receipt by Parent of written notice of such breach from the Company; or (h) by the Company in accordance with Section 6.1(c); provided that in order for the termination of this Agreement pursuant to this paragraph (h) to be deemed effective, and as a condition thereto, the Company shall have complied with all provisions contained in Section 6.1, including the notice provisions therein, and with all the applicable requirements of Section 8.3, including the payment of the Termination Fee. -45- 52 Section 8.2. Effect of Termination. In the event of any termination of this Agreement pursuant to Section 8.1, there shall be no liability or obligation on the part of Parent, the Company, Sub, or any of their respective officers, directors, stockholders or affiliates, except as set forth in Section 8.3. The foregoing limitations shall not apply, and the remedies provided by Section 8.3 shall not be exclusive, to the extent that such termination results from the willful breach by a party of any of its material representations, warranties, covenants or agreements in this Agreement. The provisions of Section 8.3 of this Agreement shall remain in full force and effect and survive any termination of this Agreement. Section 8.3. Fees and Expenses. (a) Except as set forth in this Section 8.3, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Merger is consummated; provided, however, that Parent and the Company shall share equally all fees and expenses, other than attorneys' and accounting fees and expenses, incurred in relation to the printing and filing of the Proxy Statement (including any related preliminary materials) and the Registration Statement (including financial statements and exhibits) and any amendments or supplements thereto and the fee(s) required to be paid by Parent in connection with the filing(s) required under the HSR Act and applicable foreign laws (if any) in connection with the transactions contemplated by this Agreement; provided, further, that the amount of fees and expenses to be paid by the Company pursuant to the immediately preceding proviso shall not exceed two hundred thousand dollars ($200,000). (b) If any Takeover Proposal is made between the date hereof and the termination of this Agreement, and this Agreement is terminated (i) by Parent pursuant to Section 8.1(f), or (ii) by Parent or the Company pursuant to Section 8.1(d) as a result of the failure to receive the requisite vote for adoption of this Agreement and approval of the Merger by the stockholders of the Company at the Stockholders Meeting, then if an Alternative Transaction involving the Company shall take place or the Company shall enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement with respect to an Alternative Transaction (each, an "Acquisition Agreement") within twelve (12) months of such termination, then the Company shall pay to Parent a termination fee in the amount of twelve million dollars ($12,000,000) (the "Termination Fee") simultaneously with the earlier to occur of such Alternative Transaction or execution of such Acquisition Agreement. (c) If this Agreement is terminated by Parent pursuant to Section 8.1(e), then the Company shall pay to Parent the Termination Fee no later than one business day following such termination. (d) If this Agreement is terminated by the Company pursuant to Section 8.1(h), then the Company shall pay to Parent the Termination Fee prior to, and as a condition to, effectiveness of such termination. -46- 53 (e) Any Termination Fee payable under this Section 8.3 shall be paid in immediately available funds. (f) As used in this Agreement, an "Alternative Transaction" involving the Company means (i) a transaction or series of transactions pursuant to which any person or group (as such term is defined under the Exchange Act), other than Parent or Sub, or any affiliate thereof (a "Third Party"), acquires (or would acquire upon completion of such transaction or series of transactions) more than thirty-five percent (35%) of the equity securities or voting power of the Company or any of its Subsidiaries, pursuant to a tender offer or exchange offer or otherwise, (ii) a merger, consolidation, share exchange or other business combination involving the Company or any of its Subsidiaries pursuant to which any Third Party acquires ownership (or would acquire ownership upon consummation of such merger, consolidation, share exchange or other business combination) of more than thirty-five percent (35%) of the outstanding equity securities or voting power of the Company or any of its Subsidiaries or of the entity surviving such merger or business combination or resulting from such consolidation, (iii) any other transaction or series of transactions pursuant to which any Third Party acquires (or would acquire upon completion of such transaction or series of transactions) control of assets of the Company or any of its Subsidiaries (including, for this purpose, outstanding equity securities of Subsidiaries of such party) having a fair market value equal to more than thirty-five percent (35%) of the fair market value of all the consolidated assets of the Company immediately prior to such transaction or series of transactions, or (iv) any transaction or series of transactions pursuant to which any Third Party acquires (or would acquire upon completion of such transaction or series of transactions) control of the Board of Directors of the Company or by which nominees of any Third Party are (or would be) elected or appointed to a majority of the seats on the Board of Directors of the Company. Section 8.4. Amendment. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of the Company, but, after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 8.5. Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions 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 a written instrument signed on behalf of such party. -47- 54 ARTICLE IX MISCELLANEOUS Section 9.1. Nonsurvival of Representations, Warranties and Agreements. None of the representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Closing and the Effective Time, except for the agreements contained in Section 6.14 (Indemnification), this Article IX, the Company Affiliate Letters delivered pursuant to Sections 3.17 and 6.11, the Parent Tax Certificate, the Company Tax Certificate and any other agreement contemplated by this Agreement which, by its terms, does not terminate until a later date. Section 9.2. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Sub, to: Tellabs, Inc. 4951 Indiana Avenue Lisle, Illinois 60532 Attention: General Counsel Facsimile No.: (630) 512-7293 with a copy to: Sidley & Austin One First National Plaza Chicago, Illinois 60603 Attention: Thomas A. Cole and Imad I. Qasim Facsimile No.: (312) 853-7036 (b) if to the Company, to: Coherent Communications Systems Corporation 45085 University Drive Ashburn, Virginia 20147 Attention: Daniel L. McGinnis Chief Executive Officer Facsimile No.: (703) 729-3345 -48- 55 with a copy to: Morgan Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 Attention: N. Jeffrey Klauder Facsimile No.: (215) 963-5299 Section 9.3. Interpretation. When a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise indicated. 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. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." Section 9.4. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 9.5. Entire Agreement; No Third Party Beneficiaries. This Agreement (including the documents and the instruments referred to herein) and the Confidentiality Agreement (other than Section 7 thereof) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. Except as provided in Section 6.14 and Section 6.17, this Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. Section 9.6. Governing Law. This Agreement shall be governed and construed, and any controversy arising out of or otherwise relating to the Agreement shall be determined, in accordance with the internal laws of the State of Delaware without regard to conflicts of law rules thereof. Each party hereto consents and submits to the exclusive jurisdiction of the courts of the State of Delaware and the courts of the United States located in such state for the adjudication of any action, suit, proceeding, claim or dispute arising out of or otherwise relating to this Agreement. -49- 56 Section 9.7. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, and any attempted assignment thereof without such consent shall be null and void. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. -50- 57 IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. TELLABS, INC. By: /s/ Michael J. Birck Name: Michael J. Birck Title: President and Chief Executive Officer CARDINAL MERGER CO. By: /s/ Michael J. Birck Name: Michael J. Birck Title: President COHERENT COMMUNICATIONS SYSTEMS CORPORATION By: /s/ Daniel L. McGinnis Name: Daniel L. McGinnis -51- 58 Title: Chief Executive Officer -52- EX-2.2 3 SAFEGUARD STOCKHOLDER AGREEMENT 1 EXHIBIT 2.2 SAFEGUARD STOCKHOLDER AGREEMENT STOCKHOLDER AGREEMENT, dated as of February 16, 1998 (this "Agreement") by the undersigned stockholder (the "Stockholder") of Coherent Communications Systems Corporation, a Delaware corporation (the "Company"), for the benefit of Tellabs, Inc., a Delaware corporation ("Parent"). WHEREAS, Parent, Cardinal Merger Co., a Delaware corporation and a wholly-owned subsidiary of Parent ("Sub"), and the Company are entering into an Agreement and Plan of Merger, dated as of February 16, 1998 (the "Merger Agreement"), whereby, upon the terms and subject to the conditions set forth in the Merger Agreement, each issued and outstanding share of the Common Stock, par value $.01 per share, of the Company ("Company Common Stock") not owned directly or indirectly by Parent or the Company, will be converted into shares of Common Stock, par value $.01 per share, of Parent ("Parent Common Stock"); WHEREAS, stockholder owns 4,843,342 shares of Company Common Stock (such shares of Company Common Stock, together with any other shares of capital stock of the Company acquired by such Stockholder after the date hereof and during the term of this Agreement, being collectively referred to herein as the "Subject Shares"); and WHEREAS, as a condition to its willingness to enter into the Merger Agreement, Parent has required that the Stockholder agree, and in order to induce Parent to enter into the Merger Agreement the Stockholder has agreed, to enter into this Agreement. NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements set forth herein, the Stockholder agrees as follows: 1. Capitalized Terms. Capitalized terms used in this Agreement that are not defined herein shall have such meanings as set forth in the Merger Agreement. 2. Covenants of Stockholder. Until the termination of this Agreement in accordance with Section 5, Stockholder agrees as follows: (a) At the Stockholders Meeting (or at any adjournment thereof) or in any other circumstances upon which a vote, consent or other approval with respect to the Merger or the Merger Agreement is sought, the Stockholder shall vote (or cause to be voted) the Subject Shares in favor of the Merger, the adoption of the Merger Agreement and the approval of the terms thereof and each of the other transactions contemplated by the Merger Agreement. 2 (b) At any meeting of stockholders of the Company or at any adjournment thereof or in any other circumstances upon which the Stockholder's vote, consent or other approval is sought, the Stockholder shall vote (or cause to be voted) the Subject Shares against (i) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantial assets, reorganization, recapitalization, dissolution, liquidation or winding up of or by the Company or any subsidiary thereof or any other Takeover Proposal or (ii) any amendment of the Company's Certificate of Incorporation or Bylaws or other proposal or transaction involving the Company or any of its subsidiaries, which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify the Merger, the Merger Agreement or any of the other transactions contemplated by the Merger Agreement or change in any manner the voting rights of any class of capital stock of the Company. The Stockholder further agrees not to commit or agree to take any action inconsistent with the foregoing. (c) The Stockholder agrees not to (i) sell, transfer, pledge, assign or otherwise dispose of (including by gift) (collectively, "Transfer"), or enter into any contract, option or other arrangement (including any profit-sharing arrangement) with respect to the Transfer of the Subject Shares to any person or (ii) enter into any voting arrangement, whether by proxy, voting agreement or otherwise, in relation to the Subject Shares, and agrees not to commit or agree to take any of the foregoing actions. (d) The Stockholder shall not, nor shall the Stockholder permit any affiliate, director, officer, employee, investment banker, attorney or other advisor or representative of the Stockholder to, (i) directly or indirectly solicit, initiate or encourage the submission of, any Takeover Proposal or (ii) directly or indirectly participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to, any Takeover Proposal. (e) The Stockholder shall use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with Parent in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by the Merger Agreement. Stockholder makes the covenants and agreements contained in this Section 2 solely in Stockholder's capacity as a stockholder of the Company and nothing contained in this Agreement shall limit the ability of Stockholder, to the extent Stockholder is a director of the Company, to discharge Stockholder's fiduciary duties as a director of the Company under applicable law. 3. The Subject Shares. The Stockholder represents and warrants to Parent that (i) the Stockholder is the record and beneficial owner of, and has good and marketable title to, the Subject Shares, (ii) the Stockholder does not own, of record or beneficially, any shares of capital stock of the Company other than the Subject Shares and (iii) the Stockholder has the sole right to vote, and the sole power of disposition with respect to, the Subject Shares, and none of the Subject 2 3 Shares is subject to any voting trust, proxy or other agreement, arrangement or restriction with respect to the voting or disposition of such Subject Shares, except as contemplated by this Agreement. 4. Affiliates Letter. Stockholder agrees to execute and deliver on a timely basis an Affiliate Letter in the form of Exhibit A to the Merger Agreement, when and if requested by Parent. 5. Termination. The obligations of the Stockholder hereunder shall terminate upon the earlier of the termination of the Merger Agreement pursuant to Section 8.1 thereof or the Effective Time; provided, however, that if the Merger Agreement is terminated pursuant to Sections 8.1(d), 8.1(e) or 8.1(f) of the Merger Agreement, this Agreement shall not terminate until 60 days following the termination of the Merger Agreement. 6. Further Assurances. Stockholder will, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further consents, documents and other instruments as Parent may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement. 7. Successors, Assigns and Transferees Bound. Any successor, assignee or transferee (including a successor, assignee or transferee as a result of the death of the Stockholder, such as an executor or heir) shall be bound by the terms hereof, and the Stockholder shall take any and all actions necessary to obtain the written confirmation from such successor, assignee or transferee that it is bound by the terms hereof. 8. Remedies. The Stockholder acknowledges that money damages would be both incalculable and an insufficient remedy for any breach of this Agreement by it, and that any such breach would cause Parent irreparable harm. Accordingly, the Stockholder agrees that in the event of any breach or threatened breach of this Agreement, Parent, in addition to any other remedies at law or in equity it may have, shall be entitled, without the requirement of posting a bond or other security, to equitable relief, including injunctive relief and specific performance. 9. Severability. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of any other provision of this Agreement in such jurisdiction, or the validity or enforceability of any provision of this Agreement in any other jurisdiction. If in the opinion of Parent's independent accountants, any provision hereof would cause the Merger to be ineligible for "pooling of interest" accounting treatment, it shall be deemed to be ineffective and inapplicable. 10. Amendment. This Agreement may be amended only by means of a written instrument executed and delivered by both the Stockholder and Parent. 11. Governing Law. This Agreement shall be governed by, and construed in accordance in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 3 4 12. Counterparts. For the convenience of the parties, this Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. Termination of Loan Agreement. The loan agreement between the Stockholder and the Company referenced in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders has been terminated and is of no force or effect and no amounts are owing to the Stockholder or the Company thereunder. 14. Termination of Administrative Services Agreement. The Stockholder agrees to take all necessary action to cause the Administrative Services Agreement dated as of May 7, 1997 between the Company and the Stockholder (the "Services Agreement") to be terminated effective immediately before the Effective Time (or such later time thereafter as may be requested by Parent, not to exceed one hundred eighty (180) days following the Effective Time) on terms that are reasonably satisfactory to Parent, which terms shall include that the Company shall have no continuing obligations under the such agreements following such termination and that the Stockholder shall not be entitled to receive any consideration in connection with such termination other than a termination fee, payable by the Company at the time of such termination, equal to the Services Fee (as defined in Section 3 of the Services Agreement) payable with respect to the period commencing on the date of such termination and ending on December 31, 1998. The Stockholder represents to Parent that a true and complete copy of such agreement has been delivered to Parent and that all amounts due to Stockholder from the Company thereunder up to and including January 1, 1998 have been paid in full. SAFEGUARD SCIENTIFICS, INC. By: /s/ James A. Ounsworth ------------------------------------------ Name: James A. Ounsworth Title: Senior Vice President, General Counsel and Secretary Accepted and Agreed to as of the date noted above: TELLABS, INC. By: /s/ Michael J. Birck ---------------------------- Name: Michael J. Birck Title: President and Chief Executive Officer 4 EX-11 4 COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT XI -- COMPUTATION OF NET INCOME PER SHARE FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 ------- ------- ------- Net earnings................................................ $13,979 $ 9,748 $ 7,590 Less preferred stock dividend............................... 0 0 0 ------- ------- ------- Net income available for common stockholders................ $13,979 $ 9,748 $ 7,590 ======= ======= ======= Average common shares outstanding(a)(b)..................... 15,230 14,969 14,554 Stock Options(b)............................................ 333 510 886 ------- ------- ------- Average number of common and dilutive shares outstanding.... 15,563 15,479 15,440 ======= ======= ======= Diluted earnings per common share........................... $ .90 $ .63 $ .49 ------- ------- ------- Basic earnings per common share............................. $ .92 $ .65 $ .52 ------- ------- -------
- --------------- (a) Average common shares outstanding include the reduction of 2,820,850 shares of common stock contributed by Safeguard Scientifics, Inc. on June 16, 1994 for the 1994 period. (b) Adjusted to reflect the two-for-one stock split effective June 9, 1995. EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF COHERENT COMMUNICATIONS SYSTEMS CORPORATION As of March 28, 1998, the Registrant had the following subsidiaries:
NAME PLACE OF INCORPORATION ---- ---------------------- E. Coherent Communications Systems Limited.................. England Telecon Acquisition Corporation............................. Delaware CCSC International Corporation.............................. St. Thomas U.S.V.I. Coherent Communications Systems (Japan) Corporation......... Delaware Coherent Communications Systems Corporation (NY)............ Delaware
EX-23 6 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.0 INDEPENDENT AUDITOR'S REPORT The Board of Directors Coherent Communications Systems Corporation We consent to incorporation by reference in the Registration Statement (No. 33-86612) on Form S-8 and the Registration Statement (No. 33-86620) on Form S-8 of Coherent Communications Systems Corporation of our report dated January 23, 1998, relating to the consolidated balance sheets of Coherent Communications Systems Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, and the related financial statement schedule II, which report appears in the December 31, 1997, annual report on Form 10-K of Coherent Communications Systems Corporation. KPMG PEAT MARWICK LLP McLean, Virginia March 23, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Condensed Consolidated Statement of Financial Condition at December 31, 1997 (unaudited) and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1997 DEC-31-1997 18,331 7,849 16,737 547 2,846 46,167 11,316 4,392 55,467 7,811 0 0 0 153 47,261 55,467 73,695 73,695 26,385 26,385 27,325 0 0 21,180 7,201 13,979 0 0 0 13,979 $.92 $.90
-----END PRIVACY-ENHANCED MESSAGE-----