-----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, F5exjodgt9Mjf3oOtkXVPJrxBLZPNvrHZ6qhYtpiLe+gxHszgkysjvtrpALO3ekk MzcYl310Vi0cBnjOUITHGA== 0000950005-97-000779.txt : 19970924 0000950005-97-000779.hdr.sgml : 19970924 ACCESSION NUMBER: 0000950005-97-000779 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970907 ITEM INFORMATION: FILED AS OF DATE: 19970923 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYLINK CORP /CA/ CENTRAL INDEX KEY: 0001005230 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 952891600 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-27742 FILM NUMBER: 97684078 BUSINESS ADDRESS: STREET 1: 910 HERMOSA COURT CITY: SUNNYVALE STATE: CA ZIP: 94086-4103 BUSINESS PHONE: 4087355800 MAIL ADDRESS: STREET 1: 910 HERMOSA CT CITY: SUNNYVALE STATE: CA ZIP: 94086-4103 8-K 1 FORM 8-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of report (Date of earliest event reported): September 7, 1997 Cylink Corporation (Exact name of Registrant as Specified in its Charter)
California 0-27742 95-3891600 (State or Other Jurisdiction (Commission File No.) (IRS Employer Identification No.) of Incorporation)
910 Hermosa Court, Sunnyvale, California 94086 (Address of Principal Executive Offices) (Zip Code) (408)735-5800 (Registrant's Telephone Number, Including Area Code) Page 1 of 4 Pages Exhibit Index Located on Page 4 ================================================================================ INFORMATION TO BE INCLUDED IN REPORT Item 2. Acquisition or Disposition of Assets. On September 8, 1997, Registrant acquired all of the outstanding shares of Algorithmic Research, Ltd., a limited liability company organized under the laws of the State of Israel ("ALR") and Algart Holdings Ltd., a limited liability company organized under the laws of the State of Israel ("Holdings") pursuant to that certain Stock Purchase Agreement, dated September 7, 1997 (the "Purchase Agreement") among Registrant, ALR and A.R. Data Security Ltd., a limited liability company organized under the laws of the State of Israel ("Parent"). Parent owned all of the outstanding shares of Holdings, which had no material assets other than certain shares of ALR, and Holdings, in combination with Parent, owned all of the outstanding shares of ALR. The consideration for this stock purchase was $40,686,972 in cash and 2,593,169 shares of Registrant's capital stock. As additional consideration, holders of options to purchase shares of Parent received $2,500,226 in cash and 409,641 options to purchase shares of Registrant's capital stock. In addition, Registrant agreed to pay up to $1,901,230 in investment banking fees, legal and other professional advisory fees incurred by Parent and ALR in connection with the transaction. The amount and type of consideration was determined on the basis of negotiations between Registrant and Parent and their management and professional advisors. The source of the funds used for the cash portion of the purchase price was Registrant's cash reserves. As part of the stock purchase, Registrant entered into a Seller's Agreement, dated September 8, 1997 (the "Seller's Agreement") with Parent and the shareholders of Parent ("Parent Shareholders"), which provides for certain restrictions on the sale of Registrant's Common Stock by Parent and Parent Shareholders, which in part were imposed in order to effect compliance with Regulation S of the Commission with respect to the shares of Registrant's Common Stock issued in this stock purchase, and certain conditional registration rights in favor of Parent and the Parent Stockholders. Registrant and the Parent Shareholders further entered into that certain Parent Shareholders Indemnity Agreement, dated as of September 8, 1997, pursuant to which the Parent Shareholders agreed to indemnify Registrant as to certain matters pertaining to ALR. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Businesses Acquired. The audited financial statements of ALR and Holdings are not yet completed. The required audited financial statements will be filed with the Securities and Exchange Commission within 60 days after the filing of this report on Form 8-K. (b) Pro Forma Financial Information. The unaudited pro forma financial information of Cylink Corporation and ALR and Holdings are not yet completed. The required unaudited pro forma information will be filed with the Securities and Exchange Commission within 60 days after the filing of this report on Form 8-K. (c) Exhibits. The Exhibit Index appearing on page 5 hereof is hereby incorporated herein by reference. Item 9. Sales of Equity Securities Pursuant to Regulation S. The 2,593,169 shares of Registrant's Common Stock issued and sold in connection with the transaction described in Item 2 above were issued in a nonunderwritten sale pursuant to Regulation S under the Securities Act of 1933, as amended. With respect to the information required pursuant to Item 701 of Regulation S-K, the description of the transaction set forth in Item 2 above is hereby incorporated herein by reference. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CYLINK CORPORATION By /s/ John H. Daws ------------------------------------- John H. Daws Vice President and Chief Financial Officer Date: September 17, 1997 3 EXHIBIT INDEX
Sequentially Exhibit Description Numbered Page ==================== ================================================================= ==================== 2.2 Stock Purchase Agreement, dated as of September 7, 1997, 5 between Registrant, A.R. Data Security Ltd. and Algorithmic Research Ltd. 2.3 Seller's Agreement, dated as of September 8, 1997, among Registrant, A.R. Data Security Ltd., Algorithmic Research Ltd., Amos Fiat, Yossi Cohen, Yossi Tulpan, Koor Capital Markets and Telrad Holdings Ltd. 2.4 Parent Shareholders Indemnity Agreement, dated as of September 8, 1997 among Registrant, A.R. Data Security Ltd., Amos Fiat, Yossi Cohen, Yossi Tulpan, Koor Capital Markets and Telrad Holdings Ltd.
4 EX-2.2 2 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("Agreement") is made as of September 7, 1997 by and among Cylink Corporation, a California corporation (the "Purchaser"), Algorithmic Research Ltd., a limited liability company organized and existing under the laws of the State of Israel (the "Company"), and A.R. Data Security Ltd., a limited liability company organized and existing under the laws of the State of Israel (the "Seller"). RECITALS A. The Seller and Algart Holdings Ltd., a limited liability company organized and existing under the laws of the State of Israel and a wholly owned subsidiary of the Seller ("Holdings"), are the sole shareholders of the Company. B. The Seller desires to sell and the Purchaser desires to purchase (i) all of the issued and outstanding shares of the Company that are owned by the Seller, and (ii) all of the issued and outstanding shares of Holdings, in accordance with the terms and conditions set forth in this Agreement, so that, upon consummation of the transactions herein contemplated, the Purchaser shall directly, or indirectly through Holdings, own all of the issued and outstanding shares of the Company. AGREEMENT In consideration of the agreements, provisions and covenants set forth below, the Purchaser, the Company and the Seller hereby agree as follows: ARTICLE I PURCHASE AND SALE 1.1. Purchase and Sale of Stock. Subject to the terms and conditions set forth below, on the Closing Date (as defined below), the Seller shall sell to the Purchaser, and the Purchaser shall purchase from the Seller: (a) 81,749 ordinary shares of the Company, NIS 0.10 nominal value per share, representing all of the ordinary shares of the Company that are owned by the Seller (said 81,749 ordinary shares of the Company being referred to herein as the "Transferred Company Shares"), and (b) 81,749 ordinary shares of Holdings, NIS 0.10 nominal value per share, representing all of the outstanding ordinary shares of Holdings (the "Holdings Shares"). 1.2. Purchase Price. (a) The aggregate consideration payable by the Purchaser for the Transferred Company Shares and the Holdings Shares shall consist of (i) U.S. $40,686,972 in cash, and (ii) 2,593,169 newly issued shares of the common stock, $.01 par value per share, of the Purchaser 1 (the "Purchaser Common Stock"), as adjusted as appropriate for stock splits, stock dividends and other changes to Purchaser Common Stock effected during the period from the date hereof through the Closing Date. (b) Any transfer taxes, stamp duties or other similar taxes or duties incurred by the Seller, Holdings or the Purchaser in connection with the transfer of the Transferred Company Shares or the Holdings Shares to the Purchaser shall be borne and paid one half by the Seller and one half by the Purchaser. 1.3. Exemption from Registration and Qualification. (a) The shares of Purchaser Common Stock to be issued in connection with this Agreement will be exempt from registration under Regulation S of the Securities Act of 1933, as amended (the "Securities Act"), and exempt from qualification under the California Corporations Code. (b) Certificates representing those shares of Purchaser Common Stock to be issued to the Seller pursuant to this Agreement will bear legends describing certain of the applicable restrictions on transferability set forth in Regulation S of the Securities Act and related stop-transfer instructions will be placed on such shares of Purchaser Common Stock by Purchaser or its duly appointed transfer agent and registrar. The Purchaser agrees that the restrictive Regulation S legend and stop-transfer instructions referred to herein will be removed upon the request of the Seller or the respective Parent Shareholders (as defined below) at the end of the applicable restricted period as set forth in Regulation S (which is forty (40) days from the Closing Date). 1.4. Closing. (a) Unless this Agreement shall theretofore have been terminated pursuant to the provisions of Article X hereof, subject to the terms and conditions set forth herein, the closing of the transactions contemplated by this Agreement (the "Closing") shall take place in Tel Aviv, Israel, at 12:00 p.m. local time on September 8, 1997 or at such other time, date and place as the parties may mutually agree in writing (the date on which the Closing takes place being referred to herein as the "Closing Date"). (b) At the Closing: (i) the Seller shall deliver to the Purchaser the certificates (if any) representing the Transferred Company Shares and the Holdings Shares, properly endorsed in favor of the Purchaser for transfer or accompanied by a duly executed share transfer deed; and (ii) the Purchaser shall (A) pay to the Seller the cash amount referred to in Section 1.2(a)(i) hereof, by wire transfer in immediately available (U.S. dollar) funds, to a bank account designated by the Seller, (B) issue and deliver to the Seller a certificate representing 1,320,869 shares of Purchaser Common Stock, and (C) issue in the name of and deliver to Hambrecht & Quist LLC (the "Escrow Agent") a certificate representing 1,272,300 shares of Purchaser Common Stock (the "Escrow Shares"), to be held in accordance with that certain Escrow Agreement to be entered into at the Closing as contemplated by Sections 7.5 and 8.4 hereof (the "Escrow Agreement"). In addition, all other actions shall be taken and all other documents shall be delivered that are necessary to consummate 2 the transactions contemplated by this Agreement (other than such actions and documents as are to be taken or delivered at another date, as specifically provided in this Agreement). 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller hereby represents and warrants to the Purchaser, except as otherwise set forth in the Disclosure Schedule being furnished by the Seller to the Purchaser simultaneously with the execution and delivery of this Agreement (the "Company Schedule"), or as disclosed or otherwise described in any of the documents listed or set forth in the Company Schedule or this Article II, as follows: 2.1. Title to Ordinary Shares. The Seller is the record and beneficial owner of the Transferred Company Shares and the Holdings Shares, and the Seller holds title to the Transferred Company Shares and the Holdings Shares free and clear of all liens, pledges, charges, encumbrances, security interests, restrictive agreements or assessments (other than restrictions on transferability generally imposed on securities under applicable securities laws). 2.2. Organization of the Company and Holdings. Each of the Company and Holdings is a limited liability private company duly organized and validly existing under the laws of the State of Israel and has full power and authority to carry on its business as now conducted, and to own its assets. Each of the Company and Holdings is duly qualified to do business and is in good standing (with respect to jurisdictions which recognize such concept) in the jurisdictions set forth in Schedule 2.2 of the Company Schedule, which are the only jurisdictions in which the Company or Holdings, as the case may be, is required to be qualified in order to carry on its business, and is duly authorized, and licensed under all laws, regulations, ordinances or orders of public authorities, or otherwise, to carry on its business in the places and in the manner presently conducted, except for qualifications, authorizations or licenses for which the failure to obtain, if required, would not have a Material Adverse Effect on the Company. Each of the Company and Holdings has heretofore made available to the Purchaser true and complete copies of its Memorandum of Association and its Articles of Association registered with the Registrar of Companies, as in effect on the date hereof. The minute books of each of the Company and Holdings contain substantially accurate records of all resolutions adopted and other actions taken by the Company's Board of Directors, all committees of its Board of Directors, and its shareholders from the date of its incorporation to the date of this Agreement. 2.3. Nonviolation. The consummation by the Seller and the Company of the stock sale contemplated by this Agreement will not (a) violate or conflict with the Memorandum of Association or Articles of Association, or similar instrument, of the Company or any Subsidiary (as defined below), (b) except as set forth in this Agreement, require the Seller, the Company or any Subsidiary to obtain the consent, approval or authorization of any governmental or quasi-governmental person or entity prior to the Closing, except where the failure to obtain such consent, approval or authorization would not have a Material Adverse Effect on the Company, or (c) give rise to a right to terminate by the other party thereto or result in a breach of the terms or conditions of, or constitute a default under, or violate, as the case may be, any Listed Agreement (as defined below), except for any such termination, breach, default or violation which would not have a Material Adverse Effect on the Company. 4 2.4. Authority for Agreement. All corporate and other proceedings required to be taken by or on behalf of the Company and the Seller to authorize the Company and the Seller to enter into and carry out this Agreement have been duly and properly taken. This Agreement has been duly executed and delivered by the Company and the Seller and is valid and binding upon the Company and the Seller, subject as to enforceability, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity. 2.5. Capitalization. The authorized capital of the Company consists of 200,000 ordinary shares, NIS .010 nominal value per share, of which 120,519 shares are issued and outstanding. All of such issued and outstanding ordinary shares of the Company have been legally and validly issued and are fully paid and nonassessable. Of such 120,519 ordinary shares, the Seller and Holdings own 81,749 and 38,770 shares, respectively, and there is no other shareholder of the Company. 2.6. Options, Warrants, Etc. There are no outstanding options, warrants, rights, calls, commitments or agreements calling for the issuance or transfer, sale or disposition by the Company or any Subsidiary of any shares, issued or unissued, of the capital stock of the Company or any Subsidiary, or of any securities convertible or exchangeable, actually or contingently, into any such capital stock, to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound. 2.7. Officers and Directors. Schedule 2.7 of the Company Schedule contains a complete and correct list of the names and home addresses of all officers and directors of the Company, Holdings and each of the Subsidiaries. 2.8. Subsidiaries. Schedule 2.8 of the Company Schedule provides a complete list of all of the subsidiaries of the Company (the "Subsidiaries"), the respective jurisdictions of their incorporation and the percentage and numbers of their outstanding shares owned by the Company, or any other person, firm or corporation. For purposes of this Agreement, any corporation of which the Company, directly or indirectly, through other corporations or otherwise, owns 50% or more of the outstanding capital stock shall be deemed to be a Subsidiary. Each of the Subsidiaries is qualified to do business in the jurisdictions set forth in Schedule 2.8 of the Company Schedule which are the only jurisdictions in which each such Subsidiary is required to be qualified in order to carry on its business, and is duly authorized, and licensed under all laws, regulations, ordinances or orders of public authorities, or otherwise, to carry on its business in the places and in the manner presently conducted, except for authorizations, qualifications or licenses for which the failure to obtain, if required, would not have a Material Adverse Effect on the Company. The outstanding shares of capital stock of each of the Subsidiaries are validly issued, fully paid and non-assessable, and all of such outstanding shares of each of the Subsidiaries are owned by the Company or another Subsidiary (or their nominees) free of any claims, liens, charges or encumbrances of any nature whatsoever (other than any claims, liens, charges or encumbrances imposed under applicable securities laws). Each of the Subsidiaries is duly organized and validly existing in good standing (with respect to jurisdictions which recognize such concept) under the 5 laws of the jurisdiction of its organization and has the power to carry on its business as now conducted and to own its assets. The Company has made available to the Purchaser true and complete copies of the Certificate of Incorporation (or similar instrument) and By-Laws (or similar instrument) of each Subsidiary, as in effect on the date hereof. The minute books of each Subsidiary contain substantially accurate records of all resolutions adopted and other actions taken by its Board of Directors and its shareholders between the time of its incorporation and the date of this Agreement. Neither the Company nor any Subsidiary has any investments in any corporation or other entity, except for short-term investments in certificates of deposit, and other deposits and debt obligations with a maturity of not more than 180 days. 2.9. Grants, Incentives and Subsidies. Schedule 2.9 of the Company Schedule provides a complete list of all material grants, incentives and subsidies from the Government of the State of Israel or any agency thereof or any quasi-public agency made specifically to the Company, any Subsidiary or Holdings, with respect to which the Company, any Subsidiary or Holdings has material continuing obligations ("Grants") , including, without limitation, (i) Grants from the Investment Center of the Ministry of Industry and Trade (the "Investment Center"), (ii) Grants from the office of the Chief Scientist of the Ministry of Industry and Trade (the "Chief Scientist") and (iii) Grants from the Fund for Encouragement of Export. The Company is in compliance, in all material respects, with the terms and conditions of the Grants and has duly fulfilled, in all material respects, all the undertakings relating thereto and all conditions imposed by law or regulation with respect thereto, including, without limitation, Section A of the Law for The Encouragement of Industry, Research and Development, except where the failure to be in compliance or to fulfill such undertakings or conditions would not have a Material Adverse Effect on the Company. To the knowledge of the Company, no event has occurred which would reasonably be expected to lead to the annulment or material limitation of any of the Grants. 2.10. Financial Statements. The audited consolidated financial statements of the Seller and its consolidated subsidiaries for each of the years in the two year period ended December 31, 1996, together with the notes thereto and the reports and opinions thereon of Kost, Levary and Forer (the "Audited Consolidated Financial Statements"), and the unaudited consolidated financial statements of the Seller and its consolidated subsidiaries for the six months ended June 30, 1997 and the notes thereto (the "Unaudited Consolidated Financial Statements"), all of which have previously been delivered to the Purchaser, fairly present the consolidated financial position of the Seller and its consolidated subsidiaries, as of the respective dates thereof and the consolidated results of their operations for the periods indicated, and were prepared in conformity with Israel generally accepted accounting principles consistently applied throughout the periods covered thereby except as specifically indicated therein (subject, in the case of unaudited statements, to normal recurring audit adjustments not material in scope or amount and except that the footnotes contained in the unaudited statements may not satisfy the requirements applicable to the preparation of footnotes under Israel generally accepted accounting principles).(The Audited Consolidated Financial Statements and the Unaudited 6 Consolidated Financial Statements are referred to collectively as the "Financial Statements.") As of June 30, 1997, except for the Transferred Company Shares and the Holdings Shares, the Seller had no assets of the type required to be reflected in the assets column of an unconsolidated balance sheet prepared in accordance with Israel generally accepted accounting principles. 2.11. Actions Since June 30, 1997. Except (a) as reflected in, or contemplated by, the Financial Statements or (b) as otherwise expressly set forth in or contemplated by this Agreement or in the Exhibits hereto or in the Company Schedule since June 30, 1997, neither the Company nor any Subsidiary has: (i) issued or sold, or agreed to issue or sell, or purchased, or agreed to purchase, any of its equity shares or securities convertible or exchangeable into such equity shares, or any options, warrants, rights or calls to purchase such equity shares, or other corporate securities; (ii) incurred any material obligation or material liability, absolute or contingent, of the type and magnitude required to be reflected in the liabilities column of a consolidated balance sheet of the Company prepared in accordance with Israel generally accepted accounting principles except in the ordinary and usual course of business; (iii) discharged or satisfied any lien or encumbrance, except in the ordinary and usual course of business, or paid or satisfied any liability other than liabilities as at June 30, 1997, except in the ordinary and usual course of business; (iv) entered into, or modified in any material respect, any employment or consulting agreement (other than its agreement with Hambrecht & Quist LLC), or made any wage or salary increases or granted any bonuses to its employees, except those made or granted in the ordinary and usual course of business; (v) mortgaged, pledged or subjected to lien or other encumbrance ("Encumbrance") any of its material properties or assets (other than (w) Encumbrances arising under or relating to any license agreement to which the Company or any of the Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound, (x) liens for current taxes or other governmental charges or levies not yet due, or for taxes or other governmental charges or levies being protested in good faith, (y) Encumbrances arising from municipal and zoning ordinances and easements for public utilities, and (z) such imperfections in the title to the assets and properties of the Company and its Subsidiaries and Encumbrances, if any, as do not materially detract from the value, or materially interfere with the present or continued use, of such assets or properties, or otherwise materially impair the business or operations of the Company and its Subsidiaries (Encumbrances of the type referred to in clauses "(w)," "(x)," "(y)," and "(z)" of this clause "(v)" being referred to herein as "Permitted Encumbrances")); (vi) sold, assigned or transferred any of its material properties or assets, except in the ordinary and usual course of business; (vii) entered into any material transaction not in the ordinary and usual course of business; (viii) irrevocably waived any rights of substantial value, or cancelled, modified or irrevocably waived any debts held by the Company or such Subsidiary in excess of U.S. $25,000 in the aggregate; (ix) made or incurred capital expenditures in excess of an aggregate of U.S. $200,000 (the Company and all Subsidiaries to be taken as a whole for this purpose); (x) declared, paid or set aside any dividends or other distributions or payments on its equity shares; (xi) made any loans or advances to any person or assumed, guaranteed, endorsed or otherwise became responsible for the obligations of any person, except for loans and advances to employees and to unaffiliated third parties in the ordinary and usual course of business; (xii) effected any merger, consolidation, recapitalization, stock split, stock dividend, reorganization or other similar transaction affecting the equity shares of the Company; (xiii) made any illegal payments to governmental or quasi-governmental officials; or (xiv) made any payments that have not been properly reflected in the Company's books and records to customers for the sharing of fees or to customers or suppliers for rebating of charges, or engaged 7 in other reciprocal practices that have not been properly reflected in the Company's books and records. 2.12. Liabilities Since June 30, 1997. There are no material liabilities or obligations of the Company or any Subsidiary of the type and magnitude required to be disclosed in the liabilities column of a consolidated balance sheet of the Company and its consolidated Subsidiaries prepared in accordance with Israel generally accepted accounting principles, whether accrued, absolute, contingent or otherwise, and whether due or to become due, which arose or, in accordance with Israel generally accepted accounting principles, were accrued or should be accrued with respect to any period beginning after June 30, 1997 and ending on the date of this Agreement other than (i) those incurred in the ordinary and usual course of the business of the Company and its Subsidiaries, which have not had in the aggregate a Material Adverse Effect on the Company, (ii) those intercompany liabilities which are properly eliminated in consolidation, (iii) those expressly disclosed in any Exhibit hereto or in the Company Schedule, (iv) those reasonably incurred in connection with this Agreement including, without limitation, any indebtedness incurred to pay any costs and expenses arising out of the transactions contemplated by this Agreement, (v) those discharged prior to the date of this Agreement, and (vi) those covered by insurance and not otherwise having a Material Adverse Effect on the Company. 2.13. Absence of Undisclosed Liabilities. As of June 30, 1997, there were no liabilities or obligations of the Company or its consolidated subsidiaries of the type and magnitude required to be disclosed in the liabilities column of a consolidated balance sheet of the Company and its consolidated Subsidiaries prepared in accordance with Israel generally accepted accounting principles (whether accrued, absolute, contingent or otherwise, and whether due or to become due), which, in accordance with Israel generally accepted accounting principles, should have been accrued as of June 30, 1997, other than (i) those disclosed, or reflected as a liability or obligation, or reserved against on the Unaudited Consolidated Financial Statements, (ii) those intercompany liabilities or obligations between the Company and its Subsidiaries which are properly eliminated in consolidation, (iii) those expressly disclosed in any Exhibit hereto or in the Company Schedule, and (iv) those fully covered by insurance and not otherwise having a Material Adverse Effect on the Company. 2.14. Litigation. There are no actions, suits, legal proceedings or governmental or quasi-governmental investigations pending against the Company or any Subsidiary before any court or governmental agency or before any arbitrator of any kind, or any order, injunction or decree outstanding against the Company or any Subsidiary and, to the knowledge of the Company, no person has since January 1, 1996 threatened orally (to any officer or director of the Company) or in writing to commence any action, suit or legal proceeding against the Company or any Subsidiary or against or relating to their property, assets or business, that in any such case would reasonably be expected to have a Material Adverse Effect on the Company. Neither the Company nor any Subsidiary is in violation of any applicable law, regulation, ordinance, order, injunction, decree, award or other requirement of any governmental or quasi-governmental body, court, or arbitrator relating to its property, assets, or business, except for any violation that would not have a Material Adverse Effect on the Company. 8 2.15. Permits. The Company and its Subsidiaries have all material governmental permits, licenses, orders, approvals, franchises and other rights and privileges necessary (including, without limitation, approvals from the Ministry of Defense and any other relevant governmental agency relating to the development, sale and export of cryptography technology) in order for them to carry on their business as conducted as of the date hereof (including, without limitation, to manufacture, sell and distribute any Material Company Products that are currently being manufactured by the Company and its Subsidiaries) and to the knowledge of the Company, there are no material impediments to the obtaining of any required governmental permits, licenses, orders, approvals, franchises and other rights and privileges as to the development, sale and export of any Material Company Products under development, except in each case, such permits, licenses, orders, approvals, franchises, and other rights and privileges of which the failure to obtain, if required, would not have a Material Adverse Effect on the Company. Schedule 2.15 of the Company Schedule sets forth a list of all such material permits, licenses, orders and approvals from all Israeli and other governmental and regulatory bodies held by the Company and its Subsidiaries. 2.16. Ownership of Assets. The Company and its Subsidiaries have good title to all of their respective owned assets and properties, tangible and intangible (including all assets reflected in the Unaudited Consolidated Financial Statements, except those disposed of in the ordinary course of business since June 30, 1997), and good title to their leasehold estates, in each case free and clear of all Encumbrances except for Permitted Encumbrances. Except as set forth in the Financial Statements, none of the material properties or assets of the Company and its Subsidiaries the value of which is reflected in the assets column of the balance sheet included in the Unaudited Consolidated Financial Statements, is held by the Company or any Subsidiary as lessee or subject to any lease or as conditional vendee under conditional sale or other title retention agreement or as optionee under any option to purchase. 2.17. Intellectual Property. (a) Schedule 2.17(a)-1 of the Company Schedule lists each patent, patent application, registered trademark, trade name, registered service mark, copyright and copyright application that (i) is owned by the Company or any of its Subsidiaries as of the date of this Agreement, and (ii) provides intellectual property protection for any material component of any Material Company Product (or for any material component, module, feature or subassembly thereof) or is otherwise material to the conduct of the business of the Company and its Subsidiaries (taken as a whole) as of the date of this Agreement. Schedule 2.17(a)-2 of the Company Schedule identifies each patent, trademark, service mark and copyright that (A) is being licensed by a third party to the Company or any of its Subsidiaries as of the date of this Agreement, (B) provides intellectual property protection for any technology or invention for which the Company cannot obtain the functional equivalent from more than one source, and (C) provides intellectual property protection for any material component of any Material Company Product (or for any material component, module, feature or subassembly thereof). Schedule 2.17(a)-2 of the Company Schedule further sets forth any such license that requires the Company or its Subsidiaries to pay any material royalties or any material fixed or variable fees or consideration for such licensing. Schedule 2.17(a)-3 of the Company Schedule identifies each software system, software application, software module or 9 software program, hardware component, system or product or other component, card, subassembly or part that: (1) is a material component of a Material Company Product, and (2) has been designed or developed for the Company by employees of or consultants to the Company prior to the date of this Agreement. For the purposes of this Agreement, "Company Intellectual Property" shall mean both: (i) the items listed in Schedule 2.17(a)-1 and Schedule 2.17(a)-2 of the Company Schedule (which, for purposes of this definition, shall be deemed to include any item that should have been listed on Schedule 2.17(a)-1 or Schedule 2.17(a)-2 of the Company Schedule by the terms of this Section 2.17(a) and was not so listed) and (ii) any technology, know-how, inventions or proprietary information that (x) is (or is reasonably likely to be) incorporated in, and is a material component of, a Material Company Product (or any material component, module, feature or subassembly thereof), (y) is subject to protection under applicable law as a trade secret right or equivalent intellectual property right, and (z) is owned by the Company or its Subsidiaries; and "Material Company Product" shall mean those existing and proposed products of the Company and its Subsidiaries listed on Schedule 2.17(a)-4 of the Company Schedule. (b) The Company Intellectual Property set forth in Schedule 2.17(a)-1 of the Company Schedule is owned by the Company or its Subsidiaries free and clear of all Encumbrances other than Permitted Encumbrances. (c) The sale of the Transferred Company Shares and Holding Shares by the Seller to the Purchaser under this Agreement will not cause the forfeiture or termination of any of the rights of the Company or its Subsidiaries to the Company Intellectual Property or in any way impair the right of the Company or its Subsidiaries to sell, license or dispose of, or to bring any action for the infringement of, any Company Intellectual Property or to manufacture, sell and use any Material Company Product, except for any forfeiture, termination or impairment which would not reasonably be expected to have a Material Adverse Effect on the Company. (d) There are no royalties, honoraria or other similar payments payable by the Company or any of its Subsidiaries to any third party for the use by the Company or any of its Subsidiaries of any Company Intellectual Property or for the manufacture, sale or use by the Company or any of its Subsidiaries of any Material Company Product, other than (i) payments to the Office of the Chief Scientist, and (ii) payments under Listed Agreements. (e) To the knowledge of the Company, the Company Intellectual Property that is owned by the Company, the use thereof by the Company or its Subsidiaries and the manufacture, sale or use of any Material Company Product by the Company or its Subsidiaries does not, in any case, infringe upon any U.S., Israeli or other foreign patent, trade secret, copyright, trade name or other intellectual property right of any third party. To the knowledge of the Company, no third party is infringing upon any Company Intellectual Property that is owned by the Company, except where the infringement would not reasonably be expected to have a Material Adverse Effect on the Company. The Company owns or has a valid right to use (by license, title or other right) all Company Intellectual Property that is incorporated in, and is a material component of, the Material Company Products. There is no action, suit or proceeding pending against the Company or its Subsidiaries before any court or governmental agency or before any arbitrator (and no person has since January 1, 1996 threatened orally (to an officer or 10 director of the Company) or in a writing delivered to the Company to commence any such action, suit or proceeding against the Company or any of its Subsidiaries) contesting the validity of, or the right of the Company or any of its Subsidiaries to own, use, license or dispose of, any Company Intellectual Property or contesting the right of the Company or any of its Subsidiaries to manufacture, sell or use any Material Company Product. (f) The Individual Parent Shareholders (as defined below) have assigned to the Company (or have otherwise permitted the Company to acquire) all of their ownership rights (if any) in their Specified Intellectual Property (as defined below) and have not voluntarily assigned any of such ownership rights (if any) in their Specified Intellectual Property to any university or to any other third party. Without limitation of the foregoing, there are no contractual obligations binding on any of the Individual Parent Shareholders with any other employer or institute of higher education which gives rise to any meritorious claim in such employer or institute to any of the Specified Intellectual Property, except any such claim which would not reasonably be expected to have a Material Adverse Effect on the Company. For purposes of this Agreement (A) "Individual Parent Shareholders" shall mean Yossi Tulpan, Amos Fiat and Yossi Cohen, and (B) "Specified Intellectual Property" of an Individual Parent Shareholder shall mean: (i) those material patents developed by such Individual Parent Shareholder that provide intellectual property protection for any software, hardware or invention that (A) has been personally developed by such Individual Parent Shareholder, and (B) is material to the business of the Company and its Subsidiaries; and (ii) those material copyrights and trade secrets developed by such Individual Parent Shareholder that provide intellectual property protection for any software, hardware or invention that (A) relates to encryption technology, (B) has been personally developed by such Individual Parent Shareholder, and (C) is material to the business of the Company and its Subsidiaries. For purposes of the preceding sentence, any software, hardware or invention will be deemed to be "material to the business of the Company and its Subsidiaries" only if such software, hardware or invention is incorporated in, and is a material component of, any Material Company Product (or any material component, module, feature or subassembly of any such Material Company Product). (g) The Company has taken reasonable steps to implement a policy requiring each employee and consultant of or to the Company and its Subsidiaries that has contributed in a material respect to the development of any software, hardware, inventions, improvements, know-how or other proprietary information incorporated into a Material Company Product to enter into an agreement substantially in the form of that certain form of agreement delivered to the Purchaser, or to enter into an ageement affording comparable protection to the protection provided by such agreement delivered to the Purchaser. 2.18. Real Estate. Schedule 2.18 of the Company Schedule sets forth a brief description of all real property which is owned by or leased to the Company or its Subsidiaries. None of the properties occupied by the Company or its Subsidiaries, or the occupancy or operation thereof by the Company or any of its Subsidiaries, is in violation of any law or any building, zoning or other ordinance, code or regulation in such a manner as to materially interfere with the use and occupancy thereof in the ordinary course of the business of the Company and its Subsidiaries. No written notice from any governmental body has been served upon the Company or any of its Subsidiaries since January 1, 1995 claiming any material violation by the Company or any of its Subsidiaries of any such law, ordinance, code or regulation, or requiring any 11 substantial work, repairs, construction, alterations or installation be undertaken by the Company or any of its Subsidiaries on or in connection with said properties, except for notices that have been complied with or withdrawn and notices of violations that have been cured in all material respects. 2.19. Insurance. Schedule 2.19 of the Company Schedule provides a complete list and brief description of all policies of fire, liability (including officers' and directors' liability), title, key-man life and other forms of insurance held by the Company and its Subsidiaries as of the date hereof. 2.20. Company Taxes. (a) All taxes, including, without limitation, income, property, sales, use, franchise, excise, value added, capital, social security, withholding, and employees' withholding taxes imposed by the State of Israel, by any foreign country, or by any political subdivision of the State of Israel or any foreign country, which have become due and payable by the Company or any of its Subsidiaries prior to the date of this Agreement and which are material to the Company and its Subsidiaries, including any material taxes for which the Company or any of its Subsidiaries is liable under contract or other arrangement, together with any interest or penalties thereon (the "Company Taxes"), have been paid in full or adequately provided for by reserves shown on the books of account of the Company; all deposits required by law to be made by the Company and its Subsidiaries with respect to the Company Taxes have been duly made, and all material returns with respect to the Company Taxes which are levied on the basis of income have been filed with, and where indicated on Schedule 2.20.1 of the Company Schedule, have been examined by the relevant tax authorities through the fiscal years ended on or before December 31, 1996, and no extension of time for the assessment of deficiencies with respect to Company Taxes has been granted by the Company and is in effect for any fiscal year. As of June 30, 1997, neither the Company nor any Subsidiary was liable for the payment of the Company Taxes which are levied on the basis of income in any jurisdiction other than those listed on Schedules 2.2 and 2.8 of the Company Schedule. No deficiency or adjustment in respect of any of the Company Taxes has been assessed against the Company or any Subsidiary prior to the date of this Agreement and remains unpaid, other than such Company Taxes which are being contested in good faith and disclosure of which has been previously made in writing to the Purchaser, and to the knowledge of the Company there is not any proposed or threatened assessment of additional liability for Company Taxes (that remains unpaid) against the Company or any Subsidiary for any period ending prior to June 30, 1997. (b) Schedule 2.20.1 of the Company Schedule lists each material tax incentive (other than generally available incentives that are not specifically granted or awarded to the Company) to which the Company is entitled under the laws of the State of Israel as of the date of this Agreement, the period for which such tax incentive applies, and the nature of such tax incentive. To the knowledge of the Company, the Company has complied with all material requirements of Israeli law to be entitled to claim the tax incentives identified in Schedule 2.20.1 of the Company Schedule. To the knowledge of the Company, subject to the receipt of the approvals set forth in Section 8.3 hereof, the consummation of the stock purchase contemplated 12 by this Agreement will not materially and adversely affect the ability of the Company to claim the benefit of any tax incentive referred to on Schedule 2.20.1 of the Company Schedule for the remaining duration of the incentive or require any recapture of any such previous incentive claimed by the Company, and no consent or approval of any governmental authority is required, other than as contemplated by Section 8.3 hereof prior to consummation of the stock purchase contemplated by this Agreement in order to preserve the entitlement of the Company to any such incentive. 2.21. Environmental Matters. The Company and its Subsidiaries are in substantial compliance with all applicable environmental regulations and environmental standards applicable to the conduct of the business of the Company and its Subsidiaries, as the case may be (except where the failure to be in such compliance would not have a Material Adverse Effect on the Company), and there exists no unlawfully stored or maintained toxic waste or other unlawful environmental hazard that has not previously been disclosed in writing to the Purchaser and which is not reflected in the Financial Statements, which would have a Material Adverse Effect on the Company. 2.22. Agreements and Obligations. (a) A "Listed Agreement" shall mean a material executory contract to which the Company or any of its Subsidiaries or Holdings is a party as of the date of this Agreement that is in one of the categories specified in the following clauses "(i)" through "(xv)" and that is not an Excluded Agreement: (i) any contract pursuant to which any Company Intellectual Property is being licensed by the Company or any of its Subsidiaries to any third party (other than (A) end-user licenses entered into in the ordinary course of business and (B) any contract entered into on terms that do not materially deviate from the Company's standard terms previously disclosed to the Purchaser), (ii) any contract pursuant to which (A) a third party is licensing to the Company or any of its Subsidiaries any material software, patents, or other proprietary information or technical know-how and (B) the Company is required to pay a material royalty or any other material fixed or variable fee or consideration for such licensing, (iii) any employment contract that is with any employee whose annual compensation exceeds $50,000 that has a remaining term exceeding six (6) months, (iv) any consulting contract that is with any consultant whose annual compensation exceeds $50,000, (v) any contract with any current officer, director, employee or stockholder of the Company, the Seller or the Subsidiaries (or with an affiliate or relative of any such officers, directors, employees or stockholders) that is on terms that are less favorable to the Company than comparable contracts negotiated at arm's length, or that requires the Company to indemnify such officers, directors, employees or stockholders in their capacities as such, (vi) any pension, retirement, profit sharing, deferred compensation, health or life insurance, bonus or incentive plan, (vii) any contract pursuant to which the Company or any of its Subsidiaries is leasing real property from any third party, (viii) any contract pursuant to which the Company or any of its Subsidiaries is leasing personal property from any third party and which requires payments by the Company or any of its Subsidiaries of more than $10,000 per annum, (ix) any union or other collective bargaining agreement, (x) any contract for the purchase by the Company or any of its Subsidiaries of materials, products, supplies or equipment which (A) requires that the Company or any of its Subsidiaries pay in the future in excess of $50,000, (B) contains any escalator or renegotiation or redetermination clause, or (C) commits the 13 Company or any of its Subsidiaries for a fixed term of three months or more, (xi) any agreement or instrument evidencing indebtedness for borrowed money in excess of $50,000 or creating any security interest (other than a Permitted Encumbrance) in any material property owned or used by the Company or any of its Subsidiaries, (xii) any contract containing covenants limiting in any material respect the legal right of the Company or any of its Subsidiaries to compete in any material line of business in which the Company or any of its Subsidiaries is or has historically been engaged, (xiii) any material reseller, original equipment manufacturer or distribution agreement, (xiv) any contract with a customer of the Company for the sharing of fees, the rebating of charges to such customer, or other similar arrangement not reflected in the Company's books and records, or (xv) any contract with holders of the Company's securities in their capacities as such. Notwithstanding anything to the contrary contained in this Agreement, a contract that is an "Excluded Agreement" shall not be deemed to be a "Listed Agreement." An "Excluded Agreement" shall mean a contract that: (w) is between or among two or more of the Company and its Subsidiaries or Holdings, or (x) imposes no material future obligations on the Company or any of its Subsidiaries, or (y) is expected to be fully performed, or is scheduled to expire, on or prior to the date 90 days after the Closing Date without any continuing material financial liability on the part of the Company or its Subsidiaries, or (z) can be canceled or otherwise terminated by the Company or any of its Subsidiaries on notice of 90 days or less without any continuing material financial liability on the part of the Company or its Subsidiaries; provided, however, that any agreement pursuant to which the Company or its Subsidiaries license any Company Intellectual Property from any third party shall not be deemed an Excluded Agreement by virtue of the preceding clauses (y) or (z). (b) Schedule 2.22 of the Company Schedule lists all of the Listed Agreements. A true and correct copy of each Listed Agreement has been made available to the Purchaser. (c) The Company and its Subsidiaries are not in breach or default in any material respect under any of the Listed Agreements such that the other party would be permitted to terminate a Listed Agreement or would have a claim for material damages against the Company or its Subsidiaries and to the knowledge of the Company (i) no other party thereto is in default in any material respect thereunder, and (ii) no event has occurred which, with the giving of notice or the passage of time, would become such a default by the Company or any of its Subsidiaries such that such other party would be permitted to terminate any such Listed Agreement or would have a claim for material damages against the defaulting party. The Company has taken all corporate action necessary for the Company to properly enter into the Listed Agreements and has not terminated or taken any action to terminate any of the Listed Agreements. To the knowledge of the Company, there are no writings extrinsic to any of such Listed Agreements which would materially modify their terms. (d) None of the Listed Agreements that have been furnished or made available only in a language other than English or Hebrew: (i) limits in any material respect the legal right of the Company or its Subsidiaries to compete in any material line of business, (ii) contains any unduly burdensome term or covenant that is reasonably likely to have a Material Adverse Effect on the Company, or (iii) grants a material exclusive license to a third party as to any Company Intellectual Property. 14 2.23. Inventory. The inventory of the Company and its Subsidiaries as reflected on the balance sheet included in the Unaudited Consolidated Financial Statements (which has not been sold by the Company or its Subsidiaries since June 30, 1997) is, in all material respects: (i) in good and merchantable condition, and (ii) currently of a useable and saleable quality. Such inventory is carried on the relevant books of account at values that approximate the lower of cost or market, in conformity with Israel generally accepted accounting principles applied on a consistent basis. 2.24. Accounts Receivable. All accounts receivable reflected on the balance sheet included in the Unaudited Consolidated Financial Statements have arisen in the ordinary course of business and, to the extent not collected prior to the date hereof, represent valid obligations due to the Company or its Subsidiaries, in the aggregate recorded amounts thereof, except to the extent set forth in the Unaudited Consolidated Financial Statements as reserves for bad debts. 2.25. Condition of Plant and Equipment. All machinery and equipment owned by the Company or any Subsidiary or otherwise used in the conduct of their business is, to the knowledge of the Company, in good operating condition and repair, except for normal breakdowns, reasonable wear and use and damage by fire or unavoidable casualty, not materially affecting the business of the Company. 2.26. Customers and Suppliers. Schedule 2.26 of the Company Schedule lists the ten largest customers and the ten largest suppliers of the Company and its Subsidiaries on a consolidated basis for the year ended December 31, 1996. Since January 1, 1997, there has been no material adverse change in the business relationship of the Company with any customer or supplier named on Schedule 2.26 of the Company Schedule (except for fluctuations in the level of orders and changes in the Company's customer base which have not had and are not reasonably likely to have a Material Adverse Effect on the Company). 2.27. Banking Arrangements. Schedule 2.27 of the Company Schedule sets forth: (i) the name of each bank, trust company, brokerage firm or other financial institution in or with which the Company or a Subsidiary has an account having a balance of at least $10,000 as of the date of this Agreement, a credit line with an outstanding balance of at least $10,000 as of the date of this Agreement or a safety deposit box containing assets with a value of at least $10,000 as of the date of this Agreement and the names of all persons authorized as of the date of this Agreement to draw thereon or having access thereto, and a brief statement describing the purpose of each such account. 2.28. Company Products. To the knowledge of the Company, none of the existing products of the Company have any defects in design or otherwise fail to comply with their published specifications where, in either case, such defects or non-compliance would have a Material Adverse Effect on the Company. 2.29. Potential Conflicts of Interest; Powers of Attorney. To the knowledge of the Company, no officer, director or greater than 5% shareholder of the Company or its Subsidiaries, or any member of their immediate families, owns any material property or rights tangible or intangible, the use of which is necessary for such business as now conducted. Schedule 2.29 15 of the Company Schedule sets forth the names of all persons now holding powers of attorney from the Company or any Subsidiary as of the date of this Agreement, and a summary of the terms thereof. 2.30. Interested Party Transactions. Since January 1, 1996, there have been no transactions involving the Company or the Subsidiaries and any interested parties which come within the purview of Chapter 4A of the Companies Ordinance (new Version) 1983. 2.31. Brokers. Except with respect to the engagement of Hambrecht & Quist LLC by the Company, the terms of which have been presented to the Purchaser, neither the Company nor any of its officers or directors has engaged, consented to, or authorized any broker or investment banker to act on its or his behalf, directly or indirectly, as a broker or finder in connection with the transactions contemplated by this Agreement. 2.32. Compliance with Law. The Company is in compliance with all laws, regulations and orders applicable to its business, including, without limitation, applicable environmental, anti-pollution, building, zoning or health laws, ordinances and regulations in respect of its plants, structures and equipment, except where the failure by the Company to be in compliance with such laws, regulations and orders would not have a Material Adverse Effect on the Company. The Company has not received any written notification that it is in violation of any such laws, regulations or orders, except for (i) notices that have been complied with in all material respects, (ii) notices that have been withdrawn, or (iii) notices of violations that have been cured in all material respects, or that relate to violations which can no longer form the basis of any material liability to the Company or would not otherwise reasonably be expected to have a Material Adverse Effect on the Company. Neither the Company nor, to the knowledge of the Company, any employee or agent of the Company acting on behalf of the Company has made any illegal payments to any governmental or quasi-governmental officials. 2.33. Foreign Investor. The Seller is not a U.S. person and is not acquiring the shares of Purchaser Common Stock for the account or benefit of any U.S. person, as those terms are defined in Regulation S under the Securities Act. 2.34. Resales Subject to U.S. Securities Laws. The Seller acknowledges that the shares of Purchaser Common Stock being issued to the Seller pursuant to this Agreement have not been registered under the Securities Act, and agrees to resell the shares of Purchaser Common Stock being issued to the Seller pursuant to this Agreement only in accordance with the Seller's Agreement. 2.35. Offshore Execution. This Agreement is being executed by the Seller outside the United States. 2.36. Holdings. (a) Holdings (i) has not conducted any material business following its initial organization, (ii) has not incurred any material liabilities since January 1, 1997 of the type and magnitude required to be reflected in the liabilities column of a consolidated balance sheet of Holdings prepared in accordance with Israel generally accepted accounting principles, 16 or (iii) has not directly incurred liabilities or obligations, actual or contingent, that exceed or may exceed in the aggregate $10,000. Holdings (1) has no subsidiaries, (2) does not own any securities of any entity other than the Company, and (3) has title to 38,770 ordinary shares of the Company, free and clear of all liens, pledges, charges, encumbrances, security interests, restrictive agreements and assessments (other than restrictions on transferability generally imposed on securities under applicable securities laws). (b) The authorized capital of Holdings consists of 238,000 ordinary shares, NIS .010 nominal value per share, of which 81,749 shares are issued and outstanding as of the date of this Agreement. All of the issued and outstanding ordinary shares of Holdings have been legally and validly issued and are fully paid and nonassessable. There are no outstanding options, warrants, rights, calls, commitments or agreements calling for the issuance or transfer, sale or disposition by Holdings of any shares of the capital stock of Holdings, or of any securities convertible or exchangeable, actually or contingently, into any such capital stock, to which Holdings is a party or by which Holdings is bound. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Seller, except as otherwise set forth in the Disclosure Schedule being furnished by the Purchaser to the Seller simultaneously with the execution and delivery of this Agreement (the "Purchaser Schedule"), or as disclosed or otherwise described in any of the documents listed or set forth in the Purchaser Schedule or this Article III, as follows: 3.1. Organization of Purchaser. The Purchaser is a corporation duly organized and validly existing under the laws of the State of California and has full power and authority to carry on its business as now conducted, and to own its assets. The Purchaser is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect on the Purchaser, is duly authorized and licensed under all laws, regulations, ordinances or orders of public authorities, or otherwise, to carry on its business in the places and in the manner presently conducted, except for qualifications, authorizations or licenses for which the failure to obtain, if required, would not have a Material Adverse Effect on the Purchaser. The Purchaser has heretofore made available to the Company true and complete copies of its Articles of Incorporation and Bylaws as certified by the Secretary of the Purchaser, as in effect on the date hereof. For purposes of this Agreement, those corporations in which the Purchaser, directly or indirectly, through other corporations or otherwise, owns 50% or more of the outstanding capital stock shall be deemed to be a Purchaser Subsidiary. 3.2. Nonviolation. The consummation by the Purchaser of the stock purchase contemplated by this Agreement will not (a) violate or conflict with the Articles of Incorporation or Bylaws of the Purchaser or any Purchaser Subsidiary (b) except as set forth in this Agreement, require the consent, approval or authorization of any governmental or quasi-governmental person or entity, except where the failure to obtain such consent, approval or 17 authorization would not have a Material Adverse Effect on the Purchaser, or (c) give rise to a right to terminate by the other party thereto or result in a breach of the terms or conditions of or constitute a default under, or violate, as the case may be, any Material Agreement (as defined below). 3.3. Authority for Agreement. All corporate and other proceedings required to be taken by or on behalf of the Purchaser to authorize and approve the entering into and carrying out of this Agreement by the Purchaser have been duly executed and properly taken. This Agreement has been duly executed and delivered by the Purchaser and is valid and binding upon the Purchaser, subject, as to enforceability, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity. 3.4. Capitalization. As of August 28, 1997, the authorized capital stock of the Purchaser consisted of (i) 5,000,000 shares of Preferred Stock, $.01 par value per share, of which no shares were issued and outstanding, and (ii) 45,000,000 shares of Purchaser Common Stock, of which 26,003,636 shares were issued and outstanding. All of the issued and outstanding shares of Purchaser Common Stock have been legally and validly issued and are fully paid and nonassessable. The shares of Purchaser Common Stock to be issued pursuant to this Agreement will be duly authorized, validly issued, fully paid, and nonassessable. 3.5. Options, Warrants, Etc. Other than as set forth in Section 3.4 hereof, there are no other outstanding shares of capital stock or voting securities of the Purchaser other than shares of Purchaser Common Stock issued under the Purchaser's various stock option plans as in effect at the date hereof (the "Purchaser Stock Option Plans"). As of the close of business on August 28, 1997, the Purchaser has reserved 5,950,000 shares of Purchaser Common Stock for issuance to employees and directors pursuant to the Purchaser Stock Option Plans, of which 3,897,051 shares were subject to outstanding, unexercised options. Other than this Agreement and pursuant to the Purchaser Stock Option Plans, and except as disclosed in the Purchaser SEC Documents (as defined below), there are no other options, warrants, calls, rights, commitments or agreements of any character to which the Purchaser or any Purchaser Subsidiary is a party or is bound obligating the Purchaser or any Purchaser Subsidiary to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of the Purchaser or any Purchaser Subsidiary or obligating the Purchaser or any Purchaser Subsidiary to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. 3.6. SEC Documents; Financial Statements. The Purchaser has filed all statements, reports, registration statements, proxy statements and other documents required to be filed by the Purchaser with the Securities and Exchange Commission (the "SEC") since January 1, 1996 and has made available to the Company a true and complete copy of each such statement, report, registration statement (with the prospectus in the form filed pursuant to Rule 424(b) of the Securities Act), definitive proxy statement, and other documents in the form filed with the SEC by the Purchaser from January 1, 1996, and, until the Closing Date, the Purchaser will have furnished the Company with true and complete copies of any additional documents filed with the SEC by the Purchaser prior to the Closing Date (all such statements, reports, registration statements, proxy statements and other documents filed by the Purchaser with the SEC are 18 referred to as the "Purchaser SEC Documents"). In addition, the Purchaser has made available to the Company all exhibits to the Purchaser SEC Documents filed prior to the date hereof, and will promptly make available to the Company all exhibits to any additional Purchaser SEC Documents filed prior to the Closing Date. All documents required to be filed as exhibits to the Purchaser SEC Documents have been so filed, and all Material Agreements (as defined below) so filed as exhibits are in full force and effect, except those which have expired in accordance with their terms, and Purchaser is not in default under any such Material Agreements. As of their respective filing dates, the Purchaser SEC Documents complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Securities Act, and none of the Purchaser SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a subsequently filed Purchaser SEC Document. The financial statements of Purchaser, including the notes thereto, included in the Purchaser SEC Documents (the "Purchaser Financial Statements") were complete and correct in all material respects as of their respective dates, complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as of their respective dates, and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto or, in the case of unaudited statements included in Quarterly Reports on Form 10-Q, as permitted by Form 10-Q of the SEC). The Purchaser Financial Statements fairly present the consolidated financial condition and operating results of the Purchaser at the dates and during the periods indicated therein (subject, in the case of unaudited statements, to normal, recurring year-end audit adjustments not material in scope or amount). There has been no change in the Purchaser accounting policies, except as described in the notes to the Purchaser Financial Statements, since January 1, 1996. 3.7. Absence of Certain Changes. Since June 30, 1997 (the "Purchaser Balance Sheet Date"), the Purchaser has conducted its business in the ordinary course consistent with past practice and there has not occurred: (i) any change, event or condition that has resulted in, or might reasonably be expected to result in, a Material Adverse Effect on the Purchaser; (ii) any change in accounting methods or practices by the Purchaser or any revaluation by the Purchaser of any of its assets; (iii) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares of the Purchaser, or any direct or indirect redemption, purchase or other acquisition by the Purchaser of any of its shares of capital stock, except for regular dividends and stock repurchases at market prices at the time of repurchase, and except as set forth in the Purchaser SEC Documents; (iv) any material contract entered into by the Purchaser or any Purchaser Subsidiary other than in the ordinary course of business, or any material amendment or termination of, or default under, any material contract to which the Purchaser or any Purchaser Subsidiary is a party or by which it is bound; or (v) any negotiation or agreement by the Purchaser or any Purchaser Subsidiary to do any of the things described in the preceding clauses (i) through (iv). 3.8. Absence of Undisclosed Liabilities. As of the Purchaser Balance Sheet Date, the Purchaser has no material obligations or liabilities of the type and magnitude required to be disclosed in the liabilities column of a consolidated balance sheet prepared in accordance with 19 GAAP (whether accrued, absolute, contingent or otherwise, and whether due or to become due) other than (i) those set forth or adequately provided for in the balance sheet included in Purchaser's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (the "Purchaser Balance Sheet"), (ii) those expressly disclosed in any Exhibit hereto or in the Purchaser Schedule, (iii) those incurred in connection with the execution of this Agreement, and (iv) those fully covered by insurance and not otherwise having a Material Adverse Effect on the Purchaser. 3.9. Permits. The Purchaser and each Purchaser Subsidiary has all governmental permits, licenses, orders, approvals, franchises and other rights and privileges necessary in order for them to carry on their respective business as presently conducted, except such permits, licenses, orders, approvals, franchises, and other rights and privileges of which the failure to obtain, if required, would not have a Material Adverse Effect on the Purchaser. 3.10. Litigation. There are no actions, suits, legal proceedings or governmental or quasi-governmental investigations, pending before any court or governmental agency or before any arbitrator of any kind, or any order, injunction or decree outstanding, and, to the knowledge of the Purchaser, no person has since January 1, 1996 threatened orally (to any executive officer or director of the Purchaser) or in writing to commence any action, suit or legal proceeding against the Purchaser or any Purchaser Subsidiary or against or relating to either of their property, assets or business, that would reasonably be expected to have a Material Adverse Effect on the Purchaser. Neither the Purchaser nor any Purchaser Subsidiary is in violation of any applicable law, regulation, ordinance, order, injunction, decree, award or other requirement of any governmental or quasi-governmental body, court, or arbitrator relating to its property, assets, or business, except for violations which would not have a Material Adverse Effect on the Purchaser. 3.11. Broker's and Finders' Fees. Except for the fees of its advisor, Volpe Brown Whelan & Company LLC, the Purchaser has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.12. Material Agreements (a) A "Material Agreement" shall mean any agreement or contract to which the Purchaser or any Purchaser Subsidiary is a party or by which the Purchaser or a Purchaser Subsidiary is bound and that is or is required to be filed as an exhibit to any of the Purchaser SEC Documents pursuant to the applicable rules and regulations of the SEC and (ii) that has not expired or been validly terminated prior to the date hereof. (b) The Purchaser and the Purchaser Subsidiaries are not in breach or default in any material respect under any of the Material Agreements such that the other party would be permitted to terminate a Material Agreement or would have a claim for material damages against the Purchaser or the Purchaser Subsidiaries. To the knowledge of the Purchaser (i) no other party thereto is in any default in any material respect under any Material Agreement and (ii) no event has occurred which, with the giving of notice or the passage of time, would become such a default by the Purchaser or any of the Purchaser Subsidiaries such that 20 such other party would be permitted to terminate such Material Agreement or would have a claim for material damages against the defaulting party. All of the Material Agreements are valid and in full force and effect and, to the knowledge of the Purchaser, none is subject to rescission or reformation and there are no circumstances or writings extrinsic to any of such Material Agreements which would materially modify their terms or prevent their assignment. 3.13. Compliance with Law. The Purchaser is in compliance with all laws, regulations and orders applicable to its business, including, without limitation, applicable environmental, anti-pollution, building, zoning or health laws, ordinances and regulations in respect of its plants, structures and equipment, except where the failure by the Purchaser to be in compliance with such laws, regulations and orders would not have a Material Adverse Effect on the Purchaser. The Purchaser has not received any notification that it is in violation of any such laws, regulations or orders, except for (i) notices that have been complied with in all material respects, (ii) notices that have been withdrawn, or (iii) notices of violations that have been cured in all material respects or that relate to violations which can no longer form the basis of any material liability of the Purchaser or would otherwise reasonably be expected to have a Material Adverse Effect on the Purchaser. Neither the Purchaser nor, to the knowledge of the Purchaser, any employee or agent of the Purchaser acting on behalf of the Purchaser has made any illegal payments to any governmental or quasi-governmental officials. 3.14. Purchaser Taxes. All taxes, including, without limitation, income, property, sales, use, franchise, excise, value added, capital, social security, withholding, and employees' withholding taxes imposed by the United States, by any foreign country, or by any political subdivision of the United States or any foreign country, which have become due and payable by the Purchaser or any of the Purchaser Subsidiaries prior to the date of this Agreement and which are material to the Purchaser and the Purchaser Subsidiaries, including any material taxes for which the Purchaser or any of the Purchaser Subsidiaries is liable under contract or other arrangement, together with any interest or penalties thereon (the "Purchaser Taxes"), have been paid in full or adequately provided for by reserves shown on the books of account of the Purchaser; all deposits required by law to be made by the Purchaser and the Purchaser Subsidiaries with respect to the Purchaser Taxes have been duly made. No deficiency or adjustment in respect of any of the Purchaser Taxes has been assessed against the Purchaser or any Purchaser Subsidiary prior to the date of this Agreement and remains unpaid, other than such Purchaser Taxes which are being contested in good faith and to the knowledge of the Purchaser there is not any proposed or threatened assessment of additional liability for the Purchaser Taxes (that remains unpaid) against the Purchaser or any Purchaser Subsidiary for any period ending prior to December 31 1996. 3.15. Investment Intent of the Purchaser. Purchaser is acquiring the Transferred Company Shares and the Holdings Shares for its own account and for investment, and not with a view to, or for sale in connection with, any distribution of any of such shares. 21 ARTICLE IV CERTAIN TRANSACTIONS AND AGREEMENTS 4.1. The Confidentiality Agreement. That certain Mutual Non-Disclosure Agreement, dated as of June 12, 1997 between the Company and the Purchaser (the "Confidentiality Agreement") shall remain in full force and effect between them and shall not be terminated or otherwise modified by this Agreement and shall survive any termination of this Agreement in accordance with its terms. 4.2. Conduct of Business of the Company and Its Subsidiaries. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing Date (the "Pre-Closing Period"), the Company agrees (except as otherwise provided in the last sentence of this Section 4.2), and shall (except as otherwise provided in the last sentence of Section 4.2) cause its Subsidiaries: (i) to carry on their business in all material respects in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, (ii) to use their reasonable efforts to preserve substantially intact their present business organizations, (iii) to use their reasonable efforts consistent with past practice to keep available the services of their present officers and key employees, (iv) to use reasonable efforts consistent with past practice to preserve their relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with them, and (v) to promptly notify the Purchaser in writing, after obtaining knowledge, of any event or occurrence which would be likely to cause any representation or warranty contained in this Agreement and made by it to be untrue or inaccurate at any time from the date of this Agreement to the Closing Date, such that the condition set forth in the first sentence of Section 7.1 hereof would not be satisfied as a result thereof. Without limitation of the foregoing, the Company agrees that during the Pre-Closing Period (except as otherwise provided in the last sentence of this Section 4.2), it will not take any of the following actions: (a) Charter Documents. Amend its Memorandum of Association or Articles of Association; (b) Issuance of Securities. Issue, deliver or sell any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or enter into any agreements or commitments of any character obligating it to issue, any such shares or other convertible securities; (c) Dividends; Changes in Capital Stock. Declare or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any shares of its capital stock, or split, combine or reclassify any shares of its capital stock, or issue any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or repurchase or otherwise acquire any shares of its capital stock; 22 (d) Extraordinary Transactions. Enter into any material transaction outside the ordinary course of business; (e) Stock Option Plans, Etc. Adopt any stock option plan; (f) Intellectual Property. Transfer to any person or entity any rights to the Company Intellectual Property other than in connection with the sale of its products in the ordinary course of business consistent with past practice; (g) Exclusive Rights. Enter into or amend any agreements pursuant to which any other party is granted exclusive marketing or other exclusive rights of any type or scope with respect to any Material Company Products or the Company Intellectual Property; or (h) Other. Agree in writing to take any of the actions described in clauses "(a)" through "(g)" of this sentence. Notwithstanding anything to the contrary contained in this Section 4.2 or elsewhere in this Agreement, the Company and its Subsidiaries shall not be prohibited from taking, and shall be permitted to take, any of the following actions (without being deemed to have breached or violated this Agreement): (i) any action that is contemplated or permitted by, or otherwise consistent with the terms of, this Agreement, (ii) any action that is referred to in the Company Schedule or is contemplated or required by the terms of any agreement or other document identified in the Company Schedule, (iii) any action that is reasonably determined by the Company to be necessary or desirable for the purpose of facilitating the consummation of any of the transactions contemplated by this Agreement or for the purpose of facilitating the compliance by the Company or any of its Subsidiaries with any applicable law, rule or regulation, or (iv) any action that is approved in writing by the Purchaser (it being understood that the Purchaser shall not unreasonably withhold its approval of any such action that is proposed to be taken by the Company). 4.3. Conduct of Business of Purchaser. The Purchaser agrees that during the Pre-Closing Period (except as otherwise provided in the last sentence of this Section 4.3), it will not take or permit any Purchaser Subsidiary to take any of the following actions: (a) Charter Documents. Amend its Articles of Incorporation or Bylaws; (b) Issuance of Securities. Issue, deliver or sell any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or enter into any agreements or commitments of any character obligating it to issue, any such shares or other convertible securities, other than (1) the issuance, delivery and/or sale of options to purchase a reasonable number of shares of Purchaser Common Stock in connection with the hiring, retention and/or promotion of employees of the Purchaser or the Purchaser Subsidiaries, or (2) the issuance of shares of Purchaser Common Stock pursuant to the exercise of stock options or other rights outstanding as of the date of this Agreement or issued after the date of this Agreement in accordance with clause "(1)" of this Section 4.3(b); 23 (c) Dividends; Changes in Capital Stock. Declare or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any shares of its capital stock, or split, combine or reclassify any of its capital stock, or issue any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or repurchase or otherwise acquire any shares of its capital stock except from former employees, directors and consultants in accordance with agreements existing as of the date of this Agreement providing for the repurchase of shares in connection with any termination of service to it or its subsidiaries; (d) Extraordinary Transactions. Enter into any material transaction outside the ordinary course of business; or (e) Other. Agree in writing to take any of the actions described in clauses "(a)" through "(d)" of this Section 4.3. Notwithstanding anything to the contrary contained in this Section 4.3 or elsewhere in this Agreement, the Purchaser and the Purchaser Subsidiaries shall not be prohibited from taking, and shall be permitted to take, (i) any action that is contemplated or permitted by, or otherwise consistent with the terms of, this Agreement, (ii) any action that is referred to in the Purchaser Schedule or is contemplated or required by the terms of any agreement or other document identified in the Purchaser Schedule, (iii) any action that is reasonably determined by the Purchaser to be necessary or desirable for the purpose of facilitating the consummation of any of the transactions contemplated by this Agreement or for the purpose of facilitating the compliance by the Purchaser or any Purchaser Subsidiary with any applicable law, rule or regulation, or (iv) any action that is approved in writing by the Company (it being understood that the Company shall not unreasonably withhold its approval of any such action that is proposed to be taken by the Purchaser). 4.4. Access to Information. (a) During the Pre-Closing Period, the Seller will cause the Company to grant the Purchaser and its accountants, legal counsel and other representatives access, during normal business hours and upon reasonable advance notice throughout the period prior to the Closing, to all of the properties, books, contracts, commitments and records relating to the business, assets and liabilities of the Company; provided, however, that (i) the Purchaser shall not contact, and the Purchaser shall ensure that none of its accountants, legal counsel or other representatives contacts, any employee of the Company or any of the Subsidiaries without the prior authorization of one of the Individual Parent Shareholders, and (ii) the Purchaser shall ensure that none of its employees, legal counsel or other representatives interferes with or otherwise disrupts the business or operations of the Company or any of its Subsidiaries while exercising the rights provided under this Section 4.4(a). (b) The Purchaser will grant the Seller and the Company and their respective accountants, legal counsel and other representatives access, during normal business hours and upon reasonable advance notice throughout the period prior to the Closing, to all of the properties, books, contracts, commitments and records relating to the business, assets and liabilities of the Purchaser; provided, however, that (i) neither the Company nor the Seller shall contact, and the Company and 24 the Seller shall ensure that none of their respective accountants, legal counsel or other representatives contacts, any employee of the Purchaser (other than those who will be engaged in the negotiation of this Agreement), without the prior authorization of Robert F. Fougner, and (ii) the Company and the Seller shall ensure that none of their respective employees, legal counsel or other representatives interferes with or otherwise disrupts the business or operations of the Purchaser while exercising the rights provided in this Section 4.4(b). 4.5. No Solicitation. During the Pre-Closing Period, neither the Company nor the Seller will, and the Company and the Seller will not authorize any of its officers, directors, employees or other agents to: (i) take any action to solicit, initiate or knowingly encourage any offer or proposal by any third party for, or any indication of interest by any third party in, a merger or business combination by such third party with, the acquisition by such third party of any voting power in, or the sale or transfer (outside the ordinary course of business) to such third party of a significant portion of the assets of, the Company or any material Subsidiary, or (ii) engage in negotiations with, or disclose any nonpublic information relating to the Company to, or afford access to the properties, books or records of the Company or any Subsidiary to, any third party that has advised the Company that it may be considering making, or that it has made, an offer or proposal for, or any indication of interest in, a merger or business combination with, the acquisition of any of the voting power in, or the sale or transfer (outside the ordinary course of business) of a significant portion of the assets of, the Company or any material Subsidiary, other than the transactions contemplated by this Agreement. 4.6. Seller's Agreement. On or before the Closing Date, the Seller and each of its shareholders (the "Parent Shareholders") shall execute and deliver to the Purchaser, and the Purchaser shall execute and deliver to the Seller and to each of the Parent Shareholders, that certain Seller's Agreement in substantially the form attached hereto as Exhibit 4.6 ("Seller's Agreement") providing (among other things) for certain resale restrictions and registration rights following the Closing as to the shares of Purchaser Common Stock issued to the Seller hereunder. 4.7. Further Assurances. Each of the parties hereto agrees that it will, from time to time after the date of this Agreement, execute and deliver such other certificates, documents and instruments and take such other action as may be reasonably requested by any of the other parties to carry out the actions and transactions contemplated by this Agreement. Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all actions necessary to consummate the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, each party to this Agreement (i) shall make all filings (if any) and give all notices (if any) required to be made and given by such party in connection with the transactions contemplated by this Agreement, (ii) shall use all reasonable efforts to obtain each consent and approval (if any) required to be obtained (pursuant to any applicable legal requirement or contract, or otherwise) by such party in connection with the transactions contemplated by this Agreement, (iii) shall cooperate with each other party hereto in connection with any filings required to be made or any consents or approvals required to be obtained by such other party, and (iv) shall use all reasonable efforts to lift any restraint, injunction or other legal bar to the consummation of the transactions contemplated by this Agreement. 25 4.8. Listing of Additional Shares. Prior to the Closing Date, the Purchaser shall file with the Nasdaq National Market a Notification Form for Listing of Additional Shares with respect to those shares of Purchaser Common Stock to be issued in connection with the transactions contemplated by this Agreement. 4.9. Visitation. The Purchaser will afford to one representative of the Seller or the Parent Shareholders ("Seller's Board Representative") the right as a non-voting representative of the Seller or of the Parent Shareholders: (a) to attend all meetings of the Purchaser's Board of Directors (the "Board") (subject to the Purchaser's right to request in good faith that such representative excuse himself from executive sessions of the Board where a conflict of interest might be present and from any Board meeting or any part thereof if such exclusion is reasonably necessary to preserve the attorney-client privilege), and (b) upon request, to receive copies of all notices for and materials distributed at or in connection with such meetings, as well as any proposed written actions by the Board concurrently with the distribution of such items to the Board. Any change in the Seller's Board Representative shall require ten (10) days prior written notice to the Purchaser and the Purchaser's prior written approval, which shall not be unreasonably withheld if any of the Parent Shareholders or an officer of any of the Parent Shareholders is the newly designated Seller's Board Representative. Commencing as of the Purchaser's 1998 annual meeting of shareholders, the Purchaser agrees, if requested by at least three of the Parent Shareholders, to use its reasonable efforts to: (1) cause the Seller's Board Representative to be elected to the Board; and (2) if required to permit Purchaser to comply with the preceding clause (1), amend the Purchaser's bylaws to increase the number of authorized positions on the Board to ten (10). The Purchaser's obligations pursuant to this Section 4.9 shall cease at such time as the aggregate number of shares of Purchaser Common Stock beneficially owned by the Seller, the Parent Shareholders and the respective relatives and affiliates of the Seller and the Parent Shareholders is less than 1,500,000 shares of Purchaser Common Stock (as adjusted for stock splits, stock dividends and the like). 4.10. Employee Benefits. For a period of not less than two years after the Closing Date and subject to such adjustments as are reasonably required to reflect local laws and commercial customs relating to employee benefits, the Purchaser shall, and shall cause the Company and its Subsidiaries to, provide each employee of the Company and its Subsidiaries with benefits, including health and welfare and paid-time off benefits, which either are equivalent to those currently provided by the Company or, if changed, are no less favorable in the aggregate than those provided by the Purchaser to its existing employees of equal rank and seniority. To the extent that any employee of the Company or any of its Subsidiaries becomes eligible to participate in any employee benefit plan of the Purchaser after the Closing Date, the Purchaser shall, and shall cause the Company and its Subsidiaries to: (i) credit such employee's service with the Company or its Subsidiaries (to the same extent as such service was credited under the similar employee benefit plans of the Company and its Subsidiaries immediately prior to the Closing Date) for purposes of determining eligibility to participate in and vesting under, and for purposes of calculating the benefits under, such employee benefit plan of the Purchaser, (ii) waive any pre-existing condition limitations, waiting periods or similar limitations under such employee benefit plan of the Purchaser and (iii) provide such employee with credit for any co-payments previously made and any deductibles previously satisfied. 26 4.11. Indemnification. (a) For a period of at least seven years from the Closing Date, the Purchaser shall, and shall cause the Company to, fulfill and honor in all respects all rights to indemnification existing in favor of the current directors and officers of the Company (the "Indemnified Parties"), as provided in the Company's Articles of Association (as in effect as of the date of this Agreement) and as provided in any indemnification agreements between the Company and such Indemnified Parties (as in effect as of the date of this Agreement) and as otherwise existing in favor of the Indemnified Parties; provided that nothing contained herein shall obligate the Purchaser to maintain any directors' and officers' liability insurance in favor of the Indemnified Parties. (b) Without limiting the generality of the foregoing, the Purchaser shall ensure that adequate funds are available (either directly from the Purchaser or through the Company) to the Indemnified Parties in order to ensure that the indemnification obligations referred to in this Section 4.11 are fully satisfied. In the event any claim, action or proceeding is asserted or commenced against any Indemnified Party, (1) after the Closing Date, the Purchaser shall advance and pay the reasonable fees and expenses of any counsel retained by such Indemnified Party in connection with such claim, action or proceeding promptly after receipt of a request therefor from such Indemnified Party, and (2) the Purchaser shall cooperate with such Indemnified Party and such Indemnified Party's counsel, and shall cause the Company to cooperate with such Indemnified Party and such Indemnified Party's counsel, in the defense of such claim, action or proceeding. (c) This Section 4.11 shall survive the consummation of the transactions contemplated hereby, is intended to benefit and may be enforced by the Indemnified Parties, and shall be binding on all successors and assigns of the Purchaser and the Company. (d) The Purchaser shall pay all expenses, including attorneys' fees, that may be incurred by any Indemnified Party in enforcing the indemnity and other obligations provided for in this Section 4.11. (e) Notwithstanding any term or condition of this Section 4.11, no indemnification shall be made by the Company or the Purchaser pursuant to Section 4.11(a) (or pursuant to any indemnification agreement or instrument referenced in Section 4.11(a)) to any Indemnified Party if the facts or circumstances that would otherwise give rise to such right of indemnification further give the Purchaser a valid and meritorious basis for obtaining indemnification (exclusive of the limits set forth in Sections 5.5, 5.6 and 5.7 hereof) under Article V hereof. 4.12. Compliance with Chief Scientist Regulation. The Purchaser shall provide any undertakings as are reasonably required by the Chief Scientist of the Ministry of Industry and Commerce with regard to maintaining ownership of the Company Intellectual Property in the State of Israel and with regard to such other matters as are reasonably required by the Chief Scientist of the Ministry of Industry and Commerce, in order to obtain the consent referred to in Sections 7.4(a) and 8.3(b) hereof. 27 4.13. Section 338 Election. At or following the Closing, the Seller agrees, if requested in writing by the Purchaser, to make an election under Internal Revenue Code Section 338 ("Section 338 Election") with respect to the transactions contemplated hereby and to execute and deliver to the Company such elections, approvals and other documents and to otherwise take such action as the Purchaser shall reasonably request to effect the Section 338 Election for U.S. income tax purposes. ARTICLE V INDEMNIFICATION; REMEDIES 5.1. Survival. All pre-Closing covenants of the parties shall terminate and expire as of the Closing Date, and all liability of the parties with respect to such covenants shall thereupon be extinguished. All representations and warranties contained in this Agreement (each as modified by the Company Schedule and the Purchaser Schedule, as the case may be, and any update or supplement to the Company Schedule or the Purchaser Schedule delivered to Purchaser or the Company, as the case may be, as provided in this Agreement) shall survive the Closing until the second anniversary of the Closing Date (the "Expiration Date"), at which time such representations and warranties shall terminate and expire and shall cease to be of any force or effect, and all liability of the parties with respect to such representations and warranties shall thereupon be extinguished; provided, however, that (i) if, prior to the Expiration Date, the Purchaser shall have duly delivered a Claim Notice to both the Seller's Representative and the Escrow Agent in conformity with all of the applicable procedures set forth in the Escrow Agreement and in Section 5.7 hereof then the specific indemnification claim set forth in such Claim Notice shall survive the Expiration Date (and shall not be extinguished thereby), and (ii) if, prior to the Expiration Date, the Seller's Representative shall have duly delivered a Claim Notice to the Purchaser in conformity with all of the applicable procedures set forth in Section 5.7 herof, then the specific indemnification claim set forth in such Claim Notice shall survive the Expiration Date (and shall not be extinguished thereby). 5.2. Indemnification by the Seller. Subject to the limitations on indemnification set forth in Sections 5.5, 5.6 and 5.7 hereof and elsewhere in this Agreement, from and after the Closing Date, the Seller shall, from and to the extent of the Escrow Fund (as defined in the Escrow Agreement), indemnify and hold harmless the Purchaser and each of the Purchaser Subsidiaries (which shall be deemed to include the Company after the Closing Date) and its agents, representatives, employees, officers, directors, successors, controlling persons and affiliates (in their capacities as such) (collectively, the "Purchaser Indemnitees"), and shall reimburse the Purchaser Indemnitees, for any loss, liability, damage, expense (including, but not limited to, reasonable costs of investigation and defense and reasonable attorneys' fees), whether or not involving a third-party claim (collectively, "Damages"), incurred by the Purchaser Indemnitees as a result of (a) any inaccuracy in any of the representations and warranties of the Seller in Article II of this Agreement (as modified by the Company Schedule and any update or supplement to the Company Schedule delivered to the Purchaser prior to the Closing Date but only to the extent such update or supplement relates to events occurring or discovered after the date of this Agreement), (b) any failure of the Company or the Seller to perform or comply with any post- 28 Closing agreement or covenant to be performed or complied with by it under this Agreement, or (c) any claim by any person for brokerage or finder's fees or similar payments in connection with any of the transactions contemplated hereunder as the result of brokers, finders or investment bankers retained by the Company or the Seller or any Parent Shareholder. 5.3. Indemnification by the Purchaser. Subject to the limitations on indemnification set forth in Sections 5.5, 5.6 and 5.7 hereof and elsewhere in this Agreement, from and after the Closing Date, the Purchaser shall indemnify and hold harmless the Seller, the Parent Shareholders and the respective agents, representatives, employees, officers, directors, successors, controlling persons and affiliates of the Seller and the Parent Shareholders (in their capacities as such) (the "Seller Indemnitees"), and shall reimburse the Seller Indemnitees, for any Damages arising as a result of (a) any inaccuracy in any of the representations and warranties of the Purchaser in Article III of this Agreement (as modified by the Purchaser Schedule and any update or supplement to the Purchaser Schedule delivered to the Company and the Seller prior to the Closing Date but only to the extent such update or supplement relates to events occurring or discovered after the date of this Agreement), (b) any failure by the Purchaser to perform or comply with any post-Closing agreement or covenant to be performed or complied with by the Purchaser in this Agreement, or (c) any claim by any person for brokerage or finder's fees or similar payments in connection with any of the transactions contemplated hereunder as the result of brokers, finders or investment bankers retained by the Purchaser. 5.4. Notification; Control of Proceedings. The party entitled to indemnification pursuant to this Article V ("Indemnified Party") shall, with reasonable promptness, give to the party obligated to provide such indemnification hereunder (an "Indemnifying Party") written notice if the Indemnified Party becomes aware of any loss, liability, damage, or expense with respect to which a claim for indemnification may be asserted; provided, however, that for the sole purpose of determining whether written notice must be provided to an Indemnifying Party under this Section 5.4 (and for the purpose of determining whether the Indenmifying Party will have the right to defend a particular claim action or proceeding), the limitation set forth in Section 5.5 hereof shall not be taken into account; provided, further, however, that the failure of an Indemnified Party to deliver such written notice with reasonable promptness shall not be deemed to bar or otherwise limit the rights of the Indemnified Party hereunder unless such failure materially prejudices the rights or defenses of the Indemnifying Party. If any claim is made by a third person or an action or proceeding commenced for which the Indemnified Party shall seek indemnity from the Indemnifying Party, the Indemnified Party shall give to such Indemnifying Party reasonable written notice of such claim, action or proceeding and request the Indemnifying Party to defend the same. The Indemnifying Party shall have the right to defend such claim, action or proceeding at its own expense, and (if the Indemnifying Party elects to accept the defense of such claim, action or proceeding) shall give written notice to the Indemnified Party of the commencement of such defense with reasonable promptness after the giving of the written notice of the claim, action or proceeding by the Indemnified Party. The Indemnified Party shall be entitled to participate at its own expense with the Indemnifying Party in such defense (subject to the right of the Indemnifying Party to control such defense), but shall not be entitled in any way to release, waive, settle, modify or pay such claim, action or proceeding without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld), if the Indemnifying Party has assumed such defense. In the event the Indemnifying Party does not accept the defense of such claim, action or proceeding, as provided above, or 29 does not notify the Indemnified Party of its election to defend such claim, action, or proceeding, within 30 days after the Indemnifying Party's receipt of written notice of such claim, action, or proceeding, from the Indemnified Party, the Indemnified Party shall have the full right to defend against such claim, action or proceeding in such manner as it may deem appropriate, but the Indemnifying Party shall not have any liability with respect to any compromise or settlement effected without its prior written consent (which consent shall not be unreasonably withheld). In the event the Indemnifying Party shall assume the defense of such claim, action, or proceeding, the Indemnified Party shall cooperate in the defense of such claim, action or proceeding and the records of each shall be available to the other with respect to such defense; provided, however, that the Indemnifying Party shall not, in the defense of any such claim, action or proceeding, consent to the entry of any judgment or enter into any settlement where such entry of judgment or settlement does not include a provision releasing the Indemnified Party from all liability with respect to such claim, action, or proceeding, except with the written consent of the Indemnified Party (which consent shall not be unreasonably withheld). 5.5. Limitation on Indemnification. Notwithstanding the provisions of Sections 5.2 and 5.3 hereof, no Indemnifying Party shall be liable to any Indemnified Party with respect to: (a) any claim by an Indemnified Party pursuant to clause (a) of Section 5.2 hereof or clause (a) of Section 5.3 hereof except to the extent that the cumulative amount of the indemnifiable Damages actually incurred by the Indemnified Party as a result of all inaccuracies in the Indemnifying Party's representations and warranties actually exceeds $250,000; and the Indemnifying Party shall only be required to pay, and shall only be liable for, the amount by which the cumulative amount of the indemnifiable Damages actually incurred by the Indemnified Party as a result of all such inaccuracies in such representations and warranties actually exceeds $250,000; or (b) any claim based on the inaccuracy of any warranty and representation of the Indemnifying Party if the Indemnified Party (or any of its officers and directors in the case of an Indemnified Party that is a corporation or a limited liability company) had actual knowledge of the inaccuracy of such representation and warranty (or of any facts or circumstances constituting or resulting in such inaccuracy) prior to the Closing, provided, that, the limitation provided by this clause (b) shall not be available to an Indemnifying Party if that Indemnifying Party also had such actual knowledge of the inaccuracy of such representation and warranty (or of any facts or circumstances constituting or resulting in such inaccuracy) prior to the signing of this Agreement by the Indemnifying Party. 5.6. Exclusive Remedy. (a) Except as provided in the Parent Shareholders Agreement, the indemnification provided for in this Article V shall be the exclusive right and remedy with respect to any claim by an Indemnified Party pursuant to clause (a) of Section 5.2 hereof or clause (a) of Section 5.3 hereof, and, except as provided in this Section 5.6, no claim or cause of action with respect to any misrepresentation or any inaccuracy, breach or default as to any representation or warranty contained in Article II or Article III of this Agreement shall be enforceable unless made in accordance with the procedures, and within the time periods, set forth in this Article V. Without limiting the generality of the foregoing, and except as provided in this Section 5.6(a), (i) any payments required to be made by the Seller under this Article V shall be made exclusively from the Escrow Shares under the Escrow Agreement, and the Purchaser shall have no recourse against the Seller or 30 the Parent Shareholders, or against any of the assets of the Seller or the Parent Shareholders, in connection with any indemnification claim, and (ii) any payments required to be made by the Purchaser under this Article V (other than for breaches occurring after the Closing of any covenant contained in Article I, IV, IX or XI hereof) shall be limited to an aggregate amount equal to U.S.$16,540,000; (b) Nothing contained in the Parent Shareholders Agreement shall require the Purchaser to first assert its rights and remedies under this Article V or the Escrow Agreement or the Parent Shareholders Agreement as to any claim by the Purchaser that is based on the inaccuracy of any representation or warranty in both this Agreement and the Parent Shareholders Agreement. To the extent that the Purchaser shall first recover Damages from one or more of the Parent Shareholders pursuant to the Parent Shareholders Agreement prior to any recovery pursuant to Article V of this Agreement or the Escrow Agreement, the amounts recovered from such Parent Shareholder(s) shall be deducted from amounts payable to the Purchaser Indemnitees pursuant to Article V of this Agreement or the Escrow Agreement. 5.7. Indemnification Claims. (a) If an Indemnified Party wishes to assert an indemnification claim against any Indemnifying Party, the Indemnified Party shall deliver or cause to be delivered to the entity or entities specified below a written notice (a "Claim Notice") setting forth (a) the specific representation, warranty or post-Closing covenant alleged to have been breached by such Indemnifying Party, (b) a summary of the facts and circumstances giving rise to the alleged breach of such representation, warranty or post-Closing covenant, and (c) a description of, and a reasonable estimate of the total amount of, the Damages actually incurred or expected to be incurred by the Indemnified Party as a direct result of such alleged breach. If the Indemnified Party is a Purchaser Indemnitee, such Purchaser Indemnitee shall deliver a copy of the Claim Notice simultaneously to the Seller's Representative and the Escrow Agent. If the Indemnified Party is a Seller Indemnitee, such Seller Indemnitee shall deliver a copy of the Claim Notice to the Purchaser. (b) Notwithstanding anything to the contrary contained in this Agreement or in the Escrow Agreement, no Purchaser Indemnitee shall be permitted to deliver any Claim Notice (and no Purchaser Indemnitee shall be entitled to assert any indemnification claim set forth in any Claim Notice) unless such Purchaser Indemnitee reasonably believes that a representation or warranty has been breached by the Seller in a manner that would entitle such Purchaser Indemnitee to be indemnified under this Article V. (c) Notwithstanding anything to the contrary contained in this Agreement, no Seller Indemnitee shall be permitted to deliver any Claim Notice (and none of the no Seller Indemnitee shall be entitled to assert any indemnification claim set forth in any Claim Notice) unless such Seller Indemnitee reasonably believes that a representation, warranty or covenant has been breached by the Purchaser in a manner that would entitle such Seller Indemnitee to be indemnified under this Article V. (d) Notwithstanding anything to the contrary contained in this Agreement, if a Claim Notice shall not have been delivered to the Indemnifying Party (and, if the Indemnifying 31 Party is the Seller, also to the Escrow Agent) prior to the Expiration Date, then such Claim Notice shall not be deemed to have been delivered and shall be of no force or effect. (e) Only the Purchaser itself shall be entitled to assert indemnification claims against the Seller under this Article V; any claim for indemnification by any other Purchaser Indemnitee must be asserted by the Purchaser on behalf of such Purchaser Indemnitee. Only the Seller's Representative (as defined below) shall be entitled to assert indemnification claims against the Purchaser under this Article V; any claim for indemnification by any Seller Indemnitee must be asserted by the Seller's Representative on behalf of such Seller Indemnitee. 5.8. Subrogation. To the extent that any Indemnifying Party makes or is required to make any indemnification payment to an Indemnified Party, (i) the Indemnifying Party shall be entitled to exercise, and shall be subrogated to, any rights and remedies (including rights of indemnity, rights of contribution and other rights of recovery) that the Indemnified Party or its affiliates may have against any other person or entity (other than the Indemnified Party or its affiliates) with respect to any Damages, circumstances or matter to which such indemnification payment is directly or indirectly related; (ii) the Indemnified Party shall permit the Indemnifying Party to use the name of the Indemnified Party or the Indemnified Party's affiliates, in any transaction or in any proceeding or other matter involving any of such rights or remedies; and (iii) the Indemnified Party shall take and shall cause each of its affiliates to take such actions as the Indemnifying Party may reasonably request for the purpose of enabling the Indemnifying Party to perfect or exercise the Indemnifying Party's right of subrogation hereunder. Any rights of an Indemnifying Party to subrogation pursuant to this Section 5.8 shall not be exercisable until such Indemnifying Party shall have fully performed its obligations pursuant to this Article V as to the indemnification of the Indemnified Party (with respect to the particular indemnification claim involved); provided, however, that, prior to the full performance of such indemnification obligations and to the extent reasonably required to preserve the rights of the Indemnifying Party to subrogation, the Indemnifying Party shall be permitted to take any action so required to preserve such subrogation rights. 5.9. Seller's Representative. (a) Zeev May shall be constituted and appointed as agent ("Seller's Representative") for and on behalf of the Seller and the Parent Shareholders to give and receive notices and communications, to authorize the Escrow Agent to deliver funds out of escrow to the Purchaser, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to indemnification claims, and to take all actions necessary or appropriate in the judgment of the Seller's Representative for the accomplishment of the foregoing. Such agency may be changed from time to time upon not less than five days' prior written notice from the Seller or, if the Seller has been liquidated, from any three Parent Shareholders, to the Purchaser. Notices or communications to or from the Seller's Representative shall constitute notice to or from the Seller. (b) The Seller's Representative shall have reasonable access to information about the Company and the assistance of the Seller and the Purchaser for purposes of performing his duties and exercising his rights hereunder, provided that the Seller's Representative shall treat 32 confidentially and not disclose to anyone (other than the Seller and the Parent Shareholders) any priorietory nonpublic information obtained from the Purchaser after the Closing to the extent such proprietory information belongs to, and relates to the conduct of the business of, the Company; provided, however, that the Seller's Representative may disclose such proprietary information: (i) on a need to know basis to individuals who agree, in writing, to treat such information as confidential, and (ii) as required by law or regulation. (c) A decision, act, consent or instruction of the Seller's Representative shall constitute a decision of the Seller or the Parent Shareholders and shall be final, binding and conclusive upon the Seller and the Purchaser, and the Escrow Agent may rely upon any written instruction of the Seller's Representative as being the decision, act, consent or instruction of the Seller. The Purchaser is hereby relieved from any liability to any person for any acts done by it in accordance with such written instructions of the Seller's Representative. ARTICLE VI CONDITIONS TO OBLIGATIONS OF THE PURCHASER AND THE SELLER The obligations of the Purchaser and the Seller to consummate the stock purchase contemplated by this Agreement on the Closing Date shall be subject to the satisfaction of the following condition, except to the extent such condition is waived in writing by the Purchaser and the Seller: 6.1. Government Approvals. All requisite governmental approvals and authorizations necessary for the consummation of the stock purchase contemplated hereby shall have been duly issued or granted, except where the failure to obtain such approvals and authorizations would not have a Material Adverse Effect on the Purchaser. No unfavorable governmental decree or court order shall exist that would prevent the consummation of the stock purchase contemplated by this Agreement. ARTICLE VII CONDITIONS TO OBLIGATIONS OF THE PURCHASER The obligation of Purchaser to consummate the stock purchase contemplated by this Agreement on the Closing Date shall be subject to the following conditions, except to the extent such conditions are waived by the Purchaser in writing: 7.1. Representations and Warranties; Performance. The representations and warranties of the Seller set forth in this Agreement (excluding any representation or warranty that refers specifically to "the date of this Agreement," "the date hereof" or any other date other than the Closing Date) shall be accurate in all material respects as of the Closing Date as if made on and as of the Closing Date (it being understood that, for purposes of determining the accuracy of such representations and warranties as of the Closing Date (i) any inaccuracies that, in the aggregate, do not have a Material Adverse Effect on the Company shall be disregarded, (ii) any inaccuracy that 33 results from or relates to general business, economic or industry conditions shall be disregarded, and (iii) any inaccuracy that results from or relates to the taking of any action contemplated or permitted by this Agreement or the announcement or pendency of the transactions contemplated by this Agreement shall be disregarded). The Seller and the Company shall have each performed and complied in all material respects with all agreements or covenants required by this Agreement to be performed or complied with by such parties prior to or at the Closing (except where the failure to have performed or complied with such agreements would not have a Material Adverse Effect on the Purchaser or the Company). 7.2. Amendments to Employment Agreements. Each of the Individual Parent Shareholders shall have entered into an amendment to his Employment Agreement with the Company substantially in the form set forth on Exhibit 7.2 hereto. 7.3. Opinion of Counsel. The Purchaser shall have received an opinion of Advocate, Zeev May, counsel to the Company and the Seller, in substantially the form of Exhibit 7.3 hereto. 7.4. Approvals. The following approvals, orders or permits shall have been received in form and substance reasonably satisfactory to the Purchaser: (a) Israel Chief Scientist. Approval of the Chief Scientist for change in control of the Company; and (b) Israel Investment Center. Approval of the Investment Center for change in control of the Company. 7.5. Escrow Agreement. The Escrow Agent, the Seller's Representative and the Seller shall have executed and delivered the Escrow Agreement. 7.6. Seller's Agreement. The Seller and each of the Parent Shareholders shall have executed and delivered to the Purchaser the Seller's Agreement. 7.7. Parent Shareholders Indemnity Agreement. Each of the Parent Shareholders shall have executed and delivered to the Purchaser a Parent Shareholders Indemnity Agreement substantially in the form set forth on Exhibit 7.7 hereto (the "Parent Shareholders Agreement"). 7.8. No Litigation. No material action or proceeding by any governmental authority in the United States or the State of Israel that challenges the stock purchase contemplated by this Agreement shall be pending against the Purchaser or the Company. 7.9. Change in Condition. Since the date of this Agreement, there shall not be any change in the Company's financial condition or results of operations which has had or would reasonably be expected to have a Material Adverse Effect on the Company; provided, however, that any change that results from or relates to general business, economic or industry conditions, the taking of any action contemplated or permitted by this Agreement or the announcement or 34 pendency of the transactions contemplated by this Agreement shall not be taken into account in determining whether there has been or would reasonably be expected to be a "Material Adverse Effect" on the Company. 7.10. Resignations. All directors of the Company and its Subsidiaries and Holdings shall have executed and delivered to the Purchaser resignations as directors. ARTICLE VIII CONDITIONS TO OBLIGATIONS OF THE SELLER The obligations of the Seller to consummate the stock purchase contemplated by this Agreement on the Closing Date shall be subject to the following conditions, except to the extent such conditions are waived by the Seller in writing: 8.1. Representations and Warranties; Performance. The representations and warranties of the Purchaser set forth in this Agreement (excluding any representation or warranty that refers specifically to "the date of this Agreement," "the date hereof" or any other date other than the Closing Date) shall be accurate in all material respects as of the Closing Date as if made on and as of the Closing Date (it being understood that, for purposes of determining the accuracy of such representations and warranties as of the Closing Date (i) any inaccuracy that does not have a Material Adverse Effect on the Purchaser shall be disregarded, (ii) any inaccuracy that results from or relates to general business, economic or industry conditions shall be disregarded, and (iii) any inaccuracy that results from or relates to the taking of any action contemplated or permitted by this Agreement or the announcement or pendency of the transactions contemplated by this Agreement shall be disregarded). The Purchaser shall have performed and complied in all material respects with all agreements or covenants required by this Agreement to be performed or complied with by it prior to or at the Closing. Without limitation of the foregoing, the Seller shall have received the cash amount referred to in Section 1.4(b)(ii)(A) hereof and the shares of Purchaser Common Stock referred to in Section 1.4(b)(ii)(B) hereof, and the Escrow Agent shall have received the shares of Purchaser Common Stock referred to in Section 1.4(b)(ii)(C) hereof. 8.2. Opinion of Counsel. The Seller shall have received an opinion of Morrison & Foerster LLP, counsel to the Purchaser, in substantially the form of Exhibit 8.2 hereto. 8.3. Approvals. The following approvals, orders and permits shall have been received in form and substance reasonably satisfactory to the Company: (a) Bank of Israel. Bank of Israel permit (i) for the Seller to exchange the Transferred Company Shares and Holdings Shares for shares of Purchaser Common Stock and to hold shares of Purchaser Common Stock, and (ii) for the Seller and the Parent Shareholders to deposit in a foreign currency deposit account ("PAMACH") the consideration received from the sale of shares of Purchaser Common Stock; (b) Israel Chief Scientist. Approval of the Chief Scientist for the change in control of the Company; and 35 (c) Israel Investment Center. Approval of the Investment Center for the change in control of the Company. 8.4. Escrow Agreement. The Escrow Agent and the Purchaser shall have executed and delivered to the Seller and the Seller's Representative the Escrow Agreement. 8.5. Seller's Agreement. The Purchaser shall have executed and delivered to the Seller and the Parent Shareholders the Seller's Agreement. 8.6. No Litigation. No material action or proceeding by any governmental authority in the United States or the State of Israel that challenges the stock purchase contemplated by this Agreement shall be pending against the Seller, the Company or any of the Parent Shareholders. 8.7. Change in Condition. Since the date of this Agreement, there shall not be any change in the Purchaser's financial condition or results of operations which has had or would reasonably be expected to have a Material Adverse Effect on the Purchaser; provided, however, that any change that results from or relates to general business, economic or industry conditions, the taking of any action contemplated or permitted by this Agreement or the announcement or pendency of the transactions contemplated by this Agreement shall not be taken into account in determining whether there has been or would reasonably be expected to be a "Material Adverse Effect" on the Purchaser. ARTICLE IX FEES AND EXPENSES 9.1. Expenses. Each of the Company, the Purchaser and the Seller shall bear its own expenses incurred in connection with the negotiation and consummation of the transactions contemplated by this Agreement; provided, however, that if the Closing takes place, (i) the Purchaser shall pay $1,701,230 of any such expenses payable by the Company to Hambrecht & Quist LLC and payable to the Seller's U.S. attorneys, (ii) the Company shall pay $200,000 of other transaction expenses of the Seller and/or the Company, and (iii) the Seller shall pay all remaining transaction expenses of the Company. ARTICLE X TERMINATION 10.1. Termination of Agreement. This Agreement and the transactions contemplated hereby may be terminated at any time before the Closing Date, as follows, and in no other manner: (a) by written consent of the Purchaser, the Company and the Seller; 36 (b) by the Purchaser, the Company or the Seller if the Closing shall not have occurred on or before 5:00 p.m., Tel Aviv Time, on September 9, 1997; provided that the right to terminate this Agreement under this Section 10.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or results in, the failure of the Closing to have occurred by such time; (c) by the Purchaser, if (i) there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Seller such that the conditions set forth in Section 7.1 hereof could not be satisfied, and (ii) such breach has not been cured within thirty (30) days after the delivery to the Seller by the Purchaser of written notice of such breach; provided, however, that the right to terminate this Agreement under this Section 10.1(c) shall not be available to the Purchaser if the Purchaser shall have materially breached this Agreement; (d) by the Company or the Seller if (i) there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Purchaser such that the conditions set forth in Section 8.1 hereof could not be satisfied, and (ii) such breach has not been cured within thirty (30) days after the delivery to the Purchaser by the Seller of written notice of such breach; provided, however, that the right to terminate this Agreement under this Section 10.1(d) shall not be available to the Company or the Seller if the Company or the Seller shall have materially breached this Agreement; or (e) by the Purchaser, the Company or the Seller if (i) there shall be a final, non-appealable order or temporary order (which temporary order shall only provide a basis for termination if not reversed, vacated or otherwise expired prior to September 9, 1997) of any court in effect preventing consummation of the transaction, or (ii) there shall be any action taken after the date of this Agreement, or any statute, rule, regulation or order enacted, promulgated or issued by any governmental entity and reasonably determined, after the date of this Agreement, to be applicable to the stock purchase herein contemplated which would make such stock purchase illegal. 10.2. Effect of Termination. In the event of a termination of this Agreement by any party pursuant to Section 10.1, this Agreement shall become void and have no effect, and there shall be no obligations or liability on the part of any party or their respective officers and directors, except (a) Article XI hereof shall survive the termination of this Agreement and (b) nothing herein shall relieve any party from liability for any willful breach of this Agreement or any representation or warranty contained herein. No termination of this Agreement shall affect the obligations of the parties contained in the Confidentiality Agreement, which shall survive any termination of this Agreement in accordance with its terms. ARTICLE XI MISCELLANEOUS 11.1. Time of the Essence. Time is of the essence of this Agreement. 37 11.2. Entire Agreement. This Agreement and the other written agreements contemplated or described herein contain the entire agreement of the parties hereto, and supersede any prior written or oral agreements between them concerning the subject matter contained herein and therein. There are no representations, agreements, arrangements or understandings, oral or written, between the parties to this Agreement and such other written agreements, relating to the subject matter contained in this Agreement and in such other written agreements, which are not fully expressed herein and therein. 11.3. Press Releases and Public Announcements. None of the Company, the Seller and the Purchaser shall issue any press release or make any public announcement concerning the matters set forth in this Agreement (other than as required by applicable disclosure rules or regulations of any governmental body) without the consent of the other party. If any party hereto is required by disclosure rules or regulations to issue a press release or make a public announcement concerning the matters set forth in this Agreement, such party shall provide notice to the other parties of such rule or regulation and shall consult with such other parties prior to issuing such press release or making such public announcement. The Company, the Seller and the Purchaser will cooperate to jointly prepare and issue any press release which may be issued to announce the signing of this Agreement and/or the Closing of the transaction contemplated by this Agreement. 11.4. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 11.5. Descriptive Headings. The Article and Section headings in this Agreement are for convenience only and shall not affect the meanings or construction of any provision of this Agreement. 11.6. Notices. Any notices required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficiently given (a) when delivered in person, (b) three business days after delivery to an "overnight" courier, (c) 24 hours after delivery by facsimile transmission (to the extent receipt of such facsimile is evidenced by a transmission report or other reasonable evidence of the successful and accurate transmission of such notice), in each case addressed as follows: If to the Purchaser: Cylink Corporation ` 910 Hermosa Court Sunnyvale, California 94086 Attention: Robert F. Fougner Fax: (408) 774-4952 With a copy to: Morrison & Foerster LLP 755 Page Mill Road Palo Alto, California 94304-1018 Attention: Michael C. Phillips 38 Fax: (650) 494-0792 With a further copy to: I. Fischer & Co. 3 Daniel Frisch Street Tel Aviv, Israel Attention: Ezra Katzen Fax: 972-3-525-0141 And if to the Seller: A.R. Data Security Ltd. c/o Algorithmic Research Ltd. 15 Gush Etzion Street Givat Shmuel, Israel Attention: Yossi Tulpan Fax: 972-3-532-2650 With a copy to: Cooley Godward LLP Five Palo Alto Square 3000 El Camino Real Palo Alto, California 94306 Attention: Richard E. Climan Keith A. Flaum Fax: (650) 857-0663 With a further copy to: Shinar, Shachor, Weissberger 5 Beit Hillel St., 3rd Floor Tel Aviv 67017, Israel Attention: Doron Shinar Fax: 972-3-562-1905 or to such other address or addresses as a party shall have previously designated by notice to the sender given in accordance with this Section. 11.7. Choice of Law; Arbitration. This Agreement shall be construed in accordance with and governed by the laws of the State of California, except insofar as Israeli corporate laws, securities laws or tax laws apply to the Company, its Israeli Subsidiaries, the Seller, their governance, and issuance of securities. Any dispute arising out of or relating to this Agreement shall be resolved through binding arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The venue for such arbitration proceedings shall be London, England. The arbitrator's fees and other related expenses of any arbitation (such as transcript fees) shall be borne by the Seller and the Purchaser in such proportions as shall be determined by the arbitrator, or if there is no such determination, such fees and other related expenses shall be borne equally by the Seller and the Purchaser. The resolution of a dispute by the arbitrator shall be conclusive and binding upon the parties hereto and judgment may be entered thereon in any court having jurisdiction thereof. The arbitrator shall have the authority to make an award of actual compensatory damages incurred by a party in connection with a dispute, but shall have no right to grant special, punitive or exemplary damages or indirect or consequential damages or to grant any form of equitable relief. 39 11.8. Binding Effect; Benefits. This Agreement shall inure to the benefit of and be binding upon the parties and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer on any person other than the parties or their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except that the provisions of Sections 4.9 and 4.11 hereof and Article V hereof are intended to confer rights and remedies on the persons referred to therein. 11.9. Assignability. Neither this Agreement nor any of the parties' rights hereunder shall be assignable by any party without the prior written consent of the other parties and any attempted assignment without such consent shall be void; provided, however, that this Agreement may be assigned by the Purchaser to an affiliate of the Purchaser which shall have been formed for the purpose of consummating the transactions contemplated hereby, but no such assignment shall relieve the Purchaser of any of its obligations under this Agreement. 11.10. Waiver and Amendment. Any term or provision of this Agreement may be waived at any time by the party which is entitled to the benefits thereof. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. The parties may, by mutual agreement in writing, amend this Agreement in any respect without the consent or approval of any other person (including any other beneficiary of any rights or remedies under this Agreement). 11.11 Attorneys' Fees. In the event of any action or proceeding to enforce the terms and conditions of this Agreement, the prevailing party shall be entitled to an award of reasonable attorneys' and experts' fees and costs, in addition to such other relief as may be granted. 11.12. Knowledge. For purposes of this Agreement, any reference to the "knowledge" of the Purchaser shall mean the actual knowledge of Fernand Sarrat, John V. Kalb or Robert B. Fougner of (i) an actual inaccuracy in any warranty or representation of the Purchaser that is subject to a "knowledge" qualification, or (ii) facts or circumstances that would reasonably be expected to constitute or to have given rise to an inaccuracy in any such warranty or representation. For purposes of this Agreement, any reference to the "knowledge" of the Company shall mean the actual knowledge of Amos Fiat, Yossi Tulpan or Yossi Cohen of (i) an actual inaccuracy in any warranty or representation of the Company that is subject to a "knowledge" qualification, or (ii) facts or circumstances that would reasonably be expected to constitute or to have given rise to an inaccuracy in any such warranty or representation. 11.13. Other Definitions. "Material Adverse Effect," when used in connection with the Company, means any effect that is materially adverse to the business or financial condition of the Company and its Subsidiaries, taken as a whole; provided, however, that (i) any adverse effect that results from or relates to general business, economic or industry conditions shall not be deemed to constitute, and shall not be taken into account in determining whether there has been, a "Material Adverse Effect" on or with respect to the Company, and (ii) any adverse effect that results from or relates to the taking of any action contemplated or permitted by this Agreement or the announcement or pendency of the transactions contemplated by this Agreement shall not be deemed to constitute, and shall not be taken into account in determining whether there has been, a 40 "Material Adverse Effect" on or with respect to the Company. "Material Adverse Effect," when used in connection with the Purchaser, means any effect that is materially adverse to the business or financial condition of the Purchaser and the Purchaser Subsidiaries, taken as a whole; provided, however, that (i) any adverse effect that results from or relates to general business, economic or industry conditions shall not be deemed to constitute, and shall not be taken into account in determining whether there has been, a "Material Adverse Effect" on or with respect to the Purchaser, and (ii) any adverse effect that results from or relates to the taking of any action contemplated or permitted by this Agreement or the announcement or pendency of the transactions contemplated by this Agreement shall not be deemed to constitute, and shall not be taken into account in determining whether there has been, a "Material Adverse Effect" on or with respect to the Purchaser . An "agreement," "arrangement," "contract," "commitment," "plan," "understanding," or "undertaking" when used in this Agreement shall mean a legally binding, written or oral agreement, arrangement, contract, commitment, plan, purchase order, understanding or undertaking, as the case may be. 11.14. No Implied Representations. The Purchaser and the Seller acknowledge that, except as expressly provided in Articles II and III hereof, and except as expressly provided in any agreement executed and delivered by a party hereto to any other party hereto pursuant to this Agreement, none of the parties has made or is making any representations or warranties whatsoever, implied or otherwise. Without limiting the generality of the foregoing, none of the parties has made or is making any representations or warranties with respect to any information or documents made available by a party or its representatives to another party or its representatives, except as expressly covered by a representation or warranty in Articles II or III hereof or in any other agreement executed and delivered by a party to another party pursuant to this Agreement. 11.15. Liquidation of the Seller. The Purchaser acknowledges and agrees that nothing contained in this Agreement or in any document delivered in connection with the transactions contemplated hereby shall be construed or shall operate to prevent the Seller from dissolving, winding up, liquidating or terminating its existence at any time after the Closing. Notwithstanding anything to the contrary contained in this Agreement, in the event of the dissolution or liquidation of the Seller, the Parent Shareholders and their successors and assigns shall succeed to, and shall be entitled to exercise and enforce, all of the rights of the Seller under this Agreement and the other documents delivered in connection with the transactions contemplated hereby. The Parent Shareholders will, as a condition to such dissolution and liquidation, be bound by Sections 1.2(b), 4.7, 4.13, 9.1, 11.3, 11.6, and 11.7 of this Agreement as, and only to the extent, provided in Section 10 of the Parent Shareholders Agreement. 11.16. Post-Closing Access. At all times after the Closing Date, the Purchaser shall give the Seller and the Seller's Representative reasonable access to the books and records of the Company and its Subsidiaries (to the extent such books and records relate to the period prior to the Closing Date), and the Purchaser shall cause such books and records to be retained for a period of at least seven years following the Closing. 41 IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the day and year first above written. PURCHASER: Cylink Corporation By: /s/ John V. Kalb, Jr. --------------------------------- John V. Kalb, Jr. Vice President, Strategy and Development THE COMPANY: Algorithmic Research Ltd. By: /s/ Yossi Tulpan --------------------------------- Yossi Tulpan Chief Executive Officer By: /s/ Yossi Cohen --------------------------------- Yossi Cohen Chief Operating Officer THE SELLER: A.R. Data Security Ltd. By: /s/ Yossi Tulpan --------------------------------- Yossi Tulpan Director By: /s/ Yossi Cohen --------------------------------- Yossi Cohen Director By: /s/ Amos Fiat --------------------------------- Amos Fiat Director By: /s/ Oded Koritshoner --------------------------------- Oded Koritshoner Director By: /s/ Zohar Tal --------------------------------- Zohar Tal Director 42 EX-2.3 3 SELLER'S AGREEMENT SELLER'S AGREEMENT THIS SELLER'S AGREEMENT ("Agreement") is made as of September 8, 1997, by and among: CYLINK CORPORATION, a California corporation (the "Purchaser"); A.R. DATA SECURITY LTD., a limited liability company organized and existing under the laws of the State of Israel (the "Seller"); and each of the shareholders of the Seller, all of which are identified on Schedule A hereto (the "Parent Shareholders"). RECITALS A. Contemporaneously with the execution and delivery of this Agreement, the Purchaser is acquiring from the Seller (i) all of the issued and outstanding shares of Algorithmic Research Ltd., a limited liability company organized under the laws of the State of Israel (the "Company"), that are owned by the Seller, and (ii) all of the issued and outstanding shares of Algart Holdings Ltd., a limited liability company organized under the laws of the State of Israel ("Holdings"), pursuant to that certain Stock Purchase Agreement, dated as of September 7, 1997, among the Purchaser, the Company and the Seller (the "Purchase Agreement"). B. As part of the purchase price for the shares of the Company and Holdings being acquired by the Purchaser pursuant to the Purchase Agreement, the Purchaser is issuing a total of 2,593,169 shares of common stock of the Purchaser (the "Transaction Shares"), of which 1,272,300 shares are being deposited in escrow in accordance with the terms of the Purchase Agreement. C. The Seller is in the process of a voluntary liquidation. It is contemplated that, in connection with the liquidation of the Seller, the Transaction Shares held by the Seller will be distributed "in kind" by the Seller to the Parent Shareholders. D. This Agreement is being executed and delivered pursuant to Sections 4.6, 7.6 and 8.5 of the Purchase Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. All capitalized terms used and not otherwise defined herein shall have the meanings given to them in the Purchase Agreement. In addition, as used in this Agreement, the following terms shall have the following respective meanings: 1 "Affiliate" shall mean, with respect to any Person, any other Person controlling, controlled by or under common control with such Person. A "Change in Control of the Purchaser" shall be deemed to have occurred if: (a) any Person (other than Pittway Corporation) or "group" (within the meaning of Rule 13d-5 under the Exchange Act) becomes the "beneficial owner" (within the meaning of Rule 13d-3 under the Exchange Act) of at least 50% of the voting securities of the Purchaser; (b) a merger, consolidation or similar transaction involving the Purchaser or any affiliate of the Purchaser is effected, and the shareholders of the Purchaser immediately prior to such transaction own less than 60% of the voting securities of the surviving corporation in such transaction; (c) assets representing more than 50% of the aggregate net book value of the Purchaser's assets (exclusive of its wireless communications division) are sold or otherwise transferred to any Person or Persons (in a single transaction or a series of transactions); or (d) the individuals who, as of the date of this Agreement, are members of the Board of Directors of the Purchaser (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board of Directors of the Purchaser (provided, however, that if the election, or nomination for election by the Purchaser's shareholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board). A "Change in Control of the Company" shall be deemed to have occurred if: (a) a Person (other than the Purchaser) becomes the "beneficial owner" (within the meaning of Rule 13d-5 under the Exchange Act) of at least 50% of the voting securities of the Company (other than in connection with a Change in Control of the Purchaser); (b) the Purchaser ceases to own more than 50% of the outstanding shares of the Company; or (c) assets representing more than 50% of the aggregate net book value of the Company's assets are sold or otherwise transferred to any Person or Persons (in a single transaction or a series of transactions). "Commission" shall mean the United States Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder. "First Restricted Period" shall mean the period commencing on the Closing Date and ending on the day that is 182 days after the Closing Date. "Form S-1," "Form S-3," "Form S-4" and "Form S-8" shall mean (as the case may be) such form under the Securities Act as is in effect on the date hereof, or any successor registration form to such form under the Securities Act subsequently adopted by the Commission. 2 "Fourth Restricted Period" shall mean the period commencing on the second anniversary of the Closing Date and ending on the day immediately preceding the third anniversary of the Closing Date. "Holders" shall mean: (a) each Potential Seller who holds Registrable Shares; (b) each Permitted Transferee who holds Registrable Shares; and (c) each other Person holding Registrable Shares to whom any rights under this Agreement shall have been assigned in accordance with Section 7 hereof. "Individual Parent Shareholders" shall mean Yossi Tulpan, Amos Fiat and Yossi Cohen. A Parent Shareholder's "Percentage Share" shall mean the "Percentage Share" set forth opposite such Parent Shareholder's name on Schedule A hereto. "Permitted Transferee" shall mean: (a) any Parent Shareholder; (b) any Affiliate, shareholder, spouse or lineal descendant of the Seller, of any Parent Shareholder or of any shareholder of any Parent Shareholder (including, without limitation, any corporation or other entity controlled by any Parent Shareholder); (c) any administrator, liquidator, executor, guardian, curator or person acting in a similar capacity for any of the Persons described in clauses "(a)" and "(b)" of this sentence; and (d) any trustee of a trust, the primary beneficiary or beneficiaries of which are any of the Persons described in clauses "(a)," "(b)" and "(c)" of this sentence; provided, however, that Koor Capital Markets and Telrad Holdings Ltd. shall not be deemed to be Permitted Transferees of any Restricted Shares transferred to them by (i) an Individual Parent Shareholder or (ii) a Permitted Transferee who received such Restricted Shares from an Individual Parent Shareholder. "Person" shall mean any individual, corporation, partnership, limited liability company, firm, joint venture, association, joint-stock company, trust, unincorporated organization, governmental or regulatory body or other entity. "Potential Sellers" shall mean the Seller and the Parent Shareholders. "Purchaser Common Stock" shall mean the common stock, $0.01 par value per share, of the Purchaser; provided, however, that if the Purchaser Common Stock is converted into or exchanged for other securities of the Purchaser or of any other Person (pursuant to a merger or recapitalization involving the Purchaser or otherwise), then, for purposes of Section 4 hereof, "Purchaser Common Stock" shall refer to such other securities. "Registrable Shares" shall mean: (a) the Transaction Shares; and (b) any securities issued with respect to, in exchange for or in replacement of any of the Transaction Shares (whether by way of a stock dividend or stock split, in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or similar event or 3 otherwise); provided, however, that shares of Purchaser Common Stock shall be treated as Registrable Shares only if and so long as such shares are held by a Holder. "Registration Expenses" shall mean: (a) all expenses, except Selling Expenses, incurred in connection with a registration pursuant to Sections 4.1, 4.2 and 4.4 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, fees and disbursements of counsel for the Purchaser and Blue Sky fees and expenses; and (b) reasonable fees and disbursements (not to exceed $100,000 for all registrations effected pursuant to this Agreement) of a single U.S. counsel and a single Israeli counsel for the Holders who are participating in a registration. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement with the Commission and the declaration or ordering of the effectiveness of such registration statement. "Regulation S" shall mean Regulation S promulgated under the Securities Act. "Restriction Expiration Date" shall mean the earliest to occur of: (a) the fourth anniversary of the Closing Date; (b) the date of commencement of a tender or exchange offer relating to at least 50% of the outstanding shares of Purchaser Common Stock; (c) the date on which a Change in Control of the Purchaser occurs; (d) the date on which a Change in Control of the Company occurs; (e) the date of execution of any binding letter of intent, contract, agreement or understanding contemplating or otherwise relating to an event of the type referred to in clause "(c)" of this sentence; or (f) the date of occurrence of any material breach or default by the Purchaser with respect to any of its obligations under Section 2 or 4 of this Agreement or Article V of the Purchase Agreement, which breach or default is not cured within twenty (20) days after notice thereof is given to the Purchaser. "Restricted Periods" shall mean the First, Second, Third and Fourth Restricted Periods. "Restricted Shares" shall mean only those Transaction Shares that are held by the Seller, the Escrow Agent (in its capacity as such), any Parent Shareholder or any Permitted Transferee; provided, however, that notwithstanding anything to the contrary contained in this Agreement: (a) a Transaction Share shall cease to be a Restricted Share (and shall cease to be subject to the restrictions contained in this Agreement) upon the earlier of (i) the Restriction Expiration Date, or (ii) the sale of such Transaction Share pursuant to Section 3.1(a), 3.1(b), 3.1(c), 3.1(d) or 3.1(f) hereof; and (b) upon the occurrence of a Special Termination Event with respect to an Individual Parent Shareholder, all Transaction Shares held by such Individual Parent Shareholder, and all Transaction Shares held by any Permitted Transferee to whom such Individual Parent Shareholder has transferred any Transaction Shares, shall cease to be Restricted Shares (and shall cease to be subject to the restrictions contained in this Agreement). 4 "Rule 144" shall mean Rule 144 promulgated under the Securities Act, or any similar or analogous rule promulgated under the Securities Act. "Second Restricted Period" shall mean the period commencing on the day immediately following the last day of the First Restricted Period and ending on the day immediately preceding the first anniversary of the Closing Date. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and (except as otherwise specified above in the definition of "Registration Expenses") all fees and disbursements of counsel for any Holder. A "Special Termination Event" with respect to an Individual Parent Shareholder shall be deemed to have occurred if: (a) the employment of such Individual Parent Shareholder with the Company or any of the Company's Affiliates shall have been terminated by the Company or any of the Company's Affiliates (other than for reasons described in sub-paragraph 6.3 of the Employment Agreement between the Company and such Individual Parent Shareholder); or (b) such Individual Parent Shareholder shall have died or become disabled. "Special Qualifying Block Trade" shall mean a sale of Restricted Shares that: (a) is made in a block trade at a price of at least $15 per share; and (b) is designated by the Seller of such Restricted Shares (in a written notice given to the Purchaser within 120 days following such sale) to be a "Special Qualifying Block Trade"; provided, however, that at any time prior to the second anniversary of the Closing Date, any Potential Seller may (without the consent or approval of the Purchaser or any other Person) rescind its designation of any such sale as a "Special Qualifying Block Trade." "Third Restricted Period" shall mean the period commencing on the first anniversary of the Closing Date and ending on the day immediately preceding the second anniversary of the Closing Date. 2. TRANSFERABILITY OF TRANSACTION SHARES. Except as expressly provided in this Agreement, the Transaction Shares (and any other securities issued with respect to, in exchange for or in replacement of any of the Transaction Shares) shall be freely tradeable and transferable, and the Purchaser shall take or cause to be taken all actions necessary to ensure that the Transaction Shares (and any such other securities) can legally be sold, publicly and otherwise, within and outside the United States, without any restriction or limitation of any nature; provided, however, that, in the event that applicable U.S. federal securities laws shall limit the ability of any Holder to sell any of the 5 Transaction Shares, the obligations of the Purchaser to cause such Transaction Shares to be freely tradeable and transferrable shall be limited to those obligations of the Purchaser set forth in Section 4 hereof. Without limiting the generality of the foregoing, to the extent that any Holder determines (in such Holder's reasonable judgment) that in order for such Holder to be able to legally sell publicly in the United States (without any restriction or limitation of any nature) any Transaction Shares that such Holder is otherwise not restricted from selling pursuant to Section 3 hereof, such Holder shall notify the Purchaser of such determination and the Purchaser shall take or cause to be taken the actions referred to in Sections 4.1 and 4.4 hereof (or the actions referred to in Section 4.8 hereof). The Purchaser agrees that it will use reasonable efforts to furnish to the Potential Sellers, on or before September 18, 1997, a written opinion of Morrison & Foerster LLP or other reputable U.S. securities counsel (reasonably satisfactory to the Potential Sellers in form and substance) that, from and after the forty-first day following the Closing Date, the sale of the Transaction Shares by the Potential Sellers will be exempt from registration under the Securities Act and will be exempt from (or otherwise not subject to) registration and qualification under state securities laws; provided, however, that the Purchaser shall have no obligation under this sentence if any of the representations and warranties of the Seller contained in Section 2.33, 2.34 or 2.35 of the Purchase Agreement is inaccurate in any material respect. 3. RESALES OF RESTRICTED SHARES. 3.1 Resale Restrictions. The Potential Sellers shall not be permitted to sell, transfer or assign any Restricted Shares during the Restricted Periods, except as follows: (a) During the Second Restricted Period, the Potential Sellers may (without being deemed to have breached this Agreement) sell, transfer and/or assign a total of up to 218,000 Restricted Shares. (b) During the Third Restricted Period, the Potential Sellers may (without being deemed to have breached this Agreement) sell, transfer and/or assign a total of up to 1,307,000 Restricted Shares, minus the number of Restricted Shares that were sold by the Potential Sellers during the Second Restricted Period pursuant to Section 3.1(a) hereof. (c) In addition to the Restricted Shares that may be sold, transferred and assigned by the Potential Sellers pursuant to Sections 3.1(a) and 3.1(b) hereof, during the First, Second and Third Restricted Periods (exclusive of the first 40 days of the First Restricted Period), the Potential Sellers may (without being deemed to have breached this Agreement) sell a total of up to 250,000 Restricted Shares in Special Qualifying Block Trades; provided, however, that, during the period commencing on the Closing Date and ending on the day immediately preceding the second anniversary of the Closing Date, the Purchaser may, on one occasion, prohibit the sale of Restricted Shares in Special Qualifying Block Trades (but may not prohibit 6 any other sale of Restricted Shares except as expressly provided in this Agreement) (i) while the Purchaser is actively engaged in a firm commitment underwritten public offering of at least 1,000,000 shares of Purchaser Common Stock, or (ii) for a period of 30 days following the consummation by the Purchaser of a public sale of at least 1,000,000 shares of Purchaser Common Stock pursuant to a firm commitment underwriting, provided that the Purchaser first furnishes to the Potential Sellers written notice and reasonably satisfactory evidence that the Purchaser is actively engaged in such an offering, or has so consummated such a sale. (d) During the Fourth Restricted Period, the Potential Sellers may (without being deemed to have breached this Agreement) sell, transfer and/or assign up to 2,376,000 Restricted Shares, minus the number of Restricted Shares that were sold by the Potential Sellers during the Second and Third Restricted Periods pursuant to Sections 3.1(a) and 3.1(b) hereof. (e) The Potential Sellers may (without being deemed to have breached this Agreement) sell, transfer and/or assign any number of Restricted Shares to any Permitted Transferee at any time and from time to time during any Restricted Period, provided that any such Permitted Transferee agrees in writing, prior to the sale, transfer or assignment to him of such Restricted Shares, to be bound by all of the applicable provisions of this Agreement as to all such Restricted Shares so sold, transferred or assigned to him. (f) The Potential Sellers may (without being deemed to have breached this Agreement) sell, transfer and/or assign Restricted Shares during any Restricted Period in accordance with the provisions of Section 4.2 hereof. 3.2 Overall Monthly Limitation. The number of Restricted Shares that may be sold by the Potential Sellers pursuant to Sections 3.1(a), 3.1(b), 3.1(c) and 3.1(d) hereof in any particular calendar month during the period commencing on the Closing Date and ending on the last day of the full calendar month immediately preceding the fourth anniversary of the Closing Date shall not exceed 8.711% of the aggregate number of shares of Purchaser Common Stock traded on all securities exchanges and reported through Nasdaq and any other automated quotation system during the calendar month immediately preceding such particular calendar month. 3.3 Percentage Share Limitation. Each Individual Parent Shareholder agrees that the total number of Restricted Shares sold by such Individual Parent Shareholder pursuant to Sections 3.1(a), 3.1(b), 3.1(c) and 3.1(d) hereof during the period from the Closing Date through the end of the Fourth Restricted Period will not exceed such Individual Parent Shareholder's Percentage Share of 2,376,000. 7 3.4 Termination of Restrictions. (a) Notwithstanding anything to the contrary contained in this Agreement, all restrictions set forth in Section 3 hereof (that have not previously terminated) shall terminate and cease to be of any further force or effect upon the Restriction Expiration Date; provided, however, that the rights granted to the Potential Sellers and the other Holders under this Agreement (including the registration rights granted under Section 4 hereof) shall survive any such termination and continue in full force and effect. Without limiting the generality of the foregoing, the rights granted by the Purchaser pursuant to Section 4 hereof shall survive any merger involving, and any other Change in Control of, the Purchaser. (b) Notwithstanding anything to the contrary contained in this Agreement: (i) upon the occurrence of a Special Termination Event with respect to an Individual Parent Shareholder, all restrictions set forth in Section 3 hereof (that have not previously terminated) shall cease to apply to such Individual Parent Shareholder and shall cease to apply to any Permitted Transferee to whom such Individual Parent Shareholder has transferred any Transaction Shares; (ii) any shares of Purchaser Common Stock sold by such Individual Parent Shareholder or any such Permitted Transferee after the occurrence of a Special Termination Event shall not be taken into account in determining the number of Restricted Shares sold pursuant to Section 3.1(a), 3.1(b), 3.1(c), 3.1(d) or 3.2 hereof; and (iii) for each Restricted Period after the Restricted Period in which a Special Termination Event occurs with respect to an Individual Parent Shareholder, the aggregate maximum number of Restricted Shares that can be sold by the remaining Parent Shareholders pursuant to the applicable provision of Section 3.1 shall be reduced by the number of shares equal to such Individual Parent Shareholder's Percentage Share of the previously applicable aggregate maximum number of Restricted Shares that could be sold under said provision of Section 3.1. (Thus, for example, if a Special Termination Event occurs with respect to Yossi Tulpan (whose Percentage Share is 31.407%) in the Third Restricted Period, then the maximum number of Restricted Shares that could be sold pursuant to Section 3.1(d) hereof by the other Parent Shareholders would be equal to 68.593% of the amount by which 2,376,000 exceeds the number of Restricted Shares that were sold by the Potential Sellers pursuant to Sections 3.1(a) and 3.1(b) hereof.) Notwithstanding anything to the contrary contained in this Agreement, the rights granted to the Individual Parent Shareholders and their Permitted Transferees under this Agreement (including the registration rights granted under Section 4 hereof) shall survive any such termination and continue in full force and effect. 3.5 Hedging Transactions. Nothing contained in this Agreement will operate to limit the ability of any Potential Seller to lend any Restricted Shares in connection with, or otherwise engage in, conventional "collar"-type or other "hedging" transactions at any time after the Closing; provided, however, that (i) the Potential Sellers shall not be permitted to engage in any "hedging" transactions with respect to their Restricted Shares during the 40-day period commencing as of the Closing Date if such transactions would jeopardize the availability of the 8 Regulation S exemption for the issuance of the Purchaser Common Stock being issued to the Seller at the Closing; and (ii) nothing contained in this Section 3.5 shall be deemed to allow a Potential Seller to sell or otherwise transfer all of such Potential Seller's beneficial interest in his Restricted Shares if such transfer would violate Section 3.1 hereof. 4. REGISTRATION. 4.1 Shelf/Demand Registration. (a) If the Purchaser shall not have delivered to the Potential Sellers, on or prior to September 18, 1997, the written opinion referred to in the last sentence of Section 2 hereof, the Purchaser shall promptly (and in any event prior to September 22, 1997) file with the Commission a registration statement on Form S-3 (a "Shelf Registration Statement") providing for the sale of 468,000 Registrable Shares, and the Purchaser shall use its reasonable efforts to cause such Shelf Registration Statement to become effective no later than the date 40 days after the Closing Date and to remain continuously effective until the earlier of (i) the date on which the Potential Sellers may sell all such Registrable Shares publicly in the United States (and otherwise) without any restriction or limitation of any nature, or (ii) the date on which the distribution described in the Shelf Registration Statement is complete. (b) Any Holder may request at any time during the sixty day period immediately preceding the first day of the Third Restricted Period that the Purchaser register under the Securities Act all or any part of the Registrable Shares that may be sold during the Third Restricted Period. If the Purchaser receives such a request, then, subject to Sections 4.1(d) and 4.8 hereof, the Purchaser shall (i) within 10 days after its receipt of such request, give written notice thereof to all other Holders, and (ii) as soon as practicable after its receipt of such request (but in any event within 30 days after its receipt of such request), effect a registration under the Securities Act of all Registrable Shares that (A) the Holders request to be registered, and (B) may be sold during such Third Restricted Period in accordance with Sections 3.1(b) and 3.1(c) hereof. The Purchaser shall use its reasonable efforts to cause such registration to remain continuously effective until the earliest of (A) the day immediately preceding the second anniversary of the Closing Date, (B) the date 30 days after delivery to all Holders of a legal opinion or "no-action" letter and other documentation satisfying the requirements of Section 4.8 hereof, or (C) the date on which the distribution covered by such registration is complete. (c) Any Holder may request at any time during the sixty day period immediately preceding the first day of the Fourth Restricted Period that the Purchaser register under the Securities Act all or any part of the Registrable Shares that may be sold during the Fourth Restricted Period. If the Purchaser receives such a request, then, subject to Sections 4.1(d) and 4.8 hereof, the Purchaser shall (i) within 10 days after its receipt of such request, give written notice thereof to all other Holders, and (ii) as soon as practicable after its receipt of such request (but in any event within 30 days after its receipt of such request), effect a registration under the Securities Act of all Registrable Shares that (A) the Holders request to be registered, 9 and (B) may be sold during such Fourth Restricted Period in accordance with Section 3.1(d) hereof. The Purchaser shall use its reasonable efforts to cause such registration to remain continuously effective until the earlier of (A) the date 30 days after delivery to all Holders of a legal opinion or "no action" letter and other documentation satisfying the requirements of Section 4.8 hereof, or (B) the date on which the distribution covered by such registration is complete. (d) Notwithstanding anything to the contrary contained in Section 4.1 hereof, the Purchaser shall have no obligation to effect any registration pursuant to Section 4.1(b) or 4.1(c) unless the aggregate number of Registrable Shares requested to be registered shall be equal to or greater than 100,000. 4.2 Purchaser Registration. (a) Notice of Registration. If at any time or from time to time the Purchaser shall determine to effect a registration with the Commission of any securities for its own account (other than on Form S-4 or Form S-8) or for the account of any other Person, the Purchaser will: (i) promptly (and in any event at least 45 days prior to the filing of a registration statement under the Securities Act with respect to such securities) give to all Holders written notice thereof; and (ii) include in such registration (and any related registration or qualification under Blue Sky laws), and in the related underwriting (if any) all Registrable Shares that the Holders request to have included in such registration (such request to be in writing and to be made within 30 days after receipt by all Holders of such written notice from the Purchaser). (b) Underwriting. If the registration of which the Purchaser gives notice is for a registered public offering involving an underwriting, the Purchaser shall so advise the Holders as a part of the written notice given pursuant to Section 4.2(a)(i) hereof. In such event the right of any Holder to have Registrable Shares included in the registration pursuant to this Section 4.2 shall be conditioned upon such Holder's participation in such underwriting. All Holders proposing to distribute any Registrable Shares through such underwriting shall (together with the Purchaser and the other shareholders of the Purchaser distributing their shares of Purchaser Common Stock through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Purchaser. Notwithstanding any other provision of this Section 4.2, if such managing underwriter reasonably determines that marketing factors require a limitation of the number of shares of Purchaser Common Stock to be included in such registration and underwriting, the managing underwriter may exclude or otherwise limit the number of shares of Purchaser Common Stock to be included in such registration and underwriting by shareholders of the Purchaser, including, 10 without limitation, the Holders, prior to the exclusion of any shares to be sold pursuant to such registration and underwriting by the Purchaser. The number of Registrable Shares that may be included in the registration and underwriting shall be allocated among all the participating Holders and other shareholders of the Purchaser participating in such registration and underwriting in proportion, as nearly as practicable, to the respective numbers of Registrable Shares held by such Holders (and requested to be included in such registration) and the number of shares of Purchaser Common Stock held by such other shareholders (and requested to be included in such registration) at the time of filing the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Purchaser may round the number of shares allocated to any Holder or shareholder to the nearest 100 shares. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Purchaser and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (c) Restrictions Not Applicable. None of the restrictions contained in Section 3 hereof shall apply to any sale of Registrable Shares pursuant to a registration under this Section 4.2. (d) Right to Terminate Registration. The Purchaser shall have the right to terminate or withdraw any registration initiated by it under this Section 4.2 prior to the effectiveness of such registration, whether or not any Holder has elected to include Registrable Shares in such registration. (e) No Other Grants of Registration Rights. Without the prior written consent of the Potential Sellers, the Purchaser shall not grant to any Person any rights to have any shares of Purchaser Common Stock, or any securities convertible into or exchangeable for shares of Purchaser Common Stock, registered under the Securities Act on terms more favorable than those set forth in this Agreement. 4.3 Expenses of Registration. All Registration Expenses shall be borne exclusively by the Purchaser. Unless otherwise stated, all Selling Expenses relating to Registrable Shares shall be borne by the Holders of such Registrable Shares pro rata on the basis of the number of Registrable Shares so sold. 4.4 Registration Procedures. In the case of each registration effected by the Purchaser pursuant to this Agreement, the Purchaser will: (a) a reasonable number of days prior to filing any registration statement, prospectus or amendment or supplement thereto with the Commission, furnish a copy of such registration statement, prospectus or amendment or supplement to each Holder participating in such registration for such Holder's review; (b) keep each Holder advised in writing as to the initiation of each registration and qualification and as to the completion thereof; and (c) at the Purchaser's own expense and as expeditiously as possible: 11 (i) prepare and file with the Commission a registration statement on Form S-3 (in the case of a registration under Section 4.1(a) hereof) and, in all other cases, on Form S-1 or Form S-3, as the Purchaser shall determine, and use its reasonable efforts to cause such registration statement to become and remain effective for such period as may be specified in this Agreement or, if not so specified, such period that shall end on the earlier of: (A) the date 270 days after its effectiveness, or (B) the date upon which all of the securities covered thereby have been sold by the Holders; (ii) furnish to each Holder participating in such registration upon request such reasonable number of copies of the registration statement (and each amendment thereto), preliminary prospectus and final prospectus (and each supplement thereto) as such Holder may reasonably request in order to facilitate the public offering of the securities covered thereby, including all documents incorporated therein by reference (whether filed with the Commission before or after the registration statement becomes effective) and all exhibits thereto; (iii) use its reasonable efforts to (A) register and qualify (or obtain appropriate exemptions for) the shares covered by such registration statement under such other securities or Blue Sky laws of such states and other jurisdictions as shall be reasonably requested by the Holders, and (B) keep such registrations and qualifications in effect for so long as each registration statement remains in effect; provided, however, that the Purchaser shall not be required in connection therewith or as a condition thereto to (1) qualify to do business in any such jurisdiction, (2) subject itself to taxation in any such jurisdiction, or (3) file a general consent to service of process in any such jurisdiction; (iv) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement (in usual and customary form) with the managing underwriters of such offering; (v) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the applicable period set forth in this Agreement, and comply with the provisions of the Securities Act with respect to the disposition of all shares covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (vi) cause all securities covered by such registration statement to be listed on each securities exchange or interdealer quotation system of the National Association of Securities Dealers, Inc. on which similar securities issued by the Purchaser are then listed; 12 (vii) provide a transfer agent and registrar for all securities covered by such registration statement not later than the effective date of such registration statement; (viii) notify each Holder participating in such registration, promptly after the Purchaser receives notice thereof, (A) of the time when such registration statement has become effective, and (B) at any time when a prospectus is required to be delivered under the Securities Act in connection with any registration statement (1) of the happening of any event as a result of which such registration statement, such prospectus, any prospectus supplement or any document incorporated by reference in any of the foregoing contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading or (2) that the Purchaser is in possession of material information that it deems advisable not to disclose in a registration statement; (ix) advise each Holder participating in such registration, promptly after the Purchaser shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for such purpose and promptly use its reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal (at the earliest practicable date) if such stop order should be issued; and (x) prior to the effectiveness of such registration statement and any post-effective amendment thereto and at each closing of an underwritten offering, (A) make such reasonable representations and warranties to the Holders participating in such registration, and the underwriters, if any, with respect to the Registrable Shares and the registration statement as are customarily made by issuers to underwriters and selling shareholders in underwritten offerings, (B) obtain opinions of counsel to the Purchaser and updates thereof (which counsel and which opinions shall be reasonably satisfactory to the underwriters, if any, and to Holders who hold a majority of the Registrable Shares being sold pursuant to such registration) addressed to each selling Holder and the underwriters, if any, covering the matters customarily covered in opinions requested in public offerings and such other matters as may be reasonably requested by such Holders and underwriters or their counsel, (C) obtain "comfort" letters and updates thereof from the Purchaser's independent certified public accountants addressed to the selling Holders and the underwriters, if any, such letters to be in customary form and to cover matters of the type customarily covered in "comfort" letters given to underwriters and selling shareholders in connection with secondary underwritten offerings, and (D) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Shares being sold pursuant to such registration and by the underwriters, if any, to evidence compliance with clause (A) of this clause "(x)" and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Purchaser. 13 4.5 Indemnification. (a) The Purchaser will indemnify each Holder who holds any Registrable Shares that are included in a registration or qualification pursuant to this Agreement and each person controlling or controlled by such Holder within the meaning of Section 15 of the Securities Act against any expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, used in connection with such registration or qualification, or (ii) any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (iii) any violation by the Purchaser of the Securities Act, the Exchange Act, any state or other securities laws or any rule or regulation promulgated under such acts or laws applicable to the Purchaser in connection with any such registration or qualification. In addition, the Purchaser will reimburse each such Holder, and each person so controlling or controlled by such Holder, for any legal or other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing to defend or defending any such claim, liability or action; provided, however, that the Purchaser will not be liable to any such Holder in any such case to the extent that any such expense, loss, damage or liability arises out of or is based on any untrue statement of a material fact made by the Purchaser in the applicable registration statement in reliance upon and in conformity with inaccurate information furnished in writing to the Purchaser by any Holder or person controlling such Holder expressly for use in the applicable registration statement. (b) Each Holder will, if Registrable Shares held by such Holder are included in the shares as to which a registration or qualification is being effected pursuant to this Agreement, indemnify the Purchaser and each person controlling or controlled by the Purchaser within the meaning of Section 15 of the Securities Act against any expenses, claims, losses, damages or liabilities (or actions in respect thereof) arising out of or based on any untrue statement of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, used in connection with such registration or qualification, and will reimburse the Purchaser, and each person so controlling or controlled by the Purchaser, for any legal or other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing to defend or defending any such claim, liability or action based on such untrue statement of a material fact, in each case to the extent, but only to the extent, that such untrue statement of a material fact is made in reliance upon and in conformity with inaccurate information furnished in writing to the Purchaser by such Holder or person controlling such Holder expressly for use in the applicable registration statement. Notwithstanding anything to the contrary contained in this Section 4.5(b) or elsewhere in this Agreement, any obligation of any Holder to indemnify or reimburse any person pursuant to this Section shall be several and not joint and shall be limited to the net amount of 14 proceeds received by such Holder from the sale of Registrable Shares pursuant to the registration or qualification in connection with which indemnification or reimbursement has been sought. (c) Each party entitled to indemnification under this Section 4.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought; provided, however, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.5 unless the failure to give such notice materially prejudices the rights or defenses of the Indemnifying Party, in which case the Indemnifying Party shall be relieved of its obligations under this Section 4.5 to the extent of such prejudice. In the event of the assertion or commencement of any claim or litigation for which indemnification may be sought, the Indemnifying Party shall have the right to assume the defense of any such claim or litigation with counsel approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party shall have the right to participate in such defense at its own expense; provided, however, that the Indemnifying Party shall not have the right to assume the defense of any matters as to which representation of both the Indemnifying Party and the Indemnified Party by the same counsel would be inappropriate (as reasonably determined by the Indemnified Party based on the written advice of counsel) due to actual or potential differing interests between them, but shall instead in such event pay the reasonable fees and costs of separate counsel for the Indemnified Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party (which consent shall not be unreasonably withheld) consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 4.5 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any expenses, claims, losses, damages and liabilities referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such expenses, claims, losses, damages or liabilities in such proportion as is appropriate to reflect not only the relevant benefits received by the Indemnifying Party but also the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements, omissions or violations that resulted in such expenses, claims, losses, damages or liabilities as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 15 4.6 Information Regarding Holder. Each Holder whose Registrable Shares are included in any registration under this Agreement shall furnish to the Purchaser such information regarding such Holder, the Registrable Shares held by such Holder and the distribution proposed by such Holder as the Purchaser may reasonably request in writing, to the extent such information is required by law to be disclosed in the applicable registration statement. 4.7 Termination of Registration Rights. The rights granted pursuant to this Section 4 shall terminate as to any Holder at such time as such Holder can immediately sell all of the Registrable Shares held by such Holder without restriction (under the Securities Act or otherwise) in accordance with Rule 144. 4.8 Opinion of Counsel/"No Action" Correspondence. In lieu of taking the actions referred to in Sections 4.1 and 4.4 hereof, the Purchaser may, at its sole expense, obtain and deliver to a Holder who desires to effect a sale of Registrable Shares: (a) a written opinion of Morrison & Foerster LLP or other reputable U.S. securities counsel (reasonably satisfactory to such Holder in form and substance) that, or such other evidence (reasonably satisfactory in form and substance to such Holder) indicating that, such sale is exempt from (or otherwise not subject to) registration and qualification under state securities laws; and (b) either (i) a written opinion of Morrison & Foerster LLP or other reputable U.S. securities counsel (reasonably satisfactory in form and substance to such Holder) that such sale is exempt from registration under the Securities Act, or (ii) a writing executed by an authorized representative of the Commission to the effect that the Commission would take no action with respect to such sale. Nothing in this Section 4.8 or elsewhere in this Agreement shall be deemed to require that any Holder obtain an opinion of counsel or a writing executed by a representative of the Commission in order to sell Registrable Shares. 5. RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the Commission which may permit the sale of the Registrable Shares to the public in the United States without registration, the Purchaser agrees that, so long as any Holder owns any Registrable Shares: (a) the Purchaser will make and keep public information available (in accordance with Rule 144) at all times; 16 (b) the Purchaser will file with the Commission, in a timely manner, all reports and other documents required to be filed by the Purchaser under the Exchange Act; and (c) the Purchaser will furnish to each Holder promptly upon request (i) a written statement by the Purchaser as to its compliance with applicable requirements of Rule 144 and of the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Purchaser, and (iii) such other reports and documents as such Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing it to sell any Registrable Shares without registration. 6. GOVERNING LAW. This Agreement and the legal relations between the parties arising hereunder shall be governed by and interpreted in accordance with the laws of the State of California without regard to its conflicts of law provisions. Any dispute arising out of or relating to this Agreement shall be resolved through binding arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The venue for such arbitration proceedings shall be in London, England. The arbitrator's fees and other related expenses of any arbitration under this Agreement (such as expenses for transcripts of the arbitration proceedings) shall be borne by the Purchaser and the other parties to such arbitration in such proportions as shall be determined by the arbitrator, or if there is no such determination, then such fees and other expenses shall be borne one-half by the Purchaser and one-half divided equally among the other parties to such arbitration. The resolution of a dispute by the arbitrator shall be conclusive and binding upon the parties hereto and judgment may be entered thereon in any court having jurisdiction thereof. The arbitrator shall have the authority to make an award of actual compensatory damages incurred by a party in connection with a dispute, but shall have no right to grant special, punitive or exemplary damages or indirect or consequential damages or to grant any form of equitable relief (except that the arbitrator may, as part of his award, require the Purchaser to perform its registration and other obligations under this Agreement). 7. ASSIGNABILITY. Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. A Holder may assign, to any Permitted Transferee or other Person to which such Holder transfers at least 10,000 Registrable Shares, such Holder's registration rights and other rights hereunder with respect to such Registrable Shares. 8. ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and agreement among the parties regarding the matters set forth herein and supersedes all prior agreements and 17 understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof. 9. NOTICES, ETC. Any notice required or permitted hereunder shall be in writing and shall be deemed given (a) when delivered in person, (b) three business days after delivery to an "overnight" courier, or (c) 24 hours after delivery by facsimile transmission (if receipt of such 18 facsimile is evidenced by a transmission report or other reasonable evidence of the successful and accurate transmission of such notice), in each case addressed as follows:
If to any Parent Shareholder: At such Parent Shareholder's address as set forth on Schedule A hereto
19 With a copy to: Shinar, Shachor, Weissberger 5 Beit Hillel Street, 3rd Floor Tel Aviv 67017, Israel Attn: Doron Shinar Fax: 972-3-562-1905 If to the Purchaser: Cylink Corporation 910 Hermosa Court Sunnyvale, CA 94086 Attn: Robert B. Fougner Fax: 408-774-4952 With a copy to: Morrison & Foerster LLP 755 Page Mill Road Palo Alto, CA 94304 Attn: Michael C. Phillips Fax: 650-494-0792 Addresses may be changed (or in the case of a Holder, added) by written notice given pursuant to this Section. Any notice given hereunder may be given on behalf of a party by his counsel or other authorized representative. 10. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11. AMENDMENTS. This Agreement may not be amended, modified or supplemented, except by means of a written amendment signed by all of the parties hereto; provided, however, that the provisions of Section 4 hereof may be amended by means of a written amendment signed by the Purchaser, on one hand, and Holders representing a majority in interest of the Registrable Shares, on the other hand, so long as such amendment does not take away any registration right of any Holder or reduce the amount of reimbursable costs to any Holder in connection with any registration hereunder without the consent of such Holder. Notwithstanding the foregoing, any Holder may from time to time enter into one or more agreements amending, modifying or 20 supplementing the provisions of this Agreement if such action does not adversely affect the rights or interest of any other Holder. This Agreement is intended to benefit, and may be enforced by, the parties hereto and the Permitted Transferees who receive Transaction Shares; provided, however, that except as set forth in this Section 11, this Agreement may be amended, modified or supplemented without the consent of any Permitted Transferee. 12. STOCK SPLITS, STOCK DIVIDENDS, ETC. All numerical references (including dollar amounts) referred to in this Agreement shall be adjusted, if appropriate, to reflect any stock split, stock dividend, combination of shares, recapitalization, merger, consolidation or other reorganization or similar event with respect to the Purchaser Common Stock. 13. LIQUIDATION OF THE SELLER; LIABILITY FOR BREACH. Nothing contained in this Agreement shall be construed or shall operate to prevent the Seller from dissolving, winding up, liquidating or terminating its existence at any time after the date of this Agreement. Notwithstanding anything to the contrary contained in this Agreement, in the event of the dissolution or liquidation of the Seller, the then current shareholder(s) of the Seller and their successors and assigns shall succeed to and shall be entitled to exercise and enforce all of the rights of the Seller under this Agreement. In the event of a breach of this Agreement, the liability, if any, of each Parent Shareholder shall be limited to such Parent Shareholder's Percentage Share of the compensable damages (if any) incurred by, and payable to, the Purchaser as a result of such breach. Notwithstanding anything to the contrary contained in this Agreement (and without limiting the effect of the preceding sentence), the total cumulative maximum liability of each Parent Shareholder for all breaches of this Agreement and the Parent Shareholders Indemnity Agreement of even date herewith shall be limited in the aggregate to the dollar value of the assets of the Seller distributed to such Parent Shareholder by the Seller in the dissolution and liquidation of the Seller, and no Parent Shareholder's liability hereunder and thereunder shall exceed such amount. 14. INTERPRETATION OF CERTAIN TERMS. All references in this Agreement to "$" or "dollars" shall mean U.S. dollars, and all references in this Agreement to "calendar month" shall be based on the Gregorian calendar. For purposes of this Agreement, the masculine gender shall be deemed to including the feminine and neuter gender, and the neuter gender shall be deemed to include the masculine and feminine genders. 21 This Agreement is hereby executed as of the date first above written. CYLINK CORPORATION By: /s/ John V. Kalb, Jr. -------------------------------------- John V. Kalb, Jr. Vice President, Strategy and Business Development ALGORITHMIC RESEARCH LTD. By: /s/ Yossi Tulpan -------------------------------------- Yossi Tulpan Chief Executive Officer By /s/ Yossi Cohen -------------------------------------- Yossi Cohen Chief Operating Officer A.R. DATA SECURITY LTD. By: /s/ Yossi Tulpan -------------------------------------- Yossi Tulpan By: /s/ Yossi Cohen -------------------------------------- Yossi Cohen By: /s/ Amos Fiat -------------------------------------- Amos Fiat By: /s/ Oded Koritshoner -------------------------------------- Oded Koritshoner By: /s/ Zohar Tal -------------------------------------- Zohar Tal 22 PARENT SHAREHOLDERS: /s/ Yossi Tulpan ----------------------------------------- Yossi Tulpan /s/ Amos Fiat ----------------------------------------- Amos Fiat /s/ Yossi Cohen ----------------------------------------- Yossi Cohen KOOR CAPITAL MARKETS By: /s/ Itzak Chalamish -------------------------------------- Itzak Chalamish President By: /s/ Yair Na'aman -------------------------------------- Yair Na'aman Head of Finance Division TELRAD HOLDINGS LTD. By: /s/ Oded Koritshoner -------------------------------------- Oded Koritshoner Managing Director By: /s/ -------------------------------------- 23 Schedule A Parent Shareholders Name and Address of Parent Shareholder Percentage Share - -------------------------------------- ---------------- Yossi Tulpan 31.407% 21 Bilu Street, Ness Tziona, Israel Amos Fiat 31.407% 20 Shalom Ash Street, Tel Aviv, Israel Yossi Cohen 10.337% 19 Mordechai Kaplan Street, Holon, Israel Koor Capital Markets 7.501% 19 Rothschild Boulevard, Tel Aviv, Israel Telrad Holdings Ltd. 19.348% 19 Rothschild Boulevard, Tel Aviv, Israel EX-2.4 4 PARENT SHAREHOLDERS INDEMNITY AGREEMENT PARENT SHAREHOLDERS INDEMNITY AGREEMENT THIS PARENT SHAREHOLDERS INDEMNITY AGREEMENT ("Agreement") is made as of September 8, 1997, by and among CYLINK CORPORATION, a California corporation (the "Purchaser") and the parties identified on Schedule A hereto (the "Parent Shareholders"), who collectively constitute all of the shareholders of A.R. DATA SECURITY LTD., a limited liability company organized under the laws of the State of Israel (the "Seller"). RECITALS A. Contemporaneously with the execution and delivery of this Agreement, the Purchaser is acquiring from the Seller (i) all of the issued and outstanding shares of Algorithmic Research Ltd., a limited liability company organized under the laws of the State of Israel (the "Company"), that are owned by the Seller, and (ii) all of the issued and outstanding shares of Algart Holdings Ltd., a limited liability company organized under the laws of the State of Israel, pursuant to that certain Stock Purchase Agreement dated as of September 7, 1997 among the Purchaser, the Company and the Seller (the "Purchase Agreement"). B. This Agreement is being entered into pursuant to Section 7.7 of the Purchase Agreement. AGREEMENT The parties hereto agree as follows: 1. CERTAIN DEFINITIONS. Unless the context otherwise requires, the capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to them in the Purchase Agreement. In addition, as used in this Agreement, the following terms shall have the following respective meanings: A Parent Shareholder's "Percentage Share" shall mean the "Percentage Share" set forth opposite such Parent Shareholder's name on Schedule A hereto. An Individual Parent Shareholder's "Specified Intellectual Property" shall mean: (i) those material patents developed by such Individual Parent Shareholder that provide intellectual property protection for any software, hardware or invention that (A) has been personally developed by such Individual Parent Shareholder, and (B) is material to the business of the Company and its Subsidiaries; and (ii) those material copyrights and trade secrets developed by such Individual Parent Shareholder that provide intellectual property protection for any software, hardware or invention that (A) relates to encryption technology, (B) has been personally developed by such Individual Shareholder, and (C) is material to the business of the 1 Company and its Subsidiaries. For purposes of the preceding sentence, any software, hardware or invention will be deemed to be "material to the business of the Company and its Subsidiaries" only if such software, hardware or invention is incorporated in, and is a material component of, any Material Company Product (or any material component, module, feature or subassembly of any such Material Company Product). 2. REPRESENTATIONS AND WARRANTIES. 2.1 Capitalization. Each Parent Shareholder represents and warrants to the Purchaser that, as of the time immediately prior to the Closing, except as disclosed in the Company Schedule or as disclosed or otherwise described in any of the documents listed or otherwise referred to in the Company Schedule, the representations and warranties of the Seller set forth in Sections 2.1, 2.5 and 2.6 of the Purchase Agreement were true and accurate in all material respects. 2.2 Ownership of Specified Intellectual Property. Each Individual Parent Shareholder represents and warrants to the Purchaser that, as of the time immediately prior to the Closing, except as disclosed in the Company Schedule or as disclosed or otherwise described in any of the documents listed or otherwise referred to in the Company Schedule, such Individual Parent Shareholder has assigned to the Company (or has otherwise permitted the Company to acquire) all of his ownership rights (if any) in his Specified Intellectual Property, and has not voluntarily assigned (or otherwise voluntarily granted or transferred) any of his ownership rights (if any) in his Specified Intellectual Property to any university or to any other third party. 2.3 No Implied Representations. Except as expressly set forth in Sections 2.1 and 2.2 hereof, no Parent Shareholder is making any representation or warranty, implied or otherwise, or is providing any assurances of any nature whatsoever. Without limiting the generality of the foregoing, no Parent Shareholder is making or shall be deemed to have made any representation or warranty regarding the validity, ownership or status of any patent, copyright or other intellectual property right, or regarding the existence or absence of any rights or any potential liabilities or risks associated with the exploitation of any such intellectual property right. 3. SURVIVAL. The representations and warranties contained in this Agreement shall survive until the expiration of the applicable statute of limitations, at which time such representations and warranties shall terminate and expire and shall cease to be of any force or effect, and all liability of the parties with respect to such representations and warranties shall thereupon be extinguished. 4. INDEMNIFICATION. 4.1 Indemnification by the Parent Shareholders. Subject to the limitations on indemnification set forth in Section 4.4 hereof and elsewhere in this Agreement, each Parent Shareholder shall indemnify and reimburse the Purchaser for such Parent Shareholder's 2 Percentage Share of the net amount of any Damages incurred by the Purchaser as a proximate result of any inaccuracy in the representation and warranty made by such Parent Shareholder in Section 2.1 hereof. For purposes of calculating the net amount of such Damages, there shall be deducted an amount equal to the aggregate dollar value (determined in the manner set forth in the Escrow Agreement) of all cash and Escrow Shares distributed by the Escrow Agent to the Purchaser in connection with any indemnification claim based on or related to any inaccuracy or alleged inaccuracy in any of the representations and warranties of the Seller contained in Sections 2.1, 2.5 and 2.6 of the Purchase Agreement. 4.2 Indemnification by the Individual Parent Shareholders. Subject to the limitations on indemnification set forth in Section 4.4 hereof and elsewhere in this Agreement, each Individual Parent Shareholder shall indemnify and reimburse the Purchaser for the net amount of any Damages incurred by the Purchaser as a result of any inaccuracy in the representation and warranty made by such Individual Parent Shareholder in Section 2.2 hereof. For purposes of calculating the net amount of such Damages, there shall be deducted an amount equal to the aggregate dollar value (determined in the manner set forth in the Escrow Agreement) of all cash and Escrow Shares distributed by the Escrow Agent to the Purchaser in connection with any indemnification claim based on or related to any inaccuracy or alleged inaccuracy in any of the representations and warranties of the Seller contained in Section 2.17(f) of the Purchase Agreement. 4.3 Notification; Control of Proceedings. The Purchaser shall, with reasonable promptness, give written notice (as provided in this Section 4.3) if the Purchaser or any of its affiliates becomes aware of any loss, liability, damage or expense with respect to which an indemnification claim may be asserted by the Purchaser under this Agreement; provided, however, that for the sole purpose of determining whether written notice must be provided by the Purchaser under this Section 4.3 (and for the purpose of determining whether any Parent Shareholder will have the right to defend a particular action, claim or proceeding), the limitation set forth in Section 4.4 shall not be taken into account. Such written notice shall be given to: (i) all of the Parent Shareholders, if such indemnification claim may be asserted pursuant to Section 4.1 hereof; or (ii) the particular Individual Parent Shareholder(s) against whom such indemnification claim may be asserted, if such indemnification claim may be asserted pursuant to Section 4.2 hereof. (The failure of the Purchaser to deliver such written notice with reasonable promptness shall not be deemed to bar or otherwise limit the rights of the Purchaser hereunder unless such failure materially prejudices any of the rights or defenses of any of the Parent Shareholders.) If any claim is made by a third party or an action or proceeding is commenced for which the Purchaser shall seek indemnification from any Parent Shareholder, the Purchaser shall, with reasonable promptness, give to such Parent Shareholder written notice of such claim, action or proceeding and request such Parent Shareholder to defend the same. Such Parent Shareholder shall have the right to defend such claim, action or proceeding at his or its own expense, and (if such Parent Shareholder elects to defend such claim, action or proceeding) shall give written notice to the Purchaser of the commencement of the defense of such claim, action or proceeding by such Parent Shareholder. The Purchaser shall be entitled to participate at its own 3 expense with such Parent Shareholder in such defense (subject to the right of such Parent Shareholder to control such defense), but shall not be entitled in any way to release, waive, settle, modify or pay such claim, action or proceeding without the written consent of such Parent Shareholder. In the event that such Parent Shareholder does not accept the defense of such claim, action or proceeding as provided above, or does not notify the Purchaser of its election to defend such claim, action or proceeding within 30 days after such Parent Shareholder's receipt of written notice of such claim, action or proceeding from the Purchaser, the Purchaser shall have the full right to defend such claim, action or proceeding in such manner as it may deem appropriate, but such Parent Shareholder shall not have any liability with respect to any compromise or settlement effected without its prior written consent (which consent shall not be unreasonably withheld). In the event a Parent Shareholder shall assume the defense of any such claim, action or proceeding, the Purchaser shall cooperate in the defense of such claim, action or proceeding, and the records of each shall be available to the other with respect to such defense; provided, however, that such Parent Shareholder shall not, in the defense of any such claim, action or proceeding, consent to the entry of any judgment or enter into any settlement where such entry of judgment or settlement does not include a provision releasing the Purchaser from all liability with respect to such claim, action or proceeding, except with the written consent of the Purchaser (which consent shall not be unreasonably withheld). 4.4 Limitations on Indemnification. Notwithstanding anything contained in Section 4.1 or 4.2 hereof or elsewhere in this Agreement: (a) no Parent Shareholder shall be liable to the Purchaser under this Agreement except to the extent that the cumulative amount of indemnifiable Damages actually incurred by the Purchaser as a proximate result of all inaccuracies in the representations and warranties made by such Parent Shareholder in this Agreement actually exceeds the Unused Deductible Amount; and a Parent Shareholder shall only be required to pay, and shall only be liable for, the amount by which the cumulative amount of indemnifiable Damages actually incurred by the Purchaser as a proximate result of all such inaccuracies in the representations and warranties made by such Parent Shareholder in this Agreement actually exceeds the Unused Deductible Amount; and (b) no Parent Shareholder shall be liable under this Agreement with respect to any indemnification claim based on an inaccuracy in any representation or warranty of such Parent Shareholder if any of the Purchaser's officers or directors had actual knowledge of the inaccuracy in such representation or warranty (or of any facts or circumstances constituting or resulting in such inaccuracy) prior to the execution of this Agreement; provided, however, that the limitation provided by this clause "(b)" shall not be available to a Parent Shareholder if such Parent Shareholder also had such actual knowledge of the inaccuracy in such representation and warranty (or of such facts or circumstances constituting or resulting in such inaccuracy) prior to the execution of the Purchase Agreement. For purposes of this Section 4.4, "Unused Deductible Amount" shall mean the $250,000 deductible amount referred to in Section 5.5 of the Purchase Agreement, to the extent such deductible amount has not been utilized under the Purchase Agreement to reduce the amount of indemnification payments made to the Purchaser by the Escrow Agent. 4 4.5 Exclusive Remedy. Without limitation of any term of Article V of the Purchase Agreement or the Escrow Agreement relating to the Purchaser's right to make indemnification claims against the cash and Escrow Shares held by the Escrow Agent, the indemnification provided for in Section 4 hereof shall be the exclusive right and remedy of the Purchaser with respect to any claim against any Parent Shareholder in connection with any of the transactions contemplated by or referred to in the Purchase Agreement. No claim or cause of action with respect to any inaccuracy in any representation or warranty contained in this Agreement shall be enforceable unless made in accordance with the procedures set forth in Section 4 hereof. Without limiting the generality of the foregoing (and without limiting the Purchaser's right under Article V of the Purchase Agreement to make indemnification claims against the cash and Escrow Shares held by the Escrow Agent), except as expressly provided in this Agreement, none of the Parent Shareholders shall have any liability to the Purchaser or to any of the Purchaser's affiliates for any breach by the Seller of any of the Seller's covenants, representations or warranties contained in the Purchase Agreement or for any breach by any Parent Shareholder of any of the representations or warranties contained in this Agreement. 4.6 Subrogation. To the extent that any Parent Shareholder makes or is required to make any indemnification payment to the Purchaser: (a) such Parent Shareholder shall be entitled to exercise, and shall be subrogated to, any rights and remedies (including rights of indemnity, rights of contribution and other rights of recovery) that the Purchaser or any of the Purchaser's affiliates may have against any other person or entity with respect to any Damages, circumstances or matter to which such indemnification payment is directly or indirectly related; (b) the Purchaser shall permit such Parent Shareholder to use the name of the Purchaser and each of its affiliates in any transaction or in any proceeding or other matter involving any of such rights or remedies; and (c) the Purchaser shall take, and shall cause each of its affiliates to take, such actions as such Parent Shareholder may reasonably request for the purpose of enabling such Parent Shareholder to perfect or exercise such Parent Shareholder's right of subrogation hereunder. Any rights of a Parent Shareholder to subrogation pursuant to this Section 4.6 shall not be exercisable until such Parent Shareholder shall have fully performed his or its obligations pursuant to this Agreement as to the indemnification of the Purchaser (with respect to the particular indemnification claim involved); provided, however, that prior to the full performance of such indemnification obligations (and to the extent reasonably required to preserve the rights of such Parent Shareholder to subrogation), such Parent Shareholder shall be permitted to take any action so required to preserve such subrogation rights. 4.7 Acts of Fraud. Each Parent Shareholder acknowledges and agrees that no limitation or other term contained in this Agreement, the Purchase Agreement or the Escrow Agreement shall serve to limit any liability such Parent Shareholder may otherwise have under applicable law for any fraud intentionally committed upon the Purchaser by such Parent Shareholder with respect to any representation made to the Purchaser in any written agreement with the Purchaser. 5 4.8 No Limitation of Actions. Nothing contained herein or in the Purchase Agreement or the Escrow Agreement shall require the Purchaser to first pursue its rights or remedies under Article V of the Purchase Agreement and the Escrow Agreement as to any claim by the Purchaser that is based on the breach of any representation or warranty in both this Agreement and the Purchase Agreement. To the extent that the Purchaser shall first recover Damages from one or more Parent Shareholders pursuant to this Agreement prior to any recovery pursuant to Article V of the Purchase Agreement, the amounts recovered from such Parent Shareholder shall be deducted from amounts payable pursuant to Section 5.2 of the Purchase Agreement. 5. GOVERNING LAW. This Agreement and the legal relations between the parties arising hereunder shall be governed by and interpreted in accordance with the laws of the State of California without regard to its conflict of law provisions, and shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. Any dispute arising out of or relating to this Agreement shall be resolved through binding arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The venue for such arbitration proceedings shall be London, England. The arbitrator's fees and other related expenses of any arbitration under this Agreement (such as expenses for transcripts of the arbitration proceedings) shall be borne by the Purchaser and the Parent Shareholders who are parties to such arbitration in such proportions as shall be determined by the arbitrator, or if there is no such determination, then such fees and other expenses shall be borne one-half by the Purchaser and one-half divided equally among the Parent Shareholders who are parties to such arbitration. The resolution of a dispute by the arbitrator shall be conclusive and binding upon the parties hereto and judgment may be entered thereon in any court having jurisdiction thereof. The arbitrator shall have the authority to make an award of actual compensatory damages incurred by a party in connection with a dispute, but shall have no right to grant special, punitive or exemplary damages or indirect or consequential damages or to grant any form of equitable relief. 6. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same document. 7. NOTICES. Any notice required or permitted hereunder shall be in writing and shall be deemed given (a) when delivered in person, (b) three business days after delivery to an "overnight" courier, or (c) 24 hours after delivery by facsimile transmission (if receipt of such facsimile is evidenced by a transmission report or other reasonable evidence of the successful and accurate transmission of such notice), in each case addressed as follows: If to the Purchaser: Cylink Corporation 910 Hermosa Court Sunnyvale, CA 94086 Attn: Robert B. Fougner Fax: 408-774-4952 6 With a copy to: Morrison & Foerster LLP 755 Page Mill Road Palo Alto, CA 94304 Attn: Michael C. Phillips Fax: 650-494-0792 If to a Parent Shareholder: At the address for such Parent Shareholder as set forth in Schedule A hereto With a copy to: Shinar, Shachor, Weissberger 5 Belt Hillel Street, 3rd Floor Tel Aviv 67017, Israel Attn: Doron Shinar Fax: 972-3-562-1905 Addresses may be changed by written notice given pursuant to this Section. Any notice given hereunder may be given on behalf of any party by his or its counsel or other authorized representative. 8. ENTIRE AGREEMENT. This Agreement constitutes the full and entire understand among the parties regarding the matters set forth herein and supersedes all prior agreements and understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof. 9. AMENDMENTS. This Agreement may not be amended, modified or supplemented, except by means of a written amendment signed by all parties hereto. 10. LIQUIDATION OF SELLER. Following the liquidation of the Seller, in exercising the Seller's contractual rights under the Purchase Agreement, the Parent Shareholders will be subject to the limitations and restrictions applicable to the exercise of such contractual rights under Article V and the other provisions of the Purchase Agreement. In addition, following the liquidation of the Seller, the respective Parent Shareholders will cause to be performed all continuing contractual obligations of the Seller under Sections 1.2(b), 4.7, 4.13, 9.1, 11.3, 11.6 and 11.7 of the Purchase Agreement and Section 4(e) of the Escrow Agreement; provided, however, that, in the event of any failure to cause any of such obligations to be performed, the liability (if any) of each Parent Shareholder shall be limited to such Parent Shareholder's Percentage Share of the compensable damages incurred by the Purchaser as a proximate result of such failure. Notwithstanding anything to the contrary contained in this Agreement or in any other document (and without limiting the effect of the proviso to the preceding sentence), the total cumulative maximum liability of each Parent Shareholder for all breaches of this Agreement and all breaches of the Seller's Agreement of even date herewith shall be limited in the aggregate 7 to the net dollar value of the assets of the Seller distributed to such Parent Shareholder by the Seller in the dissolution and liquidation of the Seller, and such Parent Shareholder's aggregate liability hereunder and thereunder shall in no event exceed such amount. 11. MISCELLANEOUS. For purposes of this Agreement, the masculine gender shall be deemed to include the feminine and neuter genders, and the neuter gender shall be deemed to include the masculine and feminine genders. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first stated above. CYLINK CORPORATION By: /s/ John V. Kalb, Jr. ------------------------------------------- John V. Kalb, Jr. Vice President, Strategy and Business Development By: /s/ Yossi Tulpan ------------------------------------------- Yossi Tulpan By: /s/ Amos Fiat ------------------------------------------- Amos Fiat By: /s/ Yossi Cohen ------------------------------------------- Yossi Cohen KOOR CAPITAL MARKETS By: /s/ Itzak Chalamish ------------------------------------------- Itzak Chalamish President By: /s/ Yair Na'aman ------------------------------------------- Yair Na'aman Head of Finance Division TELRAD HOLDINGS LTD. By: /s/ Oded Koritshoner ------------------------------------------- Oded Koritshoner Managing Director 9 By: /s/ ------------------------------------------- 10 SCHEDULE A TO PARENT SHAREHOLDERS INDEMNITY AGREEMENT Name and Address of Parent Shareholder Percentage Share Yossi Tulpan 31.407% 21 Bilu Street, Ness Tziona, Israel Amos Fiat 31.407% 20 Shalom Ash Street, Tel Aviv, Israel Yossi Cohen 10.337% 19 Mordechai Kaplan Street, Holon, Israel Koor Capital Markets 7.501% 19 Rothschild Boulevard, Tel Aviv, Israel Telrad Holdings Ltd. 19.348% 19 Rothschild Boulevard, Tel Aviv, Israel 11 -----END PRIVACY-ENHANCED MESSAGE-----