AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

CAPTARIS, INC.

MERLOT ACQUISITION CORPORATION

AND

CASTELLE

DATED AS OF APRIL 25, 2007

CONTENTS

 

 

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AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) is made and entered into as of April 25, 2007, by and among Captaris, Inc., a Washington corporation (“ Parent ”), Merlot Acquisition Corporation, a California corporation and direct wholly owned subsidiary of Parent (“ Merger Sub ”), and Castelle, a California corporation (the “ Company ”).

RECITALS

A. The respective Boards of Directors of Parent, Merger Sub and the Company have deemed it advisable and in the best interests of their respective corporations and shareholders that Parent and the Company consummate the business combination and other transactions provided for herein.

B. The respective Boards of Directors of Merger Sub and the Company have approved, in accordance with California law (“ California Law ”), this Agreement and the transactions contemplated hereby, including the Merger.

C. Concurrently with the execution of this Agreement, and as a condition and inducement to Parent’s willingness to enter into this Agreement, all executive officers and directors of the Company are entering into a Voting Agreement and irrevocable proxy in substantially the form attached hereto as Exhibit A (the “ Voting Agreements ”).

D. Subject to Section 6.3(d), the Board of Directors of the Company has resolved to recommend to its shareholders approval and adoption of this Agreement and approval of the Merger.

E. Parent, as the sole shareholder of Merger Sub, has approved and adopted this Agreement and approved the Merger.

F. Parent, Merger Sub and the Company desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger.

NOW, THEREFORE , in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

ARTICLE 1

THE MERGER

1.1 The Merger

At the Effective Time and subject to and upon the terms and conditions of this Agreement and the applicable provisions of California Law, Merger Sub shall be merged with and into the Company (the “ Merger ”), the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation and as a wholly owned subsidiary of Parent. The surviving corporation after the Merger is hereinafter sometimes referred to as the “ Surviving Corporation .”

1.2 Effective Time; Closing

Subject to the provisions of this Agreement, the parties hereto shall cause the Merger to be consummated by filing the articles of merger with the Secretary of State of the State of California in accordance with the relevant provisions of California Law (the “ Articles of Merger ”) (the time of such filing with the Secretary of State of the State of California (or such later time as may be agreed in writing by the Company and Parent and specified in the Articles of Merger) being the “ Effective Time ”) as soon as practicable on or after the Closing Date. The closing of the Merger (the “ Closing ”) shall take place at the offices of Perkins Coie LLP, 1201 Third Avenue, Suite 4800, Seattle, WA, at a time and date to be specified by the parties, which shall be no later than the second Business Day after the satisfaction or waiver of the conditions set forth in Article VII (other than those in Section 7.1(b), Section 7.2 and Section 7.3 that by their terms are to be satisfied or waived at the Closing), or at such other time, date and location as the parties hereto agree in writing. The date on which the Closing occurs is referred to herein as the “ Closing Date .”

1.3 Effect of the Merger

At the Effective Time, the effect of the Merger shall be as provided in this Agreement and the applicable provisions of California Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

1.4 Articles of Incorporation and Bylaws

Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time, the articles of incorporation of the Company shall be amended and restated in its entirety to be identical to the articles of incorporation of Merger Sub, as in effect immediately prior to the Effective Time, until thereafter amended in accordance with California Law and as provided in such articles of incorporation; provided, however, that at the Effective Time, Article I of the articles of incorporation of the Surviving Corporation shall be amended and restated in its entirety to read as follows: “The name of the corporation is Castelle” and the articles of incorporation shall be amended so as to comply with Section 6.10(a) . Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time, the bylaws of the Company shall be amended and restated in their entirety to be identical to the bylaws of Merger Sub, as in effect immediately prior to the Effective Time, until thereafter amended in accordance with California Law and as provided in such bylaws; provided, however, that at the Effective Time, the bylaws shall be amended so as to comply with Section 6.10(a) .

 

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1.5 Directors and Officers

Unless otherwise determined by Parent prior to the Effective Time, the initial directors of the Surviving Corporation shall be the directors of Merger Sub immediately prior to the Effective Time, until their respective successors are duly elected or appointed and qualified. Unless otherwise determined by Parent prior to the Effective Time, the initial officers of the Surviving Corporation shall be the officers of Merger Sub immediately prior to the Effective Time, until their respective successors are duly appointed. In addition, unless otherwise determined by Parent prior to the Effective Time, Parent, the Company and the Surviving Corporation shall cause the directors and officers of Merger Sub immediately prior to the Effective Time to be the directors and officers, respectively, of each of the Company’s Subsidiaries immediately after the Effective Time, each to hold office as a director or officer of each such Subsidiary in accordance with the provisions of the laws of the respective jurisdiction of organization and the respective bylaws or equivalent organizational documents of each such Subsidiary.

ARTICLE 2

CONVERSION OF SECURITIES

2.1 Effect on Capital Stock

Subject to the terms and conditions of this Agreement (including Sections 2.5 , and 2.6 ), at the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company or the holders of any shares of capital stock of the Company, each share of the Common Stock, no par value, of the Company (“ Company Common Stock ”) issued and outstanding immediately prior to the Effective Time, other than any shares of Company Common Stock to be canceled pursuant to Section 2.3 , will be canceled and extinguished and automatically converted, upon surrender of the certificate representing such share of Company Common Stock in the manner provided in Section 2.7 (or in the case of a lost, stolen or destroyed certificate, upon delivery of an affidavit (and bond, if required) in the manner provided in Section 2.7(d) ), into the right to receive from Parent an amount in cash (without interest) equal to $3.95 less the Working Capital/Cash Adjustment plus the Cash Surplus (the “ Merger Consideration ”).

2.2 Company Options

(a) Any Company Option held by any Person that is unexpired, unexercised and outstanding immediately prior to the Effective Time, shall, on the terms and subject to the conditions set forth in this Agreement, terminate in its entirety at the Effective Time, and the holder of each such terminated Company Option shall be entitled to receive therefor an amount of cash (rounded down to the nearest whole cent) equal to (i) the product of (A) the number of shares of Company Common Stock as to which such Company Option was vested and exercisable immediately prior to the Effective Time, multiplied by (B) the excess, if any, of the Merger Consideration over the per share exercise price of such Company Option immediately prior to the Effective Time, less (ii) any applicable withholdings in accordance with Section 2.7(c).

 

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(b) If and to the extent necessary or required by the terms of any Company Stock Option Plan or Company Option, the Company shall, prior to the Effective Time, (i) obtain any consents from holders of Company Options and (ii) amend the terms of its equity incentive plans or arrangements, to give effect to the provisions of Section 2.2(a) .

(c) The Company shall provide Parent a reasonable opportunity to review, and comment on, any materials to be submitted to the holders of Company Options in connection with the transactions contemplated by this Agreement. The Company shall promptly notify Parent if any holder of a Company Option under the 1988 Equity Incentive Plan terminates his or her employment or service relationship with the Company (whether voluntarily or involuntarily).

2.3 Cancellation of Treasury and Parent Owned Stock

Each share of Company Common Stock held by the Company or Parent or any direct or indirect wholly owned Subsidiary of the Company or of Parent immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof.

2.4 Capital Stock of Merger Sub

Each share of common stock, no par value per share, of Merger Sub (the “ Merger Sub Common Stock ”) issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and nonassessable share of common stock, no par value per share, of the Surviving Corporation. Each certificate evidencing ownership of shares of Merger Sub Common Stock shall evidence ownership of such shares of capital stock of the Surviving Corporation.

2.5 Adjustments to Merger Consideration

The Merger Consideration shall be adjusted to reflect fully the appropriate effect of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible into Company Common Stock), reorganization, recapitalization, reclassification or other like change with respect to Company Common Stock having a record date on or after the date hereof and prior to the Effective Time.

2.6 Dissenting Shares

(a) Notwithstanding any other provisions of this Agreement to the contrary other than Section 2.6(b) , any shares of Company Common Stock held by a holder who has demanded and perfected dissenters’ rights for such shares in accordance with the provisions of California Law and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters’ rights (collectively, the “ Dissenting Shares ”), shall not be converted into or represent a right to receive the applicable consideration for Company Common Stock set forth in Section 2.1 , but instead shall be converted into the right to receive only such consideration as may be determined to be due with respect to such Dissenting Shares under California Law. From and after the Effective Time, a holder of Dissenting Shares shall not be entitled to exercise any of the voting rights or other rights of a shareholder of the Surviving Corporation nor of a shareholder of Parent.

 

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(b) Notwithstanding the provisions of Section 2.6(a) , if any holder of shares of Company Common Stock who demands dissenters’ rights of such shares under California Law shall effectively withdraw or lose (through failure to perfect or otherwise) the right to dissent, then, as of the later of the Effective Time and the occurrence of such event, such holder’s shares shall no longer be Dissenting Shares and shall automatically be converted into and represent only the right to receive the consideration for Company Common Stock, as applicable, set forth in Section 2.1 , without interest thereon, upon surrender of the certificate representing such shares.

(c) The Company shall give Parent (i) prompt notice of any written demands for dissenters’ rights of any shares of Company Common Stock, withdrawals of such demands and any other instruments served pursuant to California Law and received by the Company which relate to any such demand for dissenters’ rights and (ii) the opportunity to participate in all negotiations and proceedings which take place prior to the Effective Time with respect to demands for dissenters’ rights under California Law. The Company shall not, except with the prior written consent of Parent, make any payment with respect to any such demands or offer to settle or settle any such demands. Any communication to be made by the Company to any holder of Company Common Stock with respect to such demands shall be submitted to Parent in advance and shall not be presented to any holder of Company Common Stock prior to the Company receiving Parent’s consent.

2.7 Surrender of Certificates

(a) Paying Agent . Following the date of this Agreement and in any event not less than three Business Days prior to the mailing of the Proxy Statement to the shareholders of the Company, Parent or Merger Sub shall designate a bank or trust company reasonably acceptable to the Company to act as Paying Agent in connection with the Merger (the “ Paying Agent ”). At or prior to the Effective Time, Parent will provide to, or cause the Surviving Corporation to provide to, and shall deposit in trust with, the Paying Agent, the aggregate consideration to which shareholders of the Company become entitled under this Article II . Until used for that purpose, the funds shall be invested by the Paying Agent in direct obligations of the U.S. Treasury; provided that no such investment or loss thereon shall affect the amounts payable to Company shareholders pursuant to this Article II . Any interest and other income resulting from such investment shall become a part of the funds, and any amounts in excess of the amounts payable to Company shareholders pursuant to this Article II shall promptly be paid to Parent.

(b) Surrender Procedures . Promptly after the Effective Time, the Surviving Corporation shall cause the Paying Agent to mail to each person who was a record holder of Company Common Stock immediately prior to the Effective Time, whose shares were converted pursuant to this Article II into the right to receive Merger Consideration, (i) a form of letter of transmittal for use in effecting the surrender of stock certificates which immediately prior to the Effective Time represented Company Common Stock (each, a “ Certificate ”) in order to receive payment of the Merger Consideration (which shall specify that delivery shall be effected, and risk of loss and title to the Certificate shall pass, only upon actual delivery of the Certificates to the Paying Agent, and shall otherwise be in customary form) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment of the Merger Consideration. When the Paying Agent receives a Certificate, together with a properly completed and executed letter of transmittal and any other required documents, the Paying Agent shall pay to the holder

 

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of the shares represented by the Certificate, or as otherwise directed in the letter of transmittal, the Merger Consideration with regard to each share represented by such Certificate, less any required Tax withholdings in accordance with Section 2.7(c) below, and the Certificate shall be cancelled. No interest shall be paid or accrued on the Merger Consideration payable upon the surrender of Certificates. If any portion of the Merger Consideration is to be paid to a Person other than the Person in whose name the surrendered Certificate is registered, it shall be a condition to such payment that (i) either such Certificate shall be properly endorsed or shall otherwise be in proper form for transfer and (ii) the Person requesting such payment shall pay to the Paying Agent any transfer or other Taxes required as a result of such payment to a Person other than the registered holder of such Certificate or establish to the satisfaction of the Paying Agent that such Taxes have been paid or are not payable. After the Effective Time, a Certificate shall represent, for all corporate purposes, only the right to receive the Merger Consideration in respect of the shares represented by such Certificate, without any interest thereon.

(c) Required Withholding . Each of Parent, the Paying Agent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement such amounts that are required to be deducted or withheld therefrom under the Internal Revenue Code of 1986, as amended (the “ Code ”), or under any provision of state, local or foreign Tax law or under any other applicable Legal Requirement. To the extent such amounts are so deducted or withheld, the amount of such consideration shall be treated for all purposes under this Agreement as having been paid to the Person to whom such consideration would otherwise have been paid.

(d) Lost, Stolen or Destroyed Certificates . In the event any Certificates shall have been lost, stolen or destroyed, the Paying Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of a customary affidavit of that fact by the holder thereof, such cash constituting the Merger Consideration; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent, the Company or the Paying Agent with respect to the Certificates alleged to have been lost, stolen or destroyed.

(e) Delivery of Funds to Parent . At any time which is more than 180 days after the Effective Time, Parent shall be entitled to require the Paying Agent to deliver to it any funds which had been deposited with the Paying Agent and have not been disbursed in accordance with this Article II (including, without limitation, interest and other income received by the Paying Agent in respect of the funds made available to it), and after the funds have been delivered to Parent, Persons entitled to payment in accordance with this Article II shall be entitled to look solely to Parent (subject to abandoned property, escheat or other similar laws) for payment of the Merger Consideration upon surrender of the Certificates held by them, without any interest thereon. Any Merger Consideration remaining unclaimed as of a date which is immediately prior to such time as such amounts would otherwise escheat to or become property of any government entity shall, to the extent permitted by applicable law, become the property of Parent free and clear of any claims or interest of any Person previously entitled thereto. Neither the Surviving Corporation, Parent nor the Paying Agent will be liable to any Person entitled to payment under this Article II for any consideration which is delivered to a public official pursuant to any abandoned property, escheat or similar law.

 

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(f) No Further Ownership Rights in Company Common Stock. All Merger Consideration paid upon the surrender for exchange of shares of Company Common Stock in accordance with the terms hereof shall be deemed to have been paid in full satisfaction of all rights pertaining to such shares of Company Common Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article II .

(g) Further Action . At and after the Effective Time, the officers and directors of Parent and the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of the Company and Merger Sub, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of Company and Merger Sub, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to Parent and Merger Sub, subject to the exceptions specifically disclosed in writing in the disclosure letter (referencing the appropriate section, subsection, paragraph and subparagraph numbers) supplied by Company to Parent dated as of the date hereof and certified by a duly authorized executive officer of Company (the “ Company Disclosure Letter ”), as follows:

3.1 Organization; Standing and Power; Charter Documents; Subsidiaries

(a) Organization; Standing and Power . The Company and each of its Subsidiaries is a corporation or other organization duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has the requisite power and authority to own, lease and operate its properties and to carry on its business as currently conducted and as currently contemplated to be conducted in the 12 months following the date of this Agreement, except where the failure to be so organized, validly existing and in good standing would not reasonably be expected to have a Material Adverse Effect on the Company and its Subsidiaries taken as a whole.

(b) Charter Documents . Except as filed as an exhibit to the Company's Annual report on Form 10-K for the year ended December 31, 2006 and available at www.sec.gov, the Company has delivered to Parent (i) a true and correct copy of the articles of incorporation and bylaws of the Company, each as amended and/or restated to date (collectively, the “ Company Charter Documents ”) and (ii) the certificate of incorporation and bylaws, or like organizational documents (collectively, “ Subsidiary Charter Documents ”), of each of its Subsidiaries, and each such instrument is in full force and effect. The Company is not in violation of any of the provisions of the Company Charter Documents and each Subsidiary is not in violation of its respective Subsidiary Charter Documents.

 

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(c) Subsidiaries . Section 3.1(c) of the Company Disclosure Letter sets forth each Subsidiary of the Company. The Company is the owner of all of the outstanding shares of capital stock of, or other equity or voting interests in, each such Subsidiary and all such shares have been duly authorized, validly issued and are fully paid and nonassessable, free and clear of all pledges, claims, liens, charges, encumbrances, options and security interests of any kind or nature whatsoever (collectively, “ Liens ”), including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests, except for restrictions imposed by applicable securities laws. Other than the Subsidiaries of the Company, neither the Company nor any of its Subsidiaries owns any capital stock of, or other equity or voting interests of any nature in, or any interest convertible, exchangeable or exercisable for, capital stock of, or other equity or voting interests of any nature in, any other Person, except for passive investments of less than 1% in the equity interests of public companies as part of the Company’s cash management program.

3.2 Capital Structure

(a) Capital Stock . The authorized capital stock of Company consists of: (i) 25,000,000 shares of Company Common Stock and (ii) 2,000,000 shares of Preferred Stock, no par value, of the Company (“ Company Preferred Stock ”). At the close of business on April 24, 2007: (i) 4,092,470 shares of Company Common Stock were issued and outstanding (excluding shares of Company Common Stock held by the Company in its treasury), (ii) 1,200 shares of Company Common Stock were issued and held by the Company in its treasury, and (iii) no shares of Company Preferred Stock were issued or outstanding. No shares of Company Common Stock are owned or held by any Subsidiary of the Company. All outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid and non-assessable and are not subject to preemptive rights created by statute, the Company Charter Documents, or any agreement to which the Company is a party or by which it is bound. The Company has not issued any shares of Company Common Stock or Company Preferred Stock since April 18, 2007.

(b) Company Options . As of the close of business on April 24, 2007: (i) 1,193,747 shares of Company Common Stock are issuable upon the exercise of outstanding options to purchase Company Common Stock under the Company’s 1995 Non-Employee Directors' Stock Option Plan, as amended, 1988 Equity Incentive Plan, as amended, and 2002 Equity Incentive Plan (together, the “ Company Stock Option Plans ”) (equity or other equity-based awards, whether payable in cash, shares or otherwise granted under or pursuant to the Company Stock Option Plans are referred to in this Agreement as “ Company Options ”); (ii) 203,953 shares of Company Common Stock are available for future grant under the Company Stock Option Plans; (iii) no shares of Company Common Stock are issuable pursuant to outstanding options to purchase Company Common Stock which are issued other than pursuant to the Company Stock Option Plans; and (iv) there are no warrants for the issuance of Company Common Stock. Section 3.2(b) of the Company Disclosure Letter sets forth a list of each outstanding Company Option: (a) the particular Company Stock Option Plan (if any) pursuant to which any such Company Option was granted (b) the name of the holder of such Company Option, (c) the number of shares of Company Common Stock subject to such Company Option, (d) the exercise price of such Company Option, (e) the date on which such Company Option was granted or issued, (f) the applicable vesting schedule, if any, and the extent to which such Company Option

 

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is vested and exercisable as of April 30, 2007, and (g) the date on which such Company Option expires. All shares of Company Common Stock subject to issuance under the Company Stock Option Plans, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, would be duly authorized, validly issued, fully paid and nonassessable. All options to purchase Company Common Stock outstanding as of the date hereof or issued by the Company in the last five years have been issued at exercise prices at least equal to the fair market value per share of Company Common Stock on the date of grant. There are no commitments or agreements of any character to which the Company is bound obligating the Company to accelerate the vesting of any Company Option as a result of the Merger (whether alone or upon the occurrence of any additional or subsequent events). There are no outstanding or authorized stock appreciation, phantom stock, profit participation or other similar rights with respect to the Company. The Company has not issued any Company Options since April 2, 2007.

(c) Voting Debt . No bonds, debentures, notes or other indebtedness of the Company or any of its Subsidiaries (i) having the right to vote on any matters on which shareholders may vote (or which is convertible into, or exchangeable for, securities having such right) or (ii) the value of which is any way based upon or derived from capital or voting stock of the Company, are issued or outstanding as of the date hereof (collectively, “ Voting Debt ”).

(d) Other Securities . Except (1) as described in this Section 3.2 and (2) as otherwise set forth in Section 3.2(b) or Section 3.2(d) of the Company Disclosure Letter, as of the date hereof, there are no securities, options, warrants, calls, rights, contracts, commitments, agreements, instruments, arrangements, understandings, obligations or undertakings of any kind to which the Company or any of its Subsidiaries is a party or by which any of them is bound obligating the Company or any of its Subsidiaries to (including on a deferred basis) issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock, Voting Debt or other voting securities of the Company or any of its Subsidiaries, or obligating the Company or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, instrument, arrangement, understanding, obligation or undertaking. There are no outstanding Contracts of the Company or any of its Subsidiaries to (i) repurchase, redeem or otherwise acquire any shares of capital stock of, or other equity or voting interests in, the Company or any of its Subsidiaries, except for repurchases from Employees following their termination pursuant to the terms of their pre-existing stock option or purchase agreements, or (ii) dispose of any shares of the capital stock of, or other equity or voting interests in, any of its Subsidiaries. The Company is not a party to any voting agreement with respect to shares of the capital stock of, or other equity or voting interests in, the Company or any of its Subsidiaries and, to the Knowledge of the Company, other than the Voting Agreements and the irrevocable proxies granted pursuant to the Voting Agreements, there are no irrevocable proxies and no voting agreements, voting trusts, rights plans, anti-takeover plans or registration rights agreements with respect to any shares of the capital stock of, or other equity or voting interests in, the Company or any of its Subsidiaries.

3.3 Authority; No Conflict; Necessary Consents

(a) Authority . The Company has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, subject, in the case of

 

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consummation of the Merger, to obtaining the approval and adoption of this Agreement and the approval of the Merger by the Company’s shareholders as contemplated in Section 6.2 . 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 the Company and no further action is required on the part of the Company to authorize the execution and delivery of this Agreement or to consummate the Merger and the other transactions contemplated hereby, subject only to the approval and adoption of this Agreement and the approval of the Merger by the Company’s shareholders and the filing of the Articles of Merger pursuant to California Law. The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock is the only vote of the holders of any class or series of Company capital stock necessary to approve or adopt this Agreement, approve the Merger and consummate the Merger and the other transactions contemplated hereby. The Board of Directors of the Company has, by resolution adopted by unanimous vote at a meeting of all directors duly called and held and not subsequently rescinded or modified in any way duly (i) determined that the Merger is fair to, and in the best interest of, the Company and its shareholders and declared the Merger to be advisable, (ii) approved this Agreement and the transactions contemplated thereby, including the Merger, and (iii) recommended that the shareholders of the Company approve and adopt this Agreement and approve the Merger and directed that such matter be submitted to the Company’s shareholders at the Company Shareholders’ Meeting. This Agreement has been duly executed and delivered by the Company and assuming due authorization, execution and delivery by Parent and Merger Sub, constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy and other similar laws and general principles of equity.

(b) No Conflict . The execution and delivery by the Company of this Agreement, and the consummation of the transactions contemplated hereby, will not (i) conflict with or violate any provision of the Company Charter Documents or any Subsidiary Charter Documents of any Subsidiary of the Company, (ii) subject to obtaining the approval and adoption of this Agreement and the approval of the Merger by the Company’s shareholders as contemplated in Section 6.2 and compliance with the requirements set forth in Section 3.3(c) , conflict with or violate any material Legal Requirement applicable to the Company or any of its Subsidiaries or by which the Company or any of its Subsidiaries or any of their respective properties or assets (whether tangible or intangible) is bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or materially impair the Company’s rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of the Company or any of its Subsidiaries pursuant to, any Company Material Contract, Contract required to be disclosed in Section 3.8 of the Company Disclosure Letter, Company Government Contract or Company Government Subcontract. Section 3.3(b) of the Company Disclosure Letter also lists any additional consents, waivers and approvals under any of the Company’s or any of its Subsidiary’s Contracts required to be obtained in connection with the consummation of the transactions contemplated hereby, which, if individually or in the aggregate not obtained, would reasonably be expected to result in a material loss of benefits to the Company, Parent or the Surviving Corporation or any of their Subsidiaries as a result of the Merger.

 

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(c) Necessary Consents . No consent, waiver, approval, order or authorization of, or registration, declaration or filing with any supranational, national, state, municipal, local or foreign government, any instrumentality, subdivision, court, administrative agency or commission or other governmental authority or instrumentality, or any quasi-governmental or private body exercising any regulatory, taxing, importing or other governmental or quasi-governmental authority (a “ Governmental Entity ”) or any other Person is required to be obtained or made by the Company in connection with the execution and delivery of this Agreement or the consummation of the Merger and other transactions contemplated hereby and thereby, except for (i) the filing of the Articles of Merger with the Secretary of State of the State of California and appropriate documents with the relevant authorities of other states in which the Company and/or Parent are qualified to do business, (ii) the filing of the Proxy Statement with the Securities and Exchange Commission (the “ SEC ”) in accordance with the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and (iii) such other consents, waivers, approvals, orders, authorizations, registrations, declarations and filings which if not obtained or made would not have a Material Adverse Effect on the Company and its Subsidiaries taken as a whole or materially adversely affect the ability of the parties hereto to consummate the Merger within the time frame in which the Merger would otherwise be consummated in the absence of the need for such consent, waiver, approval, order, authorization, registration, declaration or filing. The consents, approvals, orders, authorizations, registrations, declarations and filings set forth in (i) through (iii) are referred to herein as the “ Necessary Consents .”

3.4 SEC Filings; Financial Statements; Internal Controls

(a) SEC Filings . The Company has filed all required registration statements, prospectuses, reports, schedules, forms, statements and other documents (including exhibits and all other information incorporated by reference) required to be filed by it with the SEC since January 1, 2002. All such required registration statements, prospectuses, reports, schedules, forms, statements and other documents (including those that the Company may file subsequent to the date hereof) are referred to herein as the “ Company SEC Reports .” As of their respective dates, the Company SEC Reports (i) were prepared in accordance and complied in all material respects with the requirements of the Securities Act of 1933, as amended (the “ Securities Act ”), or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Company SEC Reports and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement 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 therein or necessary in order to make the statements therein, 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. The Company has previously furnished to Parent a complete and correct copy of any amendments or modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other instruments which previously had been filed by Company with the SEC pursuant to the Securities Act or the Exchange Act. The Company has timely responded to all comment letters of the staff of the SEC relating to the Company SEC Reports, and the SEC has not advised the Company that any final responses are inadequate, insufficient or otherwise non-responsive. The Company has made available to Parent true, correct and complete copies of all correspondence between the SEC, on the one hand, and the Company and any of its Subsidiaries, on the other, since January 1, 2002, including all SEC comment letters

 

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and responses to such comment letters by or on behalf of the Company. To the Company’s Knowledge, none of the Company SEC Reports is the subject of ongoing SEC review or outstanding SEC comment. The Company and each of its officers and directors are in compliance with, and have complied, in each case in all material respects with (i) the applicable provisions of the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”) and the related rules and regulations promulgated under or pursuant to such act and (ii) the applicable listing and corporate governance rules and regulations of the Nasdaq Stock Market (“ Nasdaq ”).

(b) Financial Statements . Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Company SEC Reports (the “ Company Financials ”), including each Company SEC Report filed after the date hereof until the Closing: (i) complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, (ii) was prepared in accordance with United States generally accepted accounting principles (“ GAAP ”) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited interim financial statements, as may be permitted by the SEC on Form 10-Q, 8-K or any successor form under the Exchange Act), and (iii) fairly and accurately presented in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as at the respective dates thereof and the consolidated results of the Company’s operations and cash flows for the periods indicated (subject to normal year-end adjustments in the case of any unaudited interim financial statements). The Company has not been notified by its independent auditors or by the staff of the SEC that such auditors or staff of the SEC, as the case may be, are of the view that any of the Company Financials should be restated in a manner that would be materially adverse to the Company. The balance sheet of the Company contained in the Company SEC Reports as of September 30, 2006 is hereinafter referred to as the “ Company Balance Sheet .” Except as disclosed in the Company Financials, since the date of the Company Balance Sheet, neither the Company nor any of its Subsidiaries has incurred any liabilities (absolute, accrued, contingent or otherwise) of a nature required to be disclosed on a consolidated balance sheet or in the related notes to the consolidated financial statement prepared in accordance with GAAP, except for liabilities (i) accrued or reserved against in the Company Balance Sheet or (ii) incurred since the date of the Company Balance Sheet in the ordinary course of business consistent with past practice. The Company has not had any "disagreements" (as such term is defined in Item 304 of Regulation S-K under the Exchange Act) with any of its auditors regarding accounting matters or policies during any of its past five full years or during the current fiscal year-to-date. The books and records of the Company and each Subsidiary have been, and are being maintained in all material respects in accordance with applicable legal and accounting requirements and the financial statements are consistent with such books and records.

(c) Internal Controls . The Company and each of its Subsidiaries has established and maintains, adheres to and enforces a system of internal controls which are effective in providing assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP (including the Company Financials), including policies and procedures that (i) require the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company and its Subsidiaries; (ii) provide reasonable assurance that material information relating to the Company and its Subsidiaries is promptly made known to the officers responsible for establishing and maintaining the system of internal controls; (iii) provide assurance that transactions are recorded

 

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as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company and its Subsidiaries are being made only in accordance with appropriate authorizations of management and the Board of Directors of the Company; (iv) provide reasonable assurance that access to assets is permitted only in accordance with management’s general or specific authorization; (v) provide reasonable assurance that the reporting of assets is compared with existing assets at regular intervals and appropriate action is taken with respect to any differences; (vi) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of the Company and its Subsidiaries; and (vii) provide reasonable assurance that any significant deficiencies or material weaknesses in the design or operation of internal controls which are reasonably likely to materially and adversely affect the ability to record, process, summarize and report financial information, and any fraud, whether or not material, that involves the Company’s management or other Employees who have a role in the preparation of financial statements or the internal controls utilized by the Company and its Subsidiaries, are adequately and promptly disclosed to the Company’s independent auditors and the audit committee of the Company’s Board of Directors. Neither the Company nor any of its Subsidiaries (including any Employee thereof) nor, to the Company's Knowledge, the Company’s independent auditors has identified or been made aware of (i) any significant deficiency or material weakness in the system of internal controls utilized by the Company and its Subsidiaries; (ii) any fraud, whether or not material, that involves the Company’s management or other Employees who have a role in the preparation of financial statements or the internal controls utilized by the Company and its Subsidiaries; or (iii) any claim or allegation regarding any of the foregoing.

(d) Off-Balance Sheet Transactions . Neither the Company nor any of its Subsidiaries is a party to, or has any commitment to become a party to, any joint venture, partnership agreement or any similar Contract (including any Contract relating to any transaction, arrangement or relationship between or among the Company or any of its Subsidiaries, on the one hand, and any unconsolidated affiliate, including any structured finance, special purpose or limited purpose entity or Person, on the other hand (such as any arrangement described in Section 303(a)(4) of Regulation S-K of the SEC)) where the purpose or effect of such arrangement is to avoid disclosure of any material transaction involving the Company or any its Subsidiaries in the Company’s consolidated financial statements.

(e) Accounting and Auditing Practices . Since January 1, 2002, neither the Company nor any of its Subsidiaries nor, to the Company’s Knowledge, any director, officer, employee, auditor, accountant, consultant or representative of the Company or any of its Subsidiaries has received or otherwise had or obtained Knowledge of any substantive complaint, allegation, assertion or claim, whether written or oral, that the Company or any of its Subsidiaries has engaged in questionable accounting or auditing practices. Since January 1, 2002, no current or former attorney representing the Company or any of its Subsidiaries has reported evidence of a material violation of securities laws, breach of fiduciary duty or similar violation by the Company or any of its officers, directors, employees or agents to the Company's Board of Directors or any committee thereof or to any director or executive officer of the Company. Moss Adams LLP does not currently perform, nor has it performed within the last five years, services for the Company or any of its Subsidiaries.

 

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(f) Section 806 of the Sarbanes-Oxley Act . To the Company’s Knowledge, no employee of the Company or any of its Subsidiaries has provided or is providing information to any law enforcement agency regarding the commission or possible commission of any crime or the violation or possible violation of any applicable Legal Requirements of the type described in Section 806 of the Sarbanes-Oxley Act by the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries nor, to the Knowledge of the Company, any director, officer, employee, contractor, subcontractor or agent of the Company or any such Subsidiary has discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against an employee of the Company or any of its Subsidiaries in the terms and conditions of employment because of any lawful act of such employee described in Section 806 of the Sarbanes-Oxley Act.

3.5 Absence of Certain Changes or Events

Since the date of the Company Balance Sheet, there has not been, accrued or arisen:

(a) any Material Adverse Effect on the Company;

(b) any acquisition by the Company or any Subsidiary of, or agreement by the Company or any Subsidiary to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or by any other manner, any business or corporation, partnership, association or other business organization or division thereof, or other acquisition or agreement to acquire any assets or any equity securities that are material, individually or in the aggregate, to the business of the Company;

(c) any declaration, setting aside or payment of any dividend on (other than as described in Section 5.3 ), or other distribution (whether in cash, stock or property) in respect of, any of the Company’s or any of its Subsidiaries’ capital stock, or any purchase, redemption or other acquisition by the Company or any of its Subsidiaries of any of the Company’s capital stock or any other securities of the Company or its Subsidiaries or any options, warrants, calls or rights to acquire any such shares or other securities except for repurchases from Employees following their termination pursuant to the terms of their pre-existing stock option or purchase agreements;

(d) any split, combination or reclassification of any of the Company’s or any of its Subsidiaries’ capital stock;

(e) any granting by the Company or any of its Subsidiaries, whether orally or in writing, of any increase in compensation (other than annual and merit-based salary increases made in the ordinary course of business consistent with past practice and not exceeding 7.5% in the aggregate for any individual) or fringe benefits or any payment by the Company or any of its Subsidiaries of any bonus (other than quarterly employee and management bonuses pursuant to the Quarterly Bonus Award Plan set forth on Section of 3.16(b) the Company Disclosure Letter) or any change by the Company or any of its Subsidiaries of severance, termination or bonus policies and practices or any entry by the Company or any of its Subsidiaries into any currently effective employment, severance, termination or indemnification agreement or any agreement the benefits of which are contingent or the terms of which are materially altered upon the occurrence of a transaction involving the Company of the nature contemplated hereby (either alone or upon the occurrence of additional or subsequent events);

 

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(f) any material change by the Company in its accounting methods, principles or practices, except as required by concurrent changes in GAAP;

(g) any debt, capital lease or other debt or equity financing transaction by the Company or any of its Subsidiaries or entry into any agreement by the Company or any of its Subsidiaries in connection with any such transaction, except for capital lease and receivables financings entered into in the ordinary course of business consistent with past practice which are not individually or in the aggregate material to the Company and its Subsidiaries taken as a whole;

(h) any grants of any material refunds, credits, rebates or other allowances by the Company to any end user, customer, reseller or distributor, in each case, other than in the ordinary course of business consistent with past practice;

(i) any material change in the level of product returns or factors influencing accounts receivable or warranty reserves (including any material change in warranties provided by the Company) experienced by the Company or any of its Subsidiaries;

(j) any material restructuring activities by the Company or any of its Subsidiaries, including any material reductions in force, lease terminations, or similar actions;

(k) any sale, lease, license, encumbrance or other disposition of any properties or assets except the sale, lease, license or disposition of property or assets which are not material, individually or in the aggregate, to the business of the Company or the licenses of current Company Products, in each case, in the ordinary course of business and in a manner consistent with past practice;

(l) any loan or extension of credit by the Company or any of its Subsidiaries to any Person other than in the ordinary course of business and in a manner consistent with past practice;

(m) any adoption of or change in any election in respect of Taxes, any adoption, change in or application to change any accounting method in respect of Taxes, any agreement or settlement of any audit, claim or assessment in respect of Taxes, any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes, any entry into any closing agreement, any filing of any amended Return, or any failure to file any Return when due (or, alternatively, failure to file for available extensions), failure to cause any Return when filed to be complete and accurate or failure to pay any Taxes when due; or

(n) any material revaluation, or any indication that such a revaluation was merited under GAAP, by the Company of any of its assets, including, without limitation, writing down the value of capitalized inventory, spares, long term or short-term investments, fixed assets, goodwill, intangible assets, deferred tax assets, or writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice.

 

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3.6 Taxes

(a) Definitions of Taxes and Returns . For all purposes of this Agreement, the following terms shall have the following respective meanings:

“ Tax ” or, collectively, “ Taxes ” shall mean (i) any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including, without limitation, taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes as well as public imposts, fees and social security charges (including health, unemployment, workers’ compensation and pension insurance), together with all interest, penalties and additions imposed with respect to such amounts; (ii) any liability for the payment of any amounts of the type described in clause (i) as a result of being or ceasing to be a member of an affiliated, consolidated, combined or unitary group for any period (including, without limitation, any liability under Treasury Regulation Section 1.1502-6 or any comparable provision of foreign, state or local law); and (iii) any liability for the payment of any amounts of the type described in clause (i) or (ii) as a result of any express or implied obligation to indemnify any other Person or as a result of any obligations under any agreements or arrangements with any other Person with respect to such amounts and including any liability for taxes of a predecessor entity.

“ Returns ” shall mean all returns, declarations, reports and statements required to be filed with respect to any Tax (including any attachments thereto and any amendment thereof), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax, and including, where permitted or required, consolidated, combined or unitary returns for any group of entities that includes the Company or any of its Subsidiaries.

(b) Tax Returns and Audits.

(i) The Company and each of its Subsidiaries (a) has timely filed or caused to be timely filed all Returns required to be filed by or with respect to it, and all such Returns are true and correct in all material respects and have been completed in accordance with all applicable Legal Requirements, and (b) has fully and timely paid, caused to be paid or accrued in the Company Financials all Taxes due and payable or claimed or asserted by any Governmental Entity to be due, from or with respect to it (whether or not such Taxes have been reflected on any Return). There are no Liens for Taxes upon any of the assets or properties of the Company or any of its Subsidiaries other than Liens for Taxes not yet due and payable. To the Knowledge of the Company, no power of attorney with respect to any Taxes has been executed or filed with any Governmental Entity by or on behalf of the Company or any of its Subsidiaries that is currently in effect.

(ii) All Taxes that the Company and each of its Subsidiaries has been required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid over to the appropriate Governmental Entity in compliance with all applicable Legal Requirements, and the Company and each of its Subsidiaries has complied with all information reporting and backup withholding requirements under all applicable Legal Requirements.

 

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(iii) To the Knowledge of the Company, there are no outstanding audits, claims or deficiencies pending or being conducted with respect to Taxes of the Company or any of its Subsidiaries, nor has the Company or any of its Subsidiaries received from any Governmental Entity any (i) notice indicating an intent to open an audit or other review, (ii) request for information related to Tax matters or (iii) notice of deficiency or proposed adjustment for any amount of Tax, proposed, asserted or assessed by any Governmental Entity against the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax and no request for any such extension or waiver is currently pending.

(iv) Neither the Company nor any of its Subsidiaries has any liabilities for unpaid Taxes which have not been accrued or reserved on the Company Financials, whether asserted or unasserted, contingent or otherwise, and neither the Company nor any of its Subsidiaries has incurred any liability for Taxes since the date of the Company Balance Sheet other than in the ordinary course of business.

(v) Neither the Company nor any of its Subsidiaries has (a) ever been a member of an affiliated group (within the meaning of Section 1504(a) of the Code) filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company), (b) ever been a party to any Tax sharing, indemnification or allocation agreement, nor does the Company or any of its Subsidiaries owe any amount under such an agreement, (c) any liability for the Taxes of any person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law including any arrangement for group or consortium Tax relief or similar arrangement), as a transferee or successor, by contract or agreement, or otherwise, or (d) ever been a party to any joint venture, partnership or other arrangement that could be treated as a partnership for Tax purposes.

(vi) Neither the Company nor any of its Subsidiaries has entered into a transaction that is being accounted for under the installment method of Section 453 of the Code or similar provision of state, local or foreign law. Neither the Company nor any of its Subsidiaries has engaged in any "intercompany transaction" in respect of which gain was and continues to be deferred pursuant to Section 1.1502-13 of the Treasury Regulations issued under the Code or any predecessor or successor thereof or analogous or similar provision of law, and the Company does not have an "excess loss account" as described in Treasury Regulation Section 1.1502-19 (or any predecessor or successor thereof of analogous or similar provision of law) with respect to the stock of any of its Subsidiaries. There is no taxable income of either the Company or any of its Subsidiaries that will be reportable in the Tax period beginning after the Closing Date that is attributable to a transaction or event that occurred prior to the Closing.

(vii) Neither the Company nor any of its Subsidiaries currently does any business in or derives any income from any jurisdiction other than jurisdictions for which Returns have been duly filed, and no claim has ever been made by an authority in a jurisdiction where the Company or any of its Subsidiaries does not file Returns that the Company or any of its Subsidiaries is or may be subject to taxation by that jurisdiction.

 

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(viii) Neither the Company nor any of its Subsidiaries has been either a “distributing corporation” or a “controlled corporation” in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code.

(ix) Neither the Company nor any of its Subsidiaries has engaged in or has any commitment to engage in a "reportable transaction" within the meaning of Treasury Regulation Section 1.6011-4(b).

(x) Neither the Company nor any of its Subsidiaries has made any payment or payments or is obligated to make any payment or payments, nor is the Company or any of its Subsidiaries a party to (or participating employer in) any agreement or Employee Benefit Plan that (A) could obligate it or its successors (including Parent) or affiliates to make any payment or payments that (1) constitute or could constitute a "parachute payment," as defined in Section 280G of the Code (or any comparable provisions of foreign, state or local law) or (2) will or could otherwise not be deductible under Section 162 or 404 of the Code (or any comparable provisions of foreign, state or local law). There is no agreement, plan, arrangement or other contract by which the Company or any of its Subsidiaries (or any of their successors or affiliates) is bound to compensate any Employee for excise taxes paid pursuant to Section 4999 of the Code.

(xi) Neither the Company nor any of its Subsidiaries is subject to any private letter ruling or prefiling agreement of the IRS or any comparable ruling of any other Governmental Entity, nor has the Company or any of its Subsidiaries requested any such ruling.

(xii) There has been no ownership change, as defined in Section 382(g) of the Code (or comparable provision of foreign, state or local law), with respect to the Company during or after any Tax period in which the Company incurred a net operating loss which is reflected in the most recent Company Financials. None of the net operating losses or other Tax attributes of the Company or any of its Subsidiaries which are reflected in the most recent Company Financials is or has been subject to the "separate return limitation years" provisions described in Treasury Regulations under Section 1502 of the Code (or any comparable provision of foreign, state or local law).

(xiii) The Company and each of its Subsidiaries has retained tax exemption certificates or other proof of tax exemption with respect to all sales for which the Company or any of its Subsidiaries did not report, collect, remit, or pay sales, use, or similar state or local transfer taxes.

3.7 Title to Properties

(a) Properties . Neither the Company nor any of its Subsidiaries owns or has ever owned any real property. Section 3.7(a) of the Company Disclosure Letter sets forth a list of all real property currently leased, licensed or subleased by the Company or any of its Subsidiaries or otherwise used or occupied by the Company or any of its Subsidiaries (the “ Leased Real Property ”), the name of the lessor, licensor, sublessor, master lessor and/or lessee and the date of the lease, license, sublease or other occupancy right and each amendment thereto. All such current leases are in full force and effect, are valid and effective in accordance with their

 

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respective terms, and there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default). The Company or its Subsidiaries currently occupies all of the Leased Real Property for the operation of its business. No parties other than the Company or any of its Subsidiaries have a right to occupy any material Leased Real Property. The Leased Real Property and the physical assets of the Company and the Subsidiaries are, in all material respects, in good condition and repair and regularly maintained in accordance with standard industry practice and the Leased Real Property is in compliance with Legal Requirements. Neither the Company nor any of its Subsidiaries will be required to incur any cost or expense for any restoration or surrender obligations, or any other costs otherwise qualifying as asset retirement obligations under Financial Accounting Standards Board Statement of Financial Accounting Standard No. 143 “Accounting for Asset Retirement Obligations,” upon the expiration or earlier termination of any leases or other occupancy agreements. The Company and each of its Subsidiaries has performed all of its obligations under any termination agreements pursuant to which it has terminated any leases of real property that are no longer in effect and has no material continuing liability with respect to such terminated real property leases.

(b) Documents . The Company has provided Parent true, correct and complete copies of all leases, lease guaranties, agreements for the leasing, use or occupancy of, or otherwise granting a right in or relating to the Leased Real Property, including all amendments, terminations and modifications thereof (“ Lease Documents ”).

(c) Valid Title . The Company and each of its Subsidiaries has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any Liens except (i) as reflected in the Company Balance Sheet, (ii) Liens for Taxes not yet due and payable, and (iii) such imperfections of title and encumbrances, if any, which do not in any material respect detract from the value or interfere with the present use of the property subject thereto or affected thereby. The rights, properties and assets presently owned, leased or licensed by the Company and its Subsidiaries include all rights, properties and assets necessary to permit the Company and its Subsidiaries to conduct their business in the same manner as their businesses have been conducted prior to the date hereof.

3.8 Intellectual Property

(a) Definitions . For all purposes of this Agreement, the following terms shall have the following respective meanings:

“ Company Intellectual Property ” shall mean any and all Intellectual Property Rights and Intellectual Property that are owned or controlled by, or claimed by the Company or any of its Subsidiaries to be owned or controlled by, or exclusively licensed to, the Company or its Subsidiaries.

“ Company Products ” shall mean all products and services developed (including products and services under development), owned, made, provided, distributed, imported, sold or licensed by or on behalf of the Company and any of its Subsidiaries at any time.

 

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“ Company Registered Intellectual Property ” shall mean the applications, registrations and filings for Intellectual Property Rights that have been registered, filed, certified or otherwise recorded with or by any Governmental Entity by or in the name of the Company or any of its Subsidiaries.

“ Intellectual Property ” shall mean any or all of the following (i) works of authorship including computer programs, source code, and executable code, whether embodied in software, firmware, products or otherwise, architecture, documentation, designs, files, records, programmer notes, and data, (ii) inventions (whether or not patentable), discoveries, improvements, and technology, (iii) proprietary information, confidential information, trade secrets and know how, (iv) databases, data compilations and collections (including, without limitation, customer and supplier lists) and technical data, (v) logos, trade names, trade dress, trademarks, service marks and packaging, (vi) domain names, web addresses and web sites and related content and graphics, (vii) tools, methods, techniques, concepts and processes, and (viii) devices, prototypes, schematics, maskworks, test methodologies, and hardware development tools, and (ix) any and all instantiations of the foregoing in any form and embodied in any media.

“ Intellectual Property Rights ” shall mean worldwide common law and statutory rights associated with (i) patents, patent applications and inventors’ certificates, (ii) copyrights, copyright registrations and copyright applications, “moral” rights and mask work rights, (iii) trade and industrial secrets and confidential information, (iv) other proprietary rights relating to intangible intellectual property, (v) trademarks, trade names and service marks, (vi) divisions, continuations, renewals, reissuances and extensions of the foregoing (as applicable) and (vii) analogous rights to those set forth above, including the right to enforce and recover remedies for any of the foregoing.

“ Open Source Software ” shall mean any software distributed under any license that requires that the software covered by the license or any software incorporated into, based upon, combined with, linked to, derived from or distributed with such software (i) be disclosed, distributed or made available in Source Code form or (ii) licensed under the terms of the open source license, in whole or part. Open Source Software includes, without limitation, software licensed under the BSD License, GNU General Public License, GNU Lesser General Public License and any licenses approved by the Open Source Initiative.

“ Shrink-Wrapped Code ” means generally commercially available software code or programs used for internal business purposes and not redistribution. Shrink-Wrapped Code does not include development tools, development environments, SDKs or similar programs).

“ Source Code ” shall mean computer software and code, in form other than object code form, including related programmer comments and annotations, help text, data and data structures, instructions and procedural, object-oriented and other code, which may be printed out or displayed in human readable form.

“ Third Party-IP ” means any Intellectual Property or Intellectual Property Rights owned or controlled by a third party and used, reproduced, distributed, sublicensed or otherwise exploited or exercised in the conduct of the Company's business at any time , including, without limitation, the development, manufacture, sale and other disposition of the Company Products.

 

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(b) Ownership; No Default/No Conflict . The Company owns or has the valid right or license to use all Company Intellectual Property and Third Party-IP as previously used, currently used and currently proposed to be used in the 12 months following the date of this Agreement by the Company or its Subsidiaries. The Company Intellectual Property and Third Party-IP is sufficient for the conduct of the Company's business as currently conducted and as currently proposed to be conducted in the 12 months following the date of this Agreement. All Contracts relating to (i) Company Intellectual Property, (ii) Third Party-IP, or (iii) any other Intellectual Property or Intellectual Property Rights used or exercised in the conduct of the business of the Company and its Subsidiaries, including, without limitation, the Contracts listed in Sections 3.8(l), (m) and (n) of the Disclosure Letter, are valid, in full force and effect, and enforceable in accordance with their terms. The consummation of the transactions contemplated by this Agreement will neither violate nor result in the breach, modification, cancellation, termination, suspension of, or acceleration of any payments with respect to, such Contracts. Each of the Company and its Subsidiaries is in compliance with, and has not breached any term of any such Contracts or committed or failed to perform any act which, with or without notice, lapse of time or both would constitute a default under the provisions of any such Contract and, to the Knowledge of the Company, all other parties to such Contracts are in compliance with, and have not breached any term of, such Contracts. Following the Closing Date, the Surviving Corporation will be permitted to exercise all of the Company’s and its Subsidiaries’ rights under such Contracts to the same extent the Company and its Subsidiaries would have been able to had the transactions contemplated by this Agreement not occurred and without the payment of any additional amounts or consideration other than ongoing fees, royalties or payments which the Company or any of its Subsidiaries would otherwise be required to pay and which have been disclosed to Parent in Section 3.8(l) of the Disclosure Letter. Neither the Company nor any Subsidiary has received notice that any party to any such Contract intends to cancel, terminate or refuse to renew (if renewable) such Contract or to exercise or decline to exercise any option or right thereunder.

(c) No Infringement . The operation of the business by or on behalf of the Company and its Subsidiaries as previously conducted, as it is currently conducted, and as it is contemplated to be conducted by the Company and its Subsidiaries in the 12 months following the date of this Agreement, including the design, development, use, import, branding, advertising, promotion, marketing, manufacture, sale, and other disposition of any Company Product and the use of the Company Intellectual Property has not and does not infringe or misappropriate, and will not infringe or misappropriate when conducted by the Surviving Corporation following the Closing in the same manner as currently conducted by the Company and as it is contemplated to be conducted by the Company and its Subsidiaries in the 12 months following the date of this Agreement, any valid Intellectual Property Rights of any Person, violate any right of any Person (including any right to privacy or publicity), or constitute unfair competition or trade practices under the laws of any jurisdiction; provided , however , that any representation or warranty given in this sentence with regard to the infringement of patents or trademarks of a third party is given to the Knowledge of the Company. Neither the Company nor any of the Subsidiaries has received any written opinions of counsel relating to infringement, invalidity or unenforceability of any Company Intellectual Property or the infringement or misappropriation of any Intellectual Property owned or controlled by a third party.

 

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(d) Notice . Neither the Company nor any of its Subsidiaries has received notice (whether written or oral) from any Person claiming that any Company Product or the operation of the business of the Company or its Subsidiaries at any time infringes or misappropriates any Intellectual Property Rights of any Person or constitutes unfair competition or trade practices under the laws of any jurisdiction (nor does the Company have Knowledge of any basis therefor). There is no pending or, to the Company's Knowledge, threatened claim or litigation contesting the validity, ownership or right of the Company or its Subsidiaries to use or exercise any Company Intellectual Property or Third Party-IP, nor to the Company's Knowledge, is there any basis for any such claim. Neither the Company nor any Subsidiary is in receipt of any offer or invitation to license or otherwise acquire rights to patents owned or controlled by a third party.

(e) Transaction . Neither this Agreement nor the Merger, will result in the Surviving Corporation or, to the Company's Knowledge, the Parent or any of its subsidiaries (i) granting to any third party any right to or with respect to any Intellectual Property or Intellectual Property Rights owned by, or licensed to, any of them, (ii) being bound by, or subject to, any non-compete or other material restriction on the operation or scope of their respective businesses, or (iii) being obligated to pay any royalties or other material amounts, or offer any discounts, to any third party in excess of those payable by, or required to be offered by, any of them, respectively, in the absence of this Agreement or the transactions contemplated hereby, other than ongoing fees, royalties or payments which the Company or any of its Subsidiaries would otherwise be required to pay pursuant to the Contracts disclosed to Parent in Sections 3.8(l), (m)  or (n)  of the Disclosure Letter.

(f) Intellectual Property . Each of the Company and its Subsidiaries has taken commercially reasonable steps to obtain, maintain and protect the Company Intellectual Property. Without limiting the foregoing, neither the Company nor any Subsidiary has (i) disclosed material confidential information to any Person who has not signed a written nondisclosure agreement containing customary terms and (ii) at all times maintained and diligently enforced commercially reasonable procedures to protect all confidential and proprietary information relating to the Company Intellectual Property.

(g) Section 3.8(g) of the Company Disclosure Letter lists (i) all current employees who have been involved or who contributed to the creation or development of any Company Intellectual Property and (ii) all current consultants and contractors who have been involved in or who contributed to the creation or development of any Company Intellectual Property. Each current or former employee, consultant and contractor who has been involved in or who contributed to the creation or development of any Company Intellectual Property has executed and delivered to the Company a valid and enforceable assignment of all right, title and interest that such consultant, contractor or employee may have or may hereafter acquire in or to such Company Intellectual Property and a valid and enforceable waiver of any and all moral rights that such consultant, contractor or employee may have therein unless such rights would vest in the Company by operation of law. Complete and correct copies of each of these agreements have been delivered to Parent. No current or former employee, officer, director, consultant or contractor has any right, license, claim, moral right or interest whatsoever in or with respect to any Company Intellectual Property. To the Knowledge of the Company, no current or former employee, consultant or contractor of the Company (x) is in violation of any provision or covenant of any employment contract, patent disclosure agreement, invention assignment

 

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agreement, non-disclosure agreement, noncompetition agreement or any other contract or agreement with any Person by virtue of such employee's, consultant's or contractor's being employed by, or performing services for, the Company, (y) has used any trade secrets or other confidential or proprietary information of any third party in connection with performing any services for the Company or the development or creation of any Company Intellectual Property, or (z) has developed or created any Company Intellectual Property that is subject to any agreement under which such employee, consultant or contractor has assigned or otherwise granted any third party any rights in or to such Company Intellectual Property. To the Knowledge of the Company, the employment of any current or former employee of the Company, and the use by the Company of any services of any current or former consultant or contractor, has not subjected the Company or any Subsidiary to any liability to any Person for improperly soliciting such employee, consultant or contractor.

(h) Section 3.8(h) of the Company Disclosure Letter lists all Company Registered Intellectual Property. The Company and its Subsidiaries are current in (i) the payment of all necessary registration, maintenance and renewal fees owing in connection with Company Registered Intellectual Property and (ii) the filing of documents that are required to be filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of obtaining and maintaining such Company Registered Intellectual Property. To the Knowledge of the Company, all of the Company Registered Intellectual Property is valid and subsisting. The Company has not taken or failed to take any action, including with respect to disclosure of information in the application for or prosecution of any Company Registered Intellectual Property that would render such Company Registered Intellectual Property invalid or unenforceable; provided, that the foregoing warranty is made to the Knowledge of the Company with respect to trademark applications and patent applications included in the Company Registered Intellectual Property.

(i) No Order . No Company Intellectual Property or Company Product is subject to any proceeding or outstanding decree, order, judgment, settlement agreement, forbearance to sue, consent, stipulation or similar obligation that restricts in any manner the use, transfer or licensing thereof by the Company or any of its Subsidiaries or may affect the validity, use or enforceability of such Company Intellectual Property or Company Product.

(j) Open Source . Section 3.8(j) of the Company Disclosure Letter lists all Open Source Software that (i) was or is used in connection with the development of any Company Intellectual Property or Company Product as currently being sold or marketed or under development or, to the Knowledge of the Company, any Third Party-IP, or (ii) was or is incorporated in whole or in part into or otherwise links to, operates with or forms any part of any Company Intellectual Property or Company Product as currently being sold or marketed or under development or, to the Knowledge of the Company, any Third Party-IP. No Open Source Software listed in Section 3.8(j) of the Company Disclosure Letter requires that (w) any Source Code to any Company Intellectual Property or Company Product (or any component thereof) be disclosed, distributed or licensed to third parties under the terms of any Open Source Software license or otherwise, (x) any Company Intellectual Property or Company Products (or any component thereof) be licensed for the purpose of making derivative works, (y) any Company

 

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Intellectual Property or Company Product (or any component thereof) be redistributable at no charge, or (z) any rights or immunities be granted under any Company Intellectual Property or Third Party-IP. Neither the Company nor any Subsidiary has used or exploited any Third Party-IP in any manner that would result in the breach of any warranty or representation made by the Company or any Subsidiary to any third Person regarding the use of Open Source Software. No Open Source Software licensed under the GNU General Public License has been statically linked to, or compiled in the same executable program as, any software or code owned by the Company or first licensed by the Company or any of its Subsidiaries under a license other than the GNU General Public License.

(k) Source Code . Neither the Company, any of its Subsidiaries, nor any other Person acting on any of their behalf has disclosed, delivered or licensed to any Person, agreed to disclose, deliver or license to any Person, or permitted the disclosure or delivery to any escrow agent or other Person of, any Source Code owned, used, licensed or distributed by Company or a Subsidiary of the Company (“ Company Source Code ”). No event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time, or both) will, or would reasonably be expected to, result in the disclosure or delivery by the Company, any of its Subsidiaries or any Person acting on their behalf to any Person of any Company Source Code. Section 3.8(k) of the Company Disclosure Letter identifies each Contract pursuant to which the Company has deposited, or is or may be required to deposit, with an escrow agent or any other Person, any Company Source Code and describes whether the execution of this Agreement or any of the other transactions contemplated by this Agreement, could result in the release from escrow of any Company Source Code.

(l) Licenses-In . Other than (i) licenses to Shrink-Wrapped Code, (ii) licenses to Open Source as set forth in Section 3.8(j) of the Company Disclosure Letter, and (iii) non-disclosure agreements entered into in the ordinary course of business, Section 3.8(l) of the Company Disclosure Letter lists all Contracts that to which the Company or any of its Subsidiaries is a party and under which the Company or any of its Subsidiaries has been granted or provided any rights to Intellectual Property or Intellectual Property Rights by a third party . Section 3.8(j) of the Company Disclosure Letter also lists all Third Party-IP used in the development of, or included in, linked to or distributed with any Company Product and the corresponding Contract under which such Third Party-IP is used or licensed, except for Shrink-Wrapped Code and the Open Source Software set forth in Section 3.8(j) of the Disclosure Letter.

(m) Supplier Agreements . Section 3.8(m) of the Company Disclosure Letter lists all Contracts or other arrangements pursuant to which Company or is Subsidiaries purchases or acquires any hardware or equipment (including any parts, supplies and components) that is material to the design, use, manufacture, sale or support of the Company Products, other than licenses for Shrink-Wrapped Code, licenses to Open Source as set forth in Section 3.8(j) of the Company Disclosure Letter, and licenses identified in Section 3.8(l) of the Company Disclosure Letter.

(n) Licenses-Out . Other than (i) written non-disclosure agreements and (ii) non-exclusive end user licenses and related agreements (including software and maintenance and support agreements) for Company Products (in each case, pursuant to written agreements that have been entered into in the ordinary course of business that do not materially differ in

 

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substance from the Company’s standard form(s) which have been provided to Parent and attached to Section 3.8(n) of the Company Disclosure Letter), Section 3.8(n) of the Company Disclosure Letter lists all Contracts to which the Company or any of its Subsidiaries is a party or bound and under which the Company has licensed or granted any rights, covenants, releases or options with respect to Company Intellectual Property. Other than the Contracts that are not required to be listed in the Disclosure Letter pursuant to Section 3.8(l) or (n), the Company and its Subsidiaries are not party to any Contracts governing or relating to any Company Intellectual Property or Third-Party IP other than the Contracts listed in Sections 3.8(l), (m) and (n) of the Disclosure Letter.

(o) Customer Information . The Company and each of its Subsidiaries are in compliance with all applicable laws, regulations and Contracts with respect to the collection, use and retention of customer lists, customer contact information, customer correspondence and customer licensing and purchasing histories relating to its current and former customers (the “ Customer Information ”) and the consummation of the transactions contemplated by this Agreement will not violate such laws, regulations and Contracts with respect to such Customer Information.

(p) Product Development . Section 3.8(p) of the Company Disclosure Letter sets for a schedule of the Company’s material product releases for the next 12 months. With respect to each such material product, the Company reasonably expects that there will not be any (i) material delay in the release of such material product or (ii) material increase in the costs incurred by the Company and its Subsidiaries in connection with such release above budgeted amounts.

(q) Indemnification . Except as provided in the Distribution Agreements, the Company has not entered into any agreement or offered to indemnify any Person against any charge of infringement by the Company Intellectual Property or Company Products or use thereof, or any other intellectual property or right. The Company has not entered into any agreement granting any Person the right to bring any infringement action with respect to, or otherwise to enforce, any of the Company Intellectual Property.

3.9 Restrictions on Business Activities

Neither the Company nor any of its Subsidiaries is party to or bound by any Contract containing any covenant (a) limiting in any respect the right of the Company or any of its Subsidiaries to engage in any line of business, to make use of any Company Intellectual Property or Company Product or compete with any Person in any line of business, (b) granting any exclusive distribution rights, (c) providing “most favored nations” or other preferential pricing terms for current Company Products, or (d) otherwise having an adverse effect on the right of the Company and its Subsidiaries to sell, distribute or manufacture any Company Products or Company Intellectual Property or to purchase or otherwise obtain any software, components, parts or subassemblies.

 

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3.10 Governmenta