-----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, Uz+eX20Aa2VykLOXlgHkke6G7yIBGtzNF5cORTUQhWZiZmM0D6oZszU28Bzv9bKk EhHNJQ2rDXAhuxMmL9ew4A== 0000950005-02-001058.txt : 20021113 0000950005-02-001058.hdr.sgml : 20021113 20021113173027 ACCESSION NUMBER: 0000950005-02-001058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020929 FILED AS OF DATE: 20021113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYLINK CORP /CA/ CENTRAL INDEX KEY: 0001005230 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 953891600 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27742 FILM NUMBER: 02821066 BUSINESS ADDRESS: STREET 1: 3131 JAY STREET CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4088556000 MAIL ADDRESS: STREET 1: 3131 JAY STREET CITY: SANTA CLARA STATE: CA ZIP: 95054 10-Q 1 p16275_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File No. 0-27742 CYLINK CORPORATION (Exact name of registrant as specified in its charter) California 95-3891600 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3131 Jay Street Santa Clara, California 95054 (Address of principal executive offices) (408) 855-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ As of November 11, 2002, there were 33,016,000 shares of the Registrant's common stock outstanding. CYLINK CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 29, 2002 INDEX
Page ---- PART I FINANCIAL INFORMATION Item 1 Financial Statements a) Condensed Consolidated Balance Sheets at September 29, 2002 and December 31, 2001 1 b) Condensed Consolidated Statements of Operations for the three and nine months ended September 29, 2002 and September 30, 2001 2 c) Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2002 and September 30, 2001 3 d) Notes to Condensed Consolidated Financial Statements 4 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3 Quantitative and Qualitative Disclosures about Market Risk 22 Item 4 Controls and Procedures 22 PART II OTHER INFORMATION 23 Item 1. Legal Proceedings 23 Item 2. Changes in Securities and Use of Proceeds 23 Item 3. Defaults upon Senior Securities 23 Item 4. Submission of Matters to a Vote of the Security Holders 23 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 26 Exhibits Index 29 2.1 4.1 10.1 10.2 10.3 10.4 99.1 99.2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements CYLINK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and par value data; unaudited)
Sep 29, Dec 31, 2002 2001 --------- --------- Assets Current assets: Cash and cash equivalents $ 8,175 $ 9,606 Accounts receivable, net of allowances of $516 and $984 5,425 10,102 Income tax receivable 475 50 Inventories 3,565 4,832 Other current assets 1,171 2,026 --------- --------- Total current assets 18,811 26,616 Restricted cash 1,400 1,400 Property and equipment, net 4,553 6,075 Acquired technology and other intangibles, net 8,996 10,426 Goodwill, net -- 6,222 Note receivable from employee 1,074 1,021 Other assets 552 932 --------- --------- $ 35,386 $ 52,692 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Equipment line of credit $ 35 $ 139 Accounts payable 1,583 2,757 Accrued liabilities 6,808 5,439 Income taxes payable 410 412 Deferred revenue 1,824 2,130 --------- --------- Total current liabilities 10,660 10,877 --------- --------- Deferred revenue, less current portion 9 214 Deferred rent and other accruals, less current portion 1,140 1,713 --------- --------- Total long-term liabilities 1,149 1,927 Shareholders' equity: Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued and outstanding Common stock, $0.01 par value; 55,000,000 shares authorized; 331 329 33,002,000 and 32,872,000 shares issued and outstanding Additional paid-in capital 158,449 158,359 Accumulated other comprehensive loss 5 (18) Accumulated deficit (135,208) (118,782) --------- --------- Total shareholders' equity 23,577 39,888 --------- --------- $ 35,386 $ 52,692 ========= =========
See accompanying notes to condensed consolidated financial statements. 1 CYLINK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data; unaudited)
Three Months Ended Nine Months ended ------------------------ ------------------------ Sep 29, Sep 30, Sep 29, Sep 30, 2002 2001 2002 2001 -------- -------- -------- -------- Revenue $ 7,101 $ 10,345 $ 21,572 $ 36,528 Cost of revenue 2,280 4,905 7,552 15,203 -------- -------- -------- -------- Gross profit 4,821 5,440 14,020 21,325 -------- -------- -------- -------- Operating expenses: Research and development 2,419 3,716 8,305 14,851 Selling and marketing 2,208 3,133 8,038 13,895 General and administrative 1,679 2,838 5,149 8,581 Amortization of acquired intangibles 477 768 1,431 2,447 Loss from divestiture of Algorithmic Research, Ltd. -- 294 -- 2,797 Impairment of goodwill 6,193 -- 6,193 -- Restructuring charges 181 -- 2,043 -- -------- -------- -------- -------- Total operating expenses 13,157 10,749 31,159 42,571 -------- -------- -------- -------- Loss from operations (8,336) (5,309) (17,139) (21,246) Other income (expense): Interest income, net 5 223 95 596 Other income, net 466 580 506 417 Write-down of investment in unaffiliated company -- (253) (222) (253) -------- -------- -------- -------- Total other income 471 550 379 760 -------- -------- -------- -------- Loss before income taxes (7,865) (4,759) (16,760) (20,486) Income tax benefit -- -- (334) (1,177) -------- -------- -------- -------- Net loss $ (7,865) $ (4,759) $(16,426) $(19,309) ======== ======== ======== ======== Loss per share - basic & diluted: $ (0.24) $ (0.15) $ (0.50) $ (0.60) ======== ======== ======== ======== Shares used in per share calculation - basic & diluted 32,970 32,623 32,912 32,437 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 2 CYLINK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands; unaudited)
Nine months ended ---------------------------- Sep 29, Sep 30, 2002 2001 -------- -------- Cash flows from operating activities: Net loss $(16,426) $(19,309) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of goodwill 6,193 -- Loss on divestiture of Algorithmic Research, Ltd. -- 2,797 Loss on disposition of fixed assets 112 31 Write-down of investment in unaffiliated company 222 -- Depreciation 2,014 2,597 Amortization of acquired intangibles 1,430 2,447 Deferred income taxes -- 800 Amortization of imputed interest on note receivable (53) (211) Deferred compensation related to stock options -- 528 Changes in assets and liabilities: Accounts receivable 4,677 6,415 Inventories 1,267 4,722 Income tax receivable (425) (109) Other assets 13 309 Accounts payable (1,174) (2,427) Accrued liabilities 825 (1,939) Income taxes payable (2) (7) Deferred revenue (511) 509 -------- -------- Net cash used in operating activities (1,838) (2,847) Cash flows from investing activities: Acquisition of property and equipment (604) (605) Collections of employee notes receivable 1,000 560 Cash transferred with divestiture of Security Design International -- (28) Cash transferred with divestiture of Algorithmic Research, Ltd. -- (1,900) -------- -------- Net cash provided by (used in) investing activities 396 (1,973) Cash flows from financing activities: Proceeds from issuance of common stock, net 92 82 Other (104) (109) -------- -------- Net cash used in financing activities (12) (27) -------- -------- Effect of exchange rate changes on cash and cash equivalents 23 (10) -------- -------- Net decrease in cash and cash equivalents (1,431) (4,857) Cash and cash equivalents at beginning of period 9,606 15,250 -------- -------- Cash and cash equivalents at end of period $ 8,175 $ 10,393 ======== ======== Supplemental disclosures Cash refunds of income tax -- $ 3,342
See accompanying notes to condensed consolidated financial statements. 3 CYLINK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The unaudited condensed consolidated financial statements included herein contain all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary to state fairly the consolidated financial position, results of operations and cash flows of Cylink Corporation ("Cylink") for the periods presented. These financial statements should be read in conjunction with Cylink's audited consolidated financial statements included in Cylink's Annual Report on Form 10-K for the year ended December 31, 2001. Interim results of operations are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in Cylink's consolidated financial statements, Cylink experienced declining annual revenues and incurred losses from continuing operations of $16.4 million in the first nine months of 2002, and $20.1 million in 2001. These factors, among others, raise substantial doubt that Cylink will be able to continue as a going concern for a reasonable period of time. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should Cylink be unable to continue as a going concern. To address these issues, Cylink effected significant cost cutting measures beginning in the fourth quarter of 2000 and continuing into 2002, including staff reductions and field office consolidations, divestiture of unprofitable operations, and has entered into a modification of its lease on its corporate headquarters facility; however, no assurances can be given that these measures will allow Cylink to attain profitable operations. Additionally, on October 30, 2002, Cylink entered into a definitive agreement with SafeNet, Inc. to be acquired through a merger of Cylink with a wholly-owned subsidiary of SafeNet, Inc. Please see Note 11 "Definitive Merger Agreement." In the event the merger with SafeNet is not consummated for any reason, Cylink may find it necessary to seek debt or equity financing; however, no assurances can be given that additional financing will be available to Cylink on acceptable terms, or at all. Critical Accounting Policies and Estimates Cylink's discussion and analysis of its financial condition and results of operations are based upon Cylink's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires Cylink to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, Cylink evaluates its estimates, including those related to allowance for doubtful accounts, inventories, investments, deferred tax assets, intangible assets, income taxes, warranty obligations, restructuring, and contingencies and litigation. Cylink bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A description of those accounting policies that Cylink believes are critical is contained in Cylink's Annual Report on Form 10-K for the year ended December 31, 2001. Certain 2001 financial statement amounts were reclassified to conform with 2002 classifications. These reclassifications had no effect on net loss or shareholders' equity previously reported. 2. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which was effective for business combinations initiated after September 29, 2001. In October 2001, the FASB issued SFAS 144, "Impairment or Disposal of Long-Lived 4 Assets", which is effective for fiscal years beginning after December 15, 2001. In June 2001, the FASB issued SFAS 143, "Accounting for Retirement Obligations," which is effective for Cylink's fiscal year beginning January 1, 2003. Cylink has not yet assessed the impact that the adoption of FAS 143 will have on its financial condition or results of operations. The adoption of SFAS 141 and SFAS 144 did not have a material effect on Cylink's financial condition or results of operations. In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. Cylink will adopt the provisions of SFAS 146 for the restructuring activities, if any, initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of Cylink's commitment to an exit plan. SFAS 146 also established that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. 3. Inventories Inventories are stated at the lower of standard costs (which approximates actual costs on a first-in, first-out basis) or market and consist of: September 29, December 31, 2002 2001 ------ ------ (in thousands) Inventories: Raw materials $1,471 $2,482 Work in process and subassemblies 1,256 1,171 Finished goods 838 1,179 ------ ------ $3,565 $4,832 ====== ====== 4. Loss Per Share Basic loss per share is based on the weighted-average number of common shares outstanding. Diluted loss per share is based on the weighted-average number of shares outstanding and dilutive potential common shares outstanding. Cylink's only potentially dilutive securities are stock options. As of September 29, 2002 and September 30, 2001, Cylink had 7,052,000 and 8,452,000 stock options outstanding with a weighted-average exercise price of $3.11 and $4.05, respectively. These options expire on various dates through 2008. All potentially dilutive securities have been excluded from the computation of diluted loss per share, as their effect is anti-dilutive on the net loss for the periods presented. 5. Comprehensive Loss The components of comprehensive loss, consisting of Cylink's reported net loss and unrealized gains or losses in the translation of foreign currencies, are as follows:
Three months ended: Nine months ended: ---------------------------- ---------------------------- September 29, September 30, September 29, September 30, 2002 2001 2002 2001 -------- -------- -------- -------- (in thousands) (in thousands) Net loss $ (7,865) $ (4,759) $(16,426) $(19,309) Other comprehensive income (loss) 9 (67) 23 (10) -------- -------- -------- -------- Total comprehensive loss $ (7,856) $ (4,826) $(16,403) $(19,319) ======== ======== ======== ========
6. Litigation Cylink is currently engaged in litigation. See Part II, Item 1. "Legal Proceedings." 5 7. Restructuring Charge In the fourth quarter of 2001, Cylink recorded a $1.4 million charge to accrue a reserve for the estimated costs of excess office space in Santa Clara and related furniture and equipment, net of estimated proceeds from planned subleasing. In the first nine months of 2002, Cylink increased its estimate by an additional $1.3 million based on a continued weak sublease market. Approximately $0.4 million of the reserves have been utilized through September 29, 2002. The reserves will be utilized for excess lease costs associated with Cylink's headquarters in future periods. The following table summarizes the activity representing the restructuring charge liability in the condensed consolidated balance sheet for the periods presented: Current Long-term Total ------- --------- ----- (in thousands) Balance at December 31, 2001 $ 478 $ 881 $ 1,359 Additions 448 871 1,319 Utilization -- (364) (364) Reclassifications 1,388 (1,388) -- ------- ------- ------- Balance at September 29, 2002 $ 2,314 $ 0 $ 2,314 ======= ======= ======= Subsequent to the end of the quarter, Cylink entered into an agreement to terminate a portion of the lease arrangement with the landlord (see Note 12). As a result of that lease termination, Cylink reclassified the long-term portion of it's restructuring liability to current. 8. Goodwill and Other Intangible Assets Cylink adopted SFAS 142, "Goodwill and Other Intangible Assets" effective Jan 1, 2002. SFAS 142 requires that goodwill is no longer amortized, but tested for impairment at least annually, or more frequently if certain indications arise. As a result of the adoption of SFAS 142, $333,000 relating to acquired workforce was reclassified from identified intangibles to goodwill. Cylink completed its initial goodwill impairment tests on January 1, 2002 and determined that no impairment of goodwill had occurred as of that date. For the quarter ended September 29, 2002, a significant decrease in market value of Cylink's publicly traded shares reduced the fair value of the company well below its carrying amount. As a result, Cylink conducted an additional impairment test and determined that all of its goodwill is impaired. The resulting impairment loss of $6.2 million is reflected in the accompanying condensed consolidated statement of operations. Changes in the carrying amount of goodwill for the nine months ended September 29, 2002 are as follows (in thousands): Balance as of December 31, 2001 $ 6,222 Write-off of Cylink-Belguim (29) Write-off of Cylink-ATM-TC (6,193) ------- Balance as of September 30, 2002 $ -- ======= A reconciliation of the previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization follows: 6
Three months ended: Nine months ended: --------------------------------- ---------------------------------- September 29, September 30, September 29, September 30, 2002 2001 2002 2001 ------------ ------------- ------------- ------------- (in thousands, except per share data) (in thousands, except per share data) Reported net loss $ (7,865) $ (4,759) $ (16,426) $ (19,309) Add back goodwill amortization, net of income taxes -- 360 -- 1,019 ------------ ------------- ------------- ------------- Adjusted net loss $ (7,865) $ (4,399) $ (16,426) $ (18,290) ============ ============= ============= ============= Adjusted basic and diluted net loss per share $ (0.24) $ (0.13) $ (0.50) $ (0.56) ============ ============= ============= =============
Information regarding Cylink's other intangible assets is as follows (in thousands):
September 29, 2002 December 31, 2001 ----------------------------------------- ----------------------------------------- Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net -------- ------------ ------- -------- ------------ ------- Developed Technology $12,077 $(3,600) $ 8,477 $12,077 $(2,305) $ 9,772 Customer Base 894 (375) 519 894 (240) 654 ------- ------- ------- ------- ------- ------- Total $12,971 $(3,975) $ 8,996 $12,971 $(2,545) $10,426 ======= ======= ======= ======= ======= =======
Amortization expense of other intangible assets was $477,000, and $1,430,000 for the three months and the nine months ended September 29, 2002, respectively. The estimated amortization for each of the five fiscal years subsequent to December 31, 2001 is as follows: Year Ended Amortization December 31, Expense ------------ ------- 2002 $ 1,908 2003 1,908 2004 1,908 2005 1,842 2006 1,728 Thereafter 1,132 -------- Total $ 10,426 ======== 9. Working Capital Loan Cylink's $7.5 million revolving working capital loan facility matured on June 27, 2002, and was renewed during the third quarter of 2002 at $5.0 million through July 27, 2003. This loan is secured by all of Cylink's tangible assets and contains a covenant to maintain a minimum tangible net worth. Due to restructuring costs associated with modification of Cylink's Santa Clara lease and professional fees incurred with respect to Cylink's pending merger with SafeNet's subsidiary, Cylink fell out of compliance with this covenant in November 2002. There have been no borrowings under the loan since its inception. 7 10. Move to NASDAQ Small Cap Market On June 27, 2002, the Company received a notice from the staff of The Nasdaq National Market that its Common Stock had failed to maintain the minimum bid price of $1.00 over the prior 30 trading days as required for continued listing on The Nasdaq National Market. On October 3, 2002, Cylink Corporation moved trading of its common stock from The Nasdaq National Market to The Nasdaq Small Cap Market. Cylink continues to be traded under the symbol, "CYLK". 11. Definitive Merger Agreement On October 30, 2002, Cylink announced that it had entered into a definitive agreement to be acquired by SafeNet, Inc. ("SafeNet"), a publicly traded Delaware corporation. SafeNet trades on The Nasdaq National market under the symbol "SFNT". Cylink will be acquired by SafeNet through a merger of Cylink with a wholly-owned subsidiary of SafeNet. If the merger is consummated each share of Cylink common stock outstanding as of the date of the closing of the merger will be converted into the right to receive 0.05 of a share of SafeNet common stock on a fixed exchange ratio basis. The transaction will be accounted for using the purchase method of accounting, whereby Cylink's net assets and operating results will be included in the consolidated financial statements of SafeNet from the date of the closing of the merger, and is intended to qualify as a tax-free reorganization under applicable U.S. tax laws and regulations. As of October 30, 2002, this represented an issuance by SafeNet of approximately 1.839 million of its shares, or approximately 16% of the outstanding stock of SafeNet, and, in accordance with purchase accounting, based on the closing prices of Cylink and SafeNet common stock on October 30, 2002, the transaction has an implied value of approximately $35.4 million. The merger agreement has been approved by the Boards of Directors of both Cylink and SafeNet and the merger is expected to formally close in the first quarter of 2003; however, there can be no assurances that the merger will be completed in that quarter, or at all. If the merger is consummated, Cylink will continue to operate as a wholly-owned subsidiary of SafeNet. The consummation of the merger is subject to the satisfaction of customary closing conditions, including the declaration by the Securities and Exchange Commission of the effectiveness of the registration statement to be filed by SafeNet in connection with the merger and the approval of both Cylink's and SafeNet's shareholders. 12. Subsequent Events Lease Modification On October 30, 2002, Cylink entered into a lease modification agreement with its landlord for its Santa Clara headquarters and manufacturing facility to terminate its lease obligations on approximately 46,724 square feet effective November 1, 2002, and another 49,104 square feet effective March 1, 2003 in exchange for the payment of $3.2 million, $1.0 million to come from an existing security deposit held by the landlord, and a warrant to purchase 500,000 shares of Cylink common stock at a price of $0.3838 per share (the average closing price of Cylink's common stock for the 15 business days prior to the effective date of the lease modification agreement). This modification will result in a restructuring charge of approximately $ 2.2 million in the fourth quarter of 2002, including the $189,000 value of the warrant. Cylink will continue to lease approximately 46,724 square feet as its headquarters and manufacturing facility from the existing landlord at the previous rates set forth in its lease agreement. Class Action Settlement On October 16, 2002, Cylink entered into an agreement to settle a class action suit, stemming from a 1998 restatement of revenues, for $6.2 million to be paid entirely from insurance proceeds. The settlement agreement is subject to approval by the United States District Court for the Northern District of California. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions also identify forward-looking statements. Forward-looking statements in this Report include, without limitation, statements regarding: implementation by Cylink of its financial plan; Cylink's plans to continue cost reducing measures in 2002; Cylink's intentions to raise additional funds through public or private equity or debt financing, sales of assets, or from other sources if necessary; expectations that Cylink will consummate its merger with a wholly-owned subsidiary of SafeNet during the first quarter of 2003 and other expectations regarding the status of completion of the merger; and Cylink's beliefs regarding when the court will approve the settlement agreement in the shareholder litigation actions. These forward-looking statements and any expectations based on such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Any of Cylink's actual results could differ materially from those included in such forward-looking statements. The above forward-looking statements are subject to the risks and uncertainties further discussed under "Risk Factors That May Affect Future Results" beginning on page 13. All forward-looking statements included in this document are based on information available to Cylink on the date hereof, and Cylink assumes no obligation to update any such forward-looking statements. Shareholders are cautioned not to place undue reliance on such statements, which speak only as of the date of this Report. The reader should also consult the cautionary statements and risk factors listed from time to time in Cylink's Reports on Forms 10-Q, 8-K, 10-K and its Annual Reports to Shareholders for other trends, risks or uncertainties which could cause Cylink's results to differ from those expressed in such forward looking statements. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Cylink's Annual Report on Form 10-K for the year ended December 31, 2001. Critical Accounting Policies and Estimates Cylink's discussion and analysis of its financial condition and results of operations are based upon Cylink's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires Cylink to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, Cylink evaluates its estimates, including those related to allowance for doubtful accounts, inventories, investments, deferred tax assets, intangible assets, income taxes, warranty obligations, restructuring, and contingencies and litigation. Cylink bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A description of those accounting policies that Cylink believes are critical is contained in Cylink's Annual Report on Form 10-K for the year ended December 31, 2001. 9 RESULTS OF OPERATIONS The following table sets forth certain consolidated statement of operations data as a percentage of revenue for the periods indicated:
Three months ended Nine months ended ---------------------- --------------------- Sep 29, Sep 30, Sep 29, Sep 30, 2002 2001 2002 2001 ----- ----- ----- ----- Revenue 100.0% 100.0% 100.0% 100.0% Cost of revenue 32.1 47.4 35.0 41.6 ----- ----- ----- ----- Gross profit 67.9 52.6 65.0 58.4 Operating expenses: Research and development 34.1 35.9 38.5 40.7 Selling and marketing 31.1 30.3 37.3 38.0 General and administrative 23.6 27.4 23.9 23.5 Amortization of acquired intangibles 6.7 7.4 6.6 6.7 Loss from divestiture of Algorithmic Research Ltd. - 2.8 - 7.7 Impairment of Goodwill 87.2 28.7 - Restructuring charges 2.6 - 9.5 - ----- ----- ----- ----- Total operating expenses 185.3 103.8 144.5 116.6 ----- ----- ----- ----- Loss from operations (117.4) (51.2) (79.5) (58.2) Other income, net 6.6 5.3 1.8 2.1 ----- ----- ----- ----- Loss before income taxes (110.8) (45.9) (77.7) (56.1) Income tax benefit - - (1.6) (3.2) ----- ----- ----- ----- Net loss (110.8)% (45.9)% (76.1)% (52.9)% ===== ===== ===== =====
Revenue. Revenue decreased 31% from $10.3 million for the three months ended September 30, 2001 to $7.1 million for the three months ended September 29, 2002, and decreased 41% from $36.5 million for the nine months ended September 30, 2001 to $21.6 million for the nine months ended September 29, 2002. The decreases in revenue are primarily due to the recent general weakening of the global economy as well as due to lower than anticipated information technology spending by Cylink's existing and prospective customers, and loss of business to competitors. International revenue comprised 32% and 29% of total revenue for the third quarter of 2001 and 2002, respectively. Gross Profit. Gross profit decreased from $5.4 million for the three months ended September 30, 2001 to $4.8 million for the three months ended September 29, 2002, and decreased from $21.3 million for the nine months ended September 30, 2001 to $14.0 million for the nine months ended September 29, 2002. This decrease in dollars primarily was a result of the overall decrease in revenue for the same period. As a percentage of sales, gross profit was approximately 53% and 68% for the quarters ended September 30, 2001 and September 29, 2002, respectively, and 58% and 65% for the nine months ended September 30, 2001 and September 29, 2002, respectively. The increase in gross profit as a percentage of revenue was due to higher service revenue margins due to benefits realized from cost reduction programs implemented by Cylink in 2002, reduced excess and obsolete inventory and warranty adjustments, offset by lower product margins resulting from the spread of fixed manufacturing and facility costs over a much lower revenue base. 10 Research and Development. Research and development expenses consist primarily of salaries and other personnel related expenses, depreciation of development equipment, facilities and supplies. Research and development expenses decreased 35% from $3.7 million for the three months ended September 30, 2001 to $2.4 million for the three months ended September 29, 2002 and decreased 44% from $14.8 million for the nine months ended September 30, 2001 to $8.3 million for the nine months ended September 29, 2002. Research and development expenses as a percentage of revenue were 36% for the third quarter of 2001 and 34% for the third quarter 2002, and 41% for the first nine months of 2001 and 39% for the first nine months of 2002. The dollar decrease in research and development expenses was a result of reduced project spending and headcount, due to cost savings initiatives implemented by Cylink. The decrease in expense as a percentage of revenue for the third quarter of each period was due to a greater decline in product development expenditures than the reduction in revenues. Selling and Marketing. Selling and marketing expenses consist primarily of personnel expenses, including sales commissions and bonuses, and expenses for public relations, seminars and trade shows. Selling and marketing expenses decreased 30% from $3.1 million for the three months ended September 30, 2001 to $2.2 million for the three months ended September 29, 2002 and decreased 42% from $13.9 million for the nine months ended September 30, 2001 to $8.0 million for the nine months ended September 29, 2002. Selling and marketing expenses as a percentage of revenue were 30% for the third quarter of 2001 and 31% for the third quarter of 2002, and 38% for the first nine months of 2001 and 37% for the first nine months of 2002. The dollar decrease in selling and marketing expenses was a result of lower commission spending due to decreased revenues, lower headcount spending driven by the reduction in workforce actions taken during 2002, and lower marketing and bonus spending due to the implementation of cost savings initiatives by Cylink. The decrease in expense as a percentage of revenue for the third quarter of each period was due to a greater decline in selling and marketing expenditures than the reduction revenues. General and Administrative. General and administrative expenses consist primarily of personnel and related costs, information systems costs, and audit, legal and other professional service fees. General and administrative expenses decreased 41% from $2.8 million for the three months ended September 30, 2001 to $1.7 million for the three months ended September 29, 2002 and decreased 40% from $8.6 million for the nine months ended September 30, 2001 to $5.1 million for the nine months ended September 29, 2002. General and administrative expenses as a percentage of revenue were 27% for the third quarter of 2001 and 24% for the third quarter 2002, and 24% for the first nine months of 2001 and 24% for the first nine months of 2002. The dollar decrease in general and administrative expenses was due to lower headcount spending driven by the reduction in workforce actions taken during 2002, and lower bonus spending due to the implementation of cost savings initiatives by Cylink, offset by an increase in professional fees associated with the acquisition by SafeNet. Restructuring Charges. Restructuring charges consist of severance expenses due or paid to former employees and the estimated cost of excess leased facilities and related furniture and equipment, net of estimated proceeds from planned subleasing of excess office space. In the third quarter of 2002, Cylink increased its estimate of the loss from excess leased facilities by $0.2 million. Amortization of Acquired Intangibles. Amortization of intangible assets declined from $0.8 million for the three months ended September 30, 2001 to $0.5 million for the three months ended September 29, 2002 and declined from $2.4 million for the nine months ended September 30, 2001 to $1.4 million for the three months ended September 29, 2002. The decline in the expense in 2002 as compared to 2001 was due to the adoption of SFAS 142, "Goodwill and Other Intangibles," on January 1, 2002, pursuant to which Cylink ceased amortizing its goodwill. Other Income (Expense), Net. Other income (expense), net consists primarily of interest income and interest expense, foreign exchange gains or losses, royalty income, and impairment losses from investments in non-operating companies. Other income, net decreased from $0.6 million for the quarter ended September 30, 2001 to $0.5 million for the quarter ended September 29, 2002, principally due to a decline in foreign exchange gains and net interest income offset by the absence of a write-down of an investment in an unaffiliated company taken in the third quarter of 2001. Other income, net decreased from income of $0.8 million for the nine months ended September 30, 2001 to $0.4 million for the nine months ended September 29, 2002, principally due to a decline in foreign exchange gains and net interest income. Provision for Income Taxes. No provision for or benefit from income taxes was recognized in the either the quarter ended September 30, 2001 or the quarter ended September 29, 2002, as Cylink incurred a net operating loss for income tax purposes. 11 Material Contracts. On October 30, 2002 Cylink entered into a lease modification agreement with its landlord for its Santa Clara headquarters and manufacturing facility to terminate its lease obligations on approximately 46,724 square feet effective November 1, 2002, and another 49,104 square feet effective March 1, 2003 in exchange for the payment of $3.2 million, $1.0 million to come from an existing security deposit held by the landlord, and a warrant to purchase 500,000 shares of Cylink common stock at a price of $0.3838 per share (the average closing price of Cylink's common stock for the 15 business days prior to the effective date of the lease modification agreement). This modification will result in an additional restructuring charge of approximately $ 2.2 million in the fourth quarter of 2002, including the $189,000 value of the warrant. Cylink will continue to lease approximately 46,724 square feet as its headquarters and manufacturing facility from the existing landlord at the previous rates set forth in its lease agreement. Pending Acquisition. On October 30, 2002, Cylink announced that it had entered into a definitive agreement to be acquired by SafeNet, Inc., a publicly traded Delaware corporation. SafeNet trades on The Nasdaq National market under the symbol "SFNT". Cylink will be acquired by SafeNet through a merger of Cylink with a wholly-owned subsidiary of SafeNet. If the merger is consummated each share of Cylink common stock outstanding as of the date of the closing of the merger will be converted into the right to receive 0.05 of a share of SafeNet common stock on a fixed exchange ratio basis. The transaction will be accounted for using the purchase method of accounting, whereby Cylink's net assets and operating results will be included in the consolidated financial statements of SafeNet from the date of the closing of the merger, and is intended to qualify as a tax-free reorganization under applicable U.S. tax laws and regulations. As of October 30, 2002 this represented an issuance by SafeNet of approximately 1.839 million of its shares, or approximately 16% of the outstanding stock of SafeNet. The merger agreement has been approved by the Boards of Directors of both Cylink and SafeNet and the merger is expected to formally close in the first quarter of 2003; however, there can be no assurances that the merger will be completed in that quarter, or at all. If the merger is consummated, Cylink will continue to operate as a wholly-owned subsidiary of SafeNet. The consummation of the merger is subject to the satisfaction of customary closing conditions, including the declaration by the Securities and Exchange Commission of the effectiveness of the registration statement to be filed by SafeNet in connection with the merger and the approval of both Cylink's and SafeNet's shareholders. Please see Item 5-Other Information on page 24 of this Quarterly Report on Form 10-Q. LIQUIDITY AND CAPITAL RESOURCES At September 29, 2002, Cylink had working capital of $8.2 million (including cash and cash equivalents of $8.2 million) and $1.1 million of long-term obligations. For the nine months ended September 29, 2002, Cylink recorded a net loss of $16.4 million. Net cash used by operating activities for the first nine months of 2002 was $1.8 million, consisting primarily of the loss from operations, offset by $3.4 million of non-cash depreciation and amortization, $6.2 million non-cash write-off of goodwill, $0.2 million write-down of an investment in an unaffiliated company, and a net decrease in working capital. The decrease in working capital included a decrease in accounts receivable of $4.7 million, a decrease in inventories of $1.3 million, an increase in accrued liabilities of $0.8 million, partially offset by a decrease in accounts payable of $1.2 million, an increase in income tax receivable of $0.4 million, and a decrease in deferred revenues of $0.5 million. The decrease in accounts receivable was due to lower shipments during 2002 and improved collection activities. The decrease in inventories was due to continued strict purchasing controls. The increase in accrued liablities was due principally to the reclassification of long-term restructuring accruals to short-term accruals as a result of the Santa Clara lease modification, offset by decreased commission, bonus and warrant liabilities, along with decreased payroll related liabilities resulting from reduced headcount. The decrease in accounts payable is due to the settlement of certain royalty obligations and reduced inventory purchasing. Net cash used in operating activities for the first nine months of 2001 was $2.8 million consisting primarily of the loss from operations of $19.3 million, partially offset by a decrease in working capital which included a decrease in accounts receivable of $6.4 million, a decrease in inventories of $4.7 million, an increase in deferred revenue of $0.5 million, a decrease in other assets of $0.3 million partially offset by a decrease in accounts payable and accrued liabilities of $4.6 million, an increase in income tax receivables of $0.1 million,. The decrease in accounts receivable was due to lower than average shipments during the year supported by improved collection activities. The decrease in inventories and the decrease in accounts payable were the result of stricter purchasing controls. The decrease in accrued liabilities was due principally to decreased commission, bonus, and legal liabilities. Cash provided by investing activities was $0.4 million for the nine months ended September 29, 2002 as compared to cash used by investing activities of $2.0 million for the nine months ended September 30, 2001. Cash provided by investing activities for the first nine months of 2002 resulted from the collection of a $1.0 million note 12 receivable, partially offset by the acquisition of $0.6 million of property, plant and equipment. Cash used in investing activities for the first nine months of 2001 consisted primarily of the acquisition of $0.6 million of property, plant and equipment, cash transferred in connection with the divestiture of Cylink's Algorithmic Research, Ltd subsidiary, offset by the collection of a $0.6 million note receivable. Cash used in financing activities for the nine months ended September 29, 2002 and September 30, 2001, respectively, was not material in both periods. Cylink's $7.5 million revolving working capital loan facility matured on June 27, 2002, and was renewed during the third quarter of 2002 at $5.0 million through July 27, 2003. This loan is secured by all of Cylink's tangible assets and contains a covenant to maintain a minimum tangible net worth. Cylink fell out of compliance with this covenant on October 30, 2002. There have been no borrowings under the loan since its inception. In conjunction with the acquisition of Celotek Corporation in August 2000, Cylink assumed an equipment loan with an outstanding balance of $0.3 million. This loan matures December 1, 2002 and bears interest at the prime rate plus 1%. As of September 29, 2002, the outstanding balance under the equipment line was $35,000. The equipment line requires Cylink to maintain certain liquidity and profitability covenants, with which it was not in compliance as of September 29, 2002. In connection with the lease modification on its Santa Clara headquarters and manufacturing facility, Cylink paid a $3.2 million lease termination fee to the landlord in the fourth quarter of 2002, of which approximately $1.0 million came from the security deposit already held by the landlord. Thus, Cylink's cash and cash equivalents were further reduced by $2.2 million in the fourth quarter of 2002. As of the date of filing of this Quarterly Report on Form 10Q, Cylink's revenue to date for 2002 is significantly below the revenue anticipated under its current financial plan for fiscal 2002. Under Cylink's financial plan for 2002, Cylink had projected a positive operating cashflow for the 2002 fiscal year, but as of September 29, 2002, Cylink's operations are not generating a positive cash flow. Due to this continued decrease in Cylink's revenues below the amounts anticipated by its management under its 2002 financial plan, Cylink undertook certain actions to reduce operating costs in its core businesses in both 2001 and 2002, including a workforce reduction in June 2002. In addition, on October 30, 2002, Cylink entered into a modification of its lease on its corporate headquarters facility. In 2002 Cylink began to realize the benefits of the actions taken in the fourth quarter of 2000, throughout 2001 and the first nine months of 2002 to reduce operating costs. Cylink plans to continue such cost reducing measures in the fourth quarter of 2002 to the extent necessary or advisable. However, there can be no assurance that cost cutting measures already implemented, either alone or in combination with such other cost cutting measures as the management of Cylink determines are necessary or advisable would be sufficient for Cylink to achieve profitability, or that Cylink's existing cash balances and available borrowing will be sufficient to fund operations through 2002. And, although Cylink has entered into a definitive agreement to be acquired by SafeNet, there can be no assurance that the acquisition of Cylink by SafeNet will be successfully concluded. In the event Cylink continues to experience a decline in revenues and cannot successfully implement additional effective cost cutting measures or its financial plan is otherwise unsuccessful, or if the acquisition by SafeNet is not consummated for any reason, Cylink may require additional funds in the near term to support its working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity or debt financing, sales of assets, or from other sources. No assurance can be given that additional financing will be available or that, if available, will be on terms favorable to Cylink or its shareholders. If Cylink is unsuccessful in implementing it's revised financial plan, and cannot raise additional funds, Cylink may not have the resources to maintain its operations. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS Cylink has a history of losses, and may not be able to meet its needs for working capital. Cylink incurred significant net losses in the nine month period ended September 29, 2002, in the fiscal year 2001 and in prior fiscal years. Cylink had an accumulated deficit of $135.2 million as of September 29, 2002. Cylink's prior losses may also adversely impact Cylink's ability to raise additional capital if required to sustain its operations. 13 As of the date of filing of this Quarterly Report on Form 10-Q, Cylink's revenue to date for 2002 is significantly below the revenue anticipated under its current financial plan for such year. Under Cylink's financial plan for 2002, Cylink had projected a positive operating cash flow for the 2002 fiscal year, but as of September 29, 2002, Cylink's operations are not generating a positive cash flow. Due to the decrease in Cylink's revenues in 2001 and the continued decrease in Cylink's revenues in 2002 below the amounts anticipated by its management under its internal financial plan for 2002, Cylink undertook certain actions to reduce operating costs in its core businesses in 2001 and 2002, including a workforce reduction in June 2002. In addition, on October 30, 2002, Cylink entered into a modification of its lease on its corporate headquarters facility in Santa Clara, CA. In 2002, Cylink began to realize the benefits of the actions taken in the fourth quarter of 2000, through 2001 and the first nine months of 2002 to reduce operating costs. Cylink plans to continue such cost reducing measures in the fourth quarter 2002 to the extent necessary or advisable. However, there can be no assurance that Cylink's cost cutting measures as it's management determines are necessary or advisable, if implemented, would be sufficient for Cylink to achieve profitability or that Cylink will be able to continue reducing costs at a pace that reflects any further reduction in its revenues below anticipated levels or that Cylink will not need to raise additional capital to fund its operations or that additional financing could be obtained by Cylink on acceptable terms, or at all. There also can be no assurances that Cylink's principal sources of liquidity, which include cash and cash equivalents of $8.2 million as of September 29, 2002, will satisfy its current anticipated working capital and capital expenditure requirements through at least the next twelve months. As a result of the lease termination fees resulting from the modification of Cylink's Santa Clara lease on October 30, 2002, Cylink's cash and cash equivalents were further reduced by $2.2 million in the fourth quarter of 2002. Cylink's $7.5 million revolving working capital loan facility matured on June 27, 2002. During the third quarter of 2002, the bank renewed Cylink's line of credit for $5.0 million through July 27, 2003. The loan is secured by all of Cylink's tangible assets and the loan agreement for such credit line contains a covenant to maintain a minimum tangible net worth. In February 2002, Cylink breached certain financial covenants contained in this loan agreement. The minimum tangible net worth covenant was reset at the time of the loan renewal; however, due to restructuring costs associated with modification of Cylink's Santa Clara lease and professional fees incurred with respect to Cylink's pending merger with SafeNet's subsidiary, Cylink fell out of compliance with this covenant on October 30, 2002. There is no guarantee that Cylink will satisfy those covenants or other covenants in the loan agreement in the future. If Cylink fails to meet such financial covenants, the line of credit may not be available to fund Cylink's operations if needed. Further, if additional funds are raised by issuing equity securities, dilution to Cylink's shareholders may result. If adequate funds needed to sustain Cylink's operations are not available, Cylink, its business, and the price of its Common Stock will be adversely affected. Cylink's quarterly operating results vary from period to period and may vary in the future. Cylink has historically experienced significant fluctuations in its operating results on a quarterly basis and could experience such fluctuations in the future. Cylink's revenues and operating results are affected by a number of factors outside of Cylink's control, including the following: o Cylink's inability to accurately forecast revenues and respond in a timely manner to changes in revenue levels; o the timing of the introduction by Cylink or by its competitors of new or enhanced products; o market acceptance of Cylink's new products and those of its competitors; o the timing, cancellation or delay of customer orders, including cancellation or delay in anticipation of new product introductions or enhancements; o changes in Cylink's pricing policies or those of its competitors; o changes in operating costs and expenses, including those resulting from changes in available production capacity of independent foundries and other suppliers and the availability of raw materials; o changes in the revenue mix from products or services sold; o changes in the percentage of products sold through Cylink's direct sales force; o loss of an important customer; o failure to grow Cylink's customer base in accordance with market expectations; 14 o customer discounts and credits; o Cylink's limited ability to reduce expenses to offset any unexpected shortfall in revenue growth or decrease in revenue; o delays in manufacturing due to shortages in components or unanticipated revisions in product design; o expenses incurred in seeking to enforce or defend claims with respect to intellectual property rights; o changes in the economy that affect the purchasing decisions of Cylink's customers; and o disruption in Cylink's operations caused by reductions in its workforce. Many of these factors are outside of Cylink's control. It is possible that in the future Cylink's operating results will be below the expectations of securities analysts and investors. In such an event, or in the event that adverse conditions prevail or are perceived to prevail generally or specifically with respect to Cylink's business or the market sector in which Cylink operates, the price of its common stock may be adversely affected. If the merger with SafeNet, Inc. is not completed Cylink's stock price and future business and operations could be harmed. If the merger with SafeNet is not completed, Cylink will be subject to the following material risks, among others: o The price of Cylink's common stock may change to the extent that the current market price of Cylink's common stock reflects an assumption that the merger will be completed; o Cylink's costs related to the merger, such as legal, accounting and some of the fees of its financial advisors, must be paid even if the merger is not completed; and o Under some circumstances Cylink may be required to pay SafeNet a cash termination fee. Further, if the merger is terminated or otherwise is not consummated and Cylink's board of directors determines to seek another merger or business combination, it is not certain that Cylink will be able to find a merger partner or that the new merger partner would be willing to pay an equivalent or more attractive price than that which would be paid by SafeNet in the merger. While the reorganization agreement is in effect, subject to specified exceptions, Cylink is prohibited from entering into or soliciting, initiating or intentionally encouraging any inquiries or proposals that may lead to a proposal or offer for a merger, consolidation, business combination, sale of substantial assets, tender offer, sale of shares of capital stock or other similar transactions with any person other than SafeNet. These restrictions could limit Cylink's ability to enter into an alternative transaction at a favorable price. Cylink is currently involved in litigation. Several securities class action complaints were filed against Cylink and certain of its current and former directors and officers in federal courts in California. These complaints allege, among other things, that Cylink's previously issued financial statements were materially false and misleading and that the defendants knew or should have known that these financial statements caused its common stock price to rise artificially. The complaints also allege violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, and Section 20 of the Exchange Act. The securities class action lawsuits have been ordered consolidated into a single action pending in the United States District Court for the Northern District of California, captioned In Re Cylink Securities Litigation, No. C98-4292 (VRW). For more information on this lawsuit, see Part II, Item 1. "Legal Proceedings." On October 16, 2002, Cylink entered into an agreement with all plaintiffs to settle the class action for $6.2 million. The settlement amount will be paid entirely from insurance proceeds under insurance policies held by Cylink. The settlement agreement is subject to approval by the United States District Court for the Northern District of California, and Cylink expects that the settlement agreement will be approved in March 2003. 15 Cylink's sales cycles are long and unpredictable, which makes period-to-period revenues difficult to predict. Sales of Cylink's products generally involve a significant commitment of capital by its customers, with the attendant delays frequently associated with large capital expenditures. For these and other reasons, the sales cycle associated with Cylink's products is typically lengthy and subject to a number of significant risks over which Cylink has little or no control. Cylink is often required to ship products shortly after it receives the orders from its customers. Consequently, order backlog at the beginning of any period has, at times in the past, represented only a small portion of that period's expected revenue. Furthermore, increases in backlog from quarter to quarter may be due to placement of orders calling for delivery dates extended over a much longer period of time into future periods. Consequently, Cylink's order backlog becomes more vulnerable to customer cancellations. As a result of these fluctuations in its sales cycle and because of order backlog, Cylink's product revenue in any period has been and will continue to be substantially dependent on orders booked and shipped in that period. Cylink typically plans its production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. In particular, market forces beyond its control, including a general economic recession and limits or changes in government spending may have a material affect on customer demand for its products. In addition, Cylink's operating expenses are based on anticipated revenue levels and a high percentage of its expenses are generally fixed in the short term. Based on these factors, a small fluctuation in the timing of sales can cause operating results to vary significantly from period to period. It is possible that in the future Cylink's operating results will be below the expectations of securities analysts and investors, as they have in the past. If Cylink disappoints the expectations of securities analysts and investors, or in the event that adverse market conditions prevail or are perceived to prevail generally or with respect to the market sector in which Cylink operates, the price of its common stock would likely be adversely affected. All of these factors make it difficult to predict Cylink's financial performance from period to period. As Cylink's quarterly results fluctuate, they may fall below the expectations of the public market analysts or investors. If this occurs, the price of Cylink's Common Stock may drop and Cylink's financial condition and results of operations may be materially and adversely affected. The overall economic climate continues to be weak. Cylink's products typically represent substantial capital commitments by its customers, and potentially involve a long sales cycle. As a result, its customers' purchase decisions may be significantly affected by a variety of factors outside of Cylink's control, including downward trends in capital spending for communication networks, increased market competition, and the availability or announcement of alternative technologies by its competitors. Continued recent weakness in general economic conditions has resulted in many of Cylink's customers delaying and/or reducing their capital spending related to information systems. If the economy continues to be weak or further weakens, demand for Cylink's products could decrease, resulting in lower revenues and a decline in the overall rate of its revenue growth. Cylink is dependent on recently introduced and new network security products. Cylink's future results of operations will be highly dependent on the successful marketing and manufacture of Cylink's NetHawk product, as well as successful marketing and manufacture of the Cylink Link Encryptors, PrivaCy Manager, Cylink ATM and Cylink Frame Encryptor products. Through the third quarter of 2002, Cylink has made only limited commercial shipments of its NetHawk product, which began shipping in mid-year 2000. This product requires additional development work, enhancement, and testing to achieve widespread commercial success. If this or other new or recently introduced products have performance, reliability, quality or other shortcomings, such products could fail to achieve adequate market acceptance. The failure of Cylink's new or existing products to achieve or enjoy market acceptance, whether for these or other reasons, could cause Cylink to experience reduced orders, higher manufacturing costs, delays in collecting accounts receivable and additional warranty and service expenses, which in each case could have a material adverse effect on Cylink's business, financial condition and results of operations. Due to insufficient market acceptance of stand alone public key infrastructure (PKI) products generally, such as Cylink's Net Authority product and similar products of its competitors, Cylink revised its marketing approach in the second half of 2001 by discontinuing efforts to sell Net Authority as a stand alone product. Instead, Cylink focused its efforts on potential customers seeking to embed its PKI product as part of their application or service. In addition, on February 8, 2002, Cylink received notice from the United States Postal Service (USPS) that it was terminating its license to Cylink's Net Authority product as of March 17, 2002, noting that its decision was "not a reflection of the quality of work performance provided by Cylink" but was due to "USPS' immediate need to reduce 16 cost" and downsize its non core businesses following the anthrax attack on its operations in October of 2001. At its request, Cylink granted USPS a continuation of its license through May 30, 2002. On May 31, 2002, this Cylink/USPS license terminated and all revenue earned under the contract expired in the second quarter of 2002. Revenue for the second quarter of 2002, and for the first nine months of 2002 resulting from the USPS license was $0.2 million, and $0.5 million, respectively. Cylink completely discontinued all further development of its PKI technology and products in July 2002. Cylink faces significant competition from other providers of network security systems Competition is intense among providers of network security systems, and Cylink expects that such competition will increase in the future. Significant competitive factors in these markets include: o the rapid development of new products and features by market participants; o product quality and performance; o customer perception regarding the adequacy of security provided by existing software and routers; o adoption of embedded security solutions in other vendors' hardware and software products; o the quality and experience of Cylink's sales, marketing and service organizations; o Cylink's products' prices and the prices of similar products of its competitors; o name recognition of Cylink versus its competitors; and o customers' perception of Cylink's stability and long-term viability. Many of these competitive factors are beyond Cylink's control. Cylink's competitors in the information security markets, including companies that offer products similar to, or are perceived as an alternative to, Cylink's products, are Checkpoint Software Technologies, Ltd., Network Associates, Inc., SafeNet, Inc., Secure Computing Corporation, RSA Security, Inc., Symantec Corporation, and Thales e-Security, Inc. Cylink's NetHawk VPN appliance competes with numerous other products, including those offered or under development by Cisco Systems, Inc., Newbridge Networks Corporation, Netscreen Technologies, Inc., Nokia Corp, and Sonic Wall, Inc. A number of significant vendors, including Microsoft Corporation, and Cisco Systems, Inc. have embedded security solutions in their software. To the extent that these embedded or optional security capabilities provide all or a portion of the functionality provided by Cylink's products, Cylink's products may no longer be required by its customers to attain network security. Many of Cylink's competitors have substantially greater financial, technical, marketing, distribution and other resources, and greater name recognition and longer standing relationships with customers than possessed by Cylink. Competitors with greater financial resources are better able to engage in more aggressive marketing campaigns and sustained price reductions in order to gain market share. However, any period of sustained price reductions in Cylink products would have a material adverse effect on its financial condition and results of operations. Cylink may not be able to compete successfully in the future and competitive pressures may result in price reductions, loss of market share or otherwise have a material adverse effect on its financial condition and results of operations. Cylink faces the risks from tort and warranty claims that may be made against it. Cylink faces risks from tort and warranty claims that third parties may make against it. Customers rely on Cylink's network security products to prevent unauthorized access to their networks and data transmissions. A malfunction or the inadequate design of a Cylink product could result in tort or warranty claims from its customers. Additionally, a breach of a Cylink customer's network by an unauthorized party, which is determined to be attributable to an alleged defect in its products, may cause substantial damages due to loss or compromise of the customer's valuable information. Furthermore, there is inadequate legal precedent for allocating responsibility for such losses caused by the wrongful acts of third parties. Although Cylink attempts to reduce the risk of such losses and claims through warranty disclaimers and liability limitation clauses in its standard forms of sales and license agreements and by maintaining product liability insurance, there can be no assurance that such measures will be effective in limiting Cylink's liability for any such damages. Any liability for damages resulting from security 17 breaches or other alleged product defects could be substantial and could have a material adverse effect on Cylink's business, financial condition and results of operations. In addition, a well-publicized actual or perceived security breach could adversely affect the market's perception of security products in general, or Cylink's products in particular, regardless of whether such breach is attributable to Cylink's products. Such negative perceptions could result in a decline in demand for Cylink's products, which, in turn, would have a material adverse effect on Cylink's business, financial condition and results of operations. On August 2, 2001, Cylink determined that a hardware design could cause a premature failure of the backup battery on its Cylink Frame Encryptor (CFE) product. Shortly thereafter, Cylink announced a program to give its customers the option of updating their CFE units by returning them to the factory, or receiving an extended warranty covering the battery through the end of December 2002. Cylink accrued approximately $1.0 million in warranty costs during the third quarter of 2001 associated with this program. While Cylink management believes that this reserve was based on reasonable estimates derived from information available at the time the reserve was accrued, Cylink's actual costs resulting from this program could exceed these reserves. After Cylink announced this program, two of its major customers stated their intention to submit substantial claims to Cylink related to their costs of avoiding product failures; however, neither of these customers (nor any other Cylink customer of this product line) has made a claim against Cylink for damages related to the failure of the backup battery. Although Cylink believes any such claims may be barred or significantly reduced by the limitations and exclusions set forth in the governing contracts of sale, there can be no assurance that Cylink would be found free from liability or any obligation to reimburse these customers should such customers bring such a claim against Cylink. If such claims were brought against Cylink and Cylink were found to be liable for these customers' damages, Cylink's operations and financial condition may be materially and adversely affected. Cylink may be unable to retain executive officers and key personnel that are critical to its business. Cylink's future success depends in large part on the abilities of its executive officers, key management and technical personnel and its ability to retain qualified and competent individuals following its recent reductions in the employee workforce and the announcement on October 30, 2002 of Cylink's agreement to be acquired by SafeNet, Inc. There is no guarantee that Cylink's present executive management and technical staff will remain with Cylink, particularly if Cylink's performance is not up to the executive's expectations, if there is prolonged uncertainty concerning the effect of the SafeNet transaction on individual positions, and if a general economic recovery leads to expanded alternative opportunities for such employees. The loss of the services of one or more of Cylink's executive officers or key personnel, or the inability to attract and retain additional executives and other qualified personnel, could delay product development cycles or otherwise have a material adverse effect on Cylink's business and operating results. Cylink may not be able to hire and retain sufficient technical, marketing and management personnel that it needs to succeed. Cylink may not be able to hire and retain sufficient technical, marketing and management personnel that it needs to succeed because Cylink has limited resources to expand its work force. Cylink recently experienced, and may continue to experience, substantial fluctuations in the number of employees and the scope of its operations in the network security business. These fluctuations resulted in increased responsibilities for the Cylink management team. To manage Cylink's businesses effectively, Cylink must continue to improve its operational, financial and management information systems and must retain, motivate and manage its employees. In the recent past, competition among companies has been intense for qualified technical, marketing and management personnel. Furthermore, the recent reductions in Cylink's workforce, the recently announced transaction with SafeNet, and the fluctuation in Cylink's stock price, may create greater uncertainty amongst Cylink's existing employees. There can be no assurance that Cylink will be able to effectively achieve or manage future growth in its work force, and its failure to do so could delay product development cycles or otherwise have a material adverse effect on its financial condition and results of operations. Cylink's intellectual property is critical to the success of its business. Cylink relies on patents, trademarks, copyrights, licenses and trade secret law to establish and preserve its intellectual property rights. Cylink owns a number of U.S. patents covering certain features of Cylink's network security product designs, and has additional U.S. patent applications pending. However, there can be no assurance 18 that any patent, trademark, copyright or license owned or held by Cylink will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to Cylink or that any of Cylink's pending or future patent applications will be issued with the scope of the claims sought by it, if at all. Further, there can be no assurance that others will not develop technologies that are similar or superior to Cylink's technology, duplicate Cylink's technology, misappropriate its trade secrets, or design around the patents owned by it. Resorting to the courts to protect Cylink's intellectual property would require significant financial and management resources. In addition, the laws of certain countries in which Cylink's products are or may be developed, manufactured or sold may not protect those products and intellectual property rights to the same extent as the laws of the United States. Cylink's inability to protect its intellectual property rights adequately could have a material adverse effect on its financial condition and results of operations. The computer, communications, software and network security industries are characterized by substantial litigation regarding patent and other intellectual property rights. In the past, Cylink has received communications from third parties asserting that its patents, features or content of certain of its products infringe upon the intellectual property rights of third parties, and Cylink may receive such communications in the future. There can be no assurance that these third parties will not assert claims against Cylink that result in litigation. Any litigation, whether or not determined in Cylink's favor, could result in significant expense to Cylink and could divert its management's attention and other resources from the day-to-day operations of the company. In the event of an adverse ruling in any such litigation involving a dispute over Cylink's intellectual property rights, Cylink might be required to discontinue the use of certain processes, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology and Cylink may suffer significant monetary damages, which could include treble damages. There can be no assurance that under such circumstances a license would be available to Cylink on reasonable terms or at all. In the event of a successful claim against Cylink, combined with its failure to develop or license a substitute technology on commercially reasonable terms, Cylink's financial condition and results of operations would be adversely affected. If Cylink is unable to adapt its services to rapidly changing technology, or if the market for its network security products fails to grow, its business and operating results could suffer. The market for Cylink's network security products is characterized by rapidly changing technology, emerging industry standards, new product introductions and changes in customer requirements and preferences. Cylink's future success will depend in part upon end users' demand for network security products in general, and upon Cylink's ability to enhance its existing products and to develop and introduce new products and technologies that meet customer requirements. Cylink faces continuing challenges to educate potential customers as to the value of its security products. Many potential customers prefer not to disclose significant security breaches of their networks or are reluctant to invest in the development of a professional security architecture to protect their networks because of the expense. Cylink also believes that many potential customers do not appreciate the need for its security products unless and until they have faced a major security breach. This general market resistance to the purchase of security products is compounded by Cylink's limited resources to invest in marketing campaigns to promote its products and services. In addition, a portion of the sales of Cylink's network security products will depend upon a robust industry and infrastructure for providing access to public switched networks, such as the Internet. The infrastructure or complementary products necessary to turn these networks into viable commercial marketplaces may not fully develop, or once fully developed, may not become viable commercial marketplaces. If Cylink is unable successfully to educate potential customers as to the value of its products and services, it is unlikely that its products will gain broad market acceptance. Without broad market acceptance for its products and services, Cylink will continue to rely primarily on selling new and existing products to its base of existing customers, which will significantly limit any opportunity for real growth. In addition, any significant advance in technologies for attacking cryptographic systems could render some or all of Cylink's existing and new products obsolete or unmarketable. Additionally, if a specific product or technology other than Cylink's is adopted as the standard for implementing network security in any segment of the network security market, sales of Cylink's existing and planned products in that market segment may be adversely impacted, which could have a material adverse effect on its business, financial condition and results of operations. The National Institute of Standards and Technology has announced a new Advanced Encryption Standard, or AES, which Cylink expects to integrate into its products. Cylink's ability to timely implement the AES into its products may materially affect its development costs and ability to timely market its solutions. 19 If Cylink's research and development activities are unsuccessful, it will not be able to market new products and services. The markets for Cylink's products are characterized by rapidly changing technologies, extensive research and new product introductions. Cylink believes that its future success will depend in part upon Cylink's ability to continue to enhance its existing products and to develop, manufacture and market new products. As a result, Cylink expects to continue to make a significant investment in engineering, research and development. However, there can be no assurances that such investments will lead to the development of new or viable products or enhancements to Cylink's existing products. In addition, Cylink may not be able to develop and introduce new products or enhancements in a timely manner that satisfies its customer needs, achieves broad market acceptance or addresses technological changes in its target markets. If Cylink fails to develop new products and enhancements or to introduce them successfully and in a timely manner, its competitive position, financial condition and results of operations will be adversely affected. Cylink faces risks associated with its international operations. Cylink plans to continue to maintain its foreign sales channels, which require significant management attention and financial resources. International sales are subject to a number of risks, including: o unexpected changes in regulatory requirements; o export control laws, tariffs and other trade barriers; o political and economic instability in foreign markets; o difficulties in the staffing, management and integration of foreign operations; o longer payment cycles and greater difficulty in collecting accounts receivable; o currency fluctuations; and o potentially adverse tax consequences. Because most of Cylink's foreign sales are denominated in U.S. dollars, its products become less price competitive in countries in which local currencies decline in value relative to the U.S. dollar. The uncertainties of monetary exchange values have caused, and may in the future cause, some foreign customers to delay new orders or delay payment for existing orders in the short term, although the long-term impact of such devaluation, cannot be predicted. Cylink's ability to compete successfully in foreign countries is dependent in part on its ability to obtain and retain reliable and experienced in-country distributors and other strategic partners. Cylink does not have long-term contracts with most of its value added resellers and distributors and, therefore, has no assurance of a continuing relationship with such reseller and distributors within a given market. Due to U.S. government regulations restricting the export of cryptographic devices and software, including Cylink's network security products to non-civilian agencies of foreign governments, Cylink often is disadvantaged in competing for international sales against companies located outside the United States which are not subject to such restrictions. Furthermore, in certain foreign countries, Cylink's distributors are required to secure licenses or formal permission before encryption products can be imported. Although the U.S. Department of Commerce continues to relax certain export control laws as they apply to sales of Cylink's products to its international commercial customers, Cylink still faces export controls on sales of its products to certain foreign governments and on transfers of its technology to its foreign partners. To date, Cylink has been able to secure the necessary export and import licenses to compete effectively in the international market. However, there can be no assurances that Cylink will be able to secure such licenses in a timely manner in the future, or at all. Cylink faces risks from its dependence on third party subcontractors and suppliers. Cylink's ability to deliver its products in a timely manner is dependent upon the availability of quality components and subsystems used in these products. Cylink depends in part upon subcontractors to manufacture, assemble and deliver certain components and subsystems used in its products in a timely and satisfactory manner. Cylink obtains certain components and subsystems from a single, or a limited number of, suppliers. A significant 20 delay in obtaining a supply of components selected by Cylink's design engineers or an interruption in the delivery of such items could have a material adverse effect on Cylink's financial condition and results of operations. On February 14, 2002, Cylink notified its OEM supplier of its ISDN encryption products, Biodata Information Technology AG ("Biodata") of its decision to terminate Cylink's development and supply agreement with Biodata, following Biodata's declaration of insolvency. Due to Biodata's financial failure, as well as the financial failure of Cylink's previous supplier of its ISDN encryption products, Dica, in the first nine months of 2001, Cylink discontinued all further sales and support for this product line. Cylink has disclaimed all liability for Biodata's and Dica's failures in terms of its supply contract with Cylink's principal customer for its ISDN encryption products; however, there can be no assurance that Biodata's and Dica's financial failures, and Cylink's subsequent discontinuance of this ISDN product line, will not give rise to claims for breach of warranty and support by Cylink's customer and end users of this product line. If these customers should bring such claims against Cylink, and if Cylink were found to be liable for these customers' damages, Cylink's operations and financial condition may be materially and adversely effected Cylink common stock could be delisted from The Nasdaq Small Cap Market, which could adversely affect Cylink and its shareholders. On June 27, 2002, Cylink received a notice from the staff of The Nasdaq National Market that its common stock had failed to maintain the minimum bid price of $1.00 over the prior 30 trading days as required for continued listing on The Nasdaq National Market. The notice stated that, if during the 90 days following the date of the notice, the bid price of Cylink common stock failed to close at or above $1.00 for at least 10 consecutive trading days, then the Cylink common stock could be delisted. On September 24, 2002, Cylink submitted its application to Nasdaq to move trading of its common stock from The Nasdaq National Market to The Nasdaq Small Cap Market. Cylink's application was accepted and on October 9, 2002 Cylink common stock began trading on The Nasdaq Small Cap Market under the symbol "CYLK". Under the listing rules of The Nasdaq Small Cap Market, Cylink received an extension of an additional 90 days to comply with the $1.00 minimum bid requirement until December 24, 2002. However, should Cylink's common stock continue to close below $1.00, Cylink common stock could be delisted from The Nasdaq Small Capital Market. If Cylink's common stock were to be delisted from The Nasdaq Small Cap Market, Cylink could apply for listing on the OTC Bulletin Board or another quotation system or exchange for which it could qualify. Cylink cannot guarantee, however, that it could apply for listing on another quotation system or exchange if it is delisted from The Nasdaq Small Cap Market or that if it does apply for listing that it will be eligible initially for such listing or that if it does become listed, that it will be able to maintain eligibility. Also, listing on another quotation system or exchange may negatively affect the price of Cylink's common stock because stocks trading on over-the-counter markets are typically less liquid and trade with larger variations between bid and ask prices. In addition, the delisting of Cylink's common stock from the Nasdaq Small Cap Market would adversely affect or limit or restrict its ability to raise funds through stock issuances. If the market price for Cylink's common stock remains below $1.00 per share, its common stock will be deemed to be penny stock and be subject to rules that impose additional sales practices on broker-dealers who sell Cylink's securities. For example, broker-dealers must make a special suitability determination for the purchaser of a penny stock and have received the purchaser's written consent to the transaction prior to the sale. Also, a disclosure schedule must be prepared prior to any transaction involving a penny stock and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. Because of these additional obligations, some brokers may be unwilling to effect transactions in penny stocks. Such circumstances could have an adverse effect on the liquidity of Cylink's common stock. Terrorist attacks may negatively impact all aspects of Cylink's operations, revenues, costs and stock price. Recent terrorist attacks in the United States, as well as future events occurring in response or connection to such attacks, including future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions impacting Cylink's domestic or foreign suppliers of merchandise, may negatively impact Cylink's operations by causing delays or losses in the delivery of goods and supplies to Cylink and decreased sales of the products it carries. More generally, any of these events may 21 continue to negatively affect the general economy and Cylink's customers' demand for capital equipment, thereby negatively impacting Cylink's operating results, revenues and costs. Recent accounting pronouncements may impact Cylink's financial position and results of operations. Cylink has adopted recent changes in financial accounting standards. In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets". The valuation of Cylink's goodwill and intangible assets under SFAS 142 depends on certain factors outside of its control, including its stock price, and Cylink has written down all of the $6.2 million net carrying value of its investment in goodwill as of September 29, 2002. In June, July and August, 2001, the FASB also issued SFAS 141 "Business Combinations", SFAS 143, "Accounting for Asset Retirement Obligations", and SFAS 144,"Impairment or Disposal of Long-Lived Assets", respectively, which are effective for fiscal years beginning after December 15, 2001. The adoption of these statements did not have a material effect on Cylink's financial condition or results of operations. There can be no assurances, however, that the issuance by FASB of additional statements of financial accounting standards would not materially adversely affect Cylink's business, financial condition, and results of operations if such are required to be adopted by us in the future. In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. Cylink will adopt the provisions of SFAS 146 for the restructuring activities, if any, initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of Cylink's commitment to an exit plan. SFAS 146 also established that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing Cylink future restructuring costs as well as the amounts ultimately recognized by Cylink in this regard. Item 3. Quantitative and Qualitative Disclosures about Market Risk As of September 29, 2002, Cylink held a total of $8.2 million of cash and cash equivalents. These securities consist primarily of money market funds and high-grade, short-term corporate obligations. Certain of these securities are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of September 29, 2002, the decline in fair value of the portfolio would not be material. Cylink transacts substantially all of its revenues and costs in U.S. dollars and its results of operations would not be materially affected by fluctuations in foreign exchange rates. Accordingly, to date, Cylink has not used material amounts of derivative financial instruments. As of September 29, 2002, Cylink had no fixed rate obligations except for an equipment loan with a balance of approximately $35,000. As such, the fair value of Cylink's fixed rate obligations is not subject to a material adverse impact from changes in interest rates. Item 4. Controls and Procedures. Within 90 days prior to the filing of this Quarterly Report, Cylink's President and Chief Executive Officer along with Cylink's Vice President of Finance and Chief Financial Officer evaluated Cylink's disclosure controls and procedures. Based upon this evaluation, Cylink's President and Chief Executive Officer along with Cylink's Vice President of Finance and Chief Financial Officer concluded that Cylink's disclosure controls and procedures are effective in ensuring that material information related to Cylink that is required to be disclosed in its periodic filings with the Securities and Exchange Commission is included in the reports that it files with the Commission. There were no significant changes in Cylink's internal controls or, to the knowledge of the management of Cylink, in other factors that could significantly affect these controls subsequent to the evaluation date, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings Securities Class Action. In 1998, Cylink filed amended Forms 10-Q for the first and third quarters of 1998 and an amended Form 10-K for the 1997 fiscal year, reflecting restated financial results for those quarters, and for the fourth quarter of 1997. Between November 6, 1998 and December 14, 1998, several securities class action complaints were filed against Cylink and certain of its current and former directors and officers in federal courts in California. These complaints alleged, among other things, that Cylink's previously issued financial statements were materially false and misleading and that the defendants knew or should have known that these financial statements caused Cylink's common stock price to rise artificially. The actions variously alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, and SEC Rule 10b-5 promulgated thereunder, and Section 20 of the Exchange Act. The securities class action lawsuits were ordered consolidated into a single action pending in the United States District Court for the Northern District of California, captioned In Re Cylink Securities Litigation, No. C98-4292 (VRW). On October 16, 2002, Cylink entered into an agreement with all plaintiffs in the securities class action lawsuit to settle all claims in the class action for $6.2 million. The settlement amount will be paid entirely from insurance proceeds under insurance policies held by Cylink. The settlement agreement is subject to approval by the United States District Court for the Northern District of California. Cylink expects that the settlement agreement will be approved in March 2003. The Stipulation and Agreement of Settlement effecting the above is attached as an exhibit to this Quarterly Report on Form 10-Q for the period ended September 29, 2002. Other Litigation In addition, in the normal course of business, Cylink, from time to time, receives inquiries or other communication with regard to possible infringement of third party intellectual property rights by Cylink's patents or the features or content of certain of its products. Cylink believes that it is unlikely that the outcome of any of these infringement inquiries will have a material adverse effect on its financial position or results of operations, however if litigation results from any of these inquires and the outcome is unfavorable to Cylink, it could have a material adverse effect on Cylink's cash flows, results of operations and financial condition. There has been substantial litigation regarding patent and other intellectual property rights in the software and network security related industries in which Cylink operates. Further commercialization of Cylink's products could provoke claims of infringement from third parties. In the future, litigation may be necessary to enforce Cylink's patents, to protect its trade secrets or know-how or to defend against claimed infringement of the intellectual property rights of others and to determine the scope and validity of the proprietary rights of others. Any litigation regarding the intellectual property rights of Cylink or others could result in substantial cost and diversion of Cylink's management's efforts from the operation of its businesses, which by itself could have a material adverse effect on its financial condition and operating results. Further, adverse determinations in such litigation could result in loss of Cylink's proprietary rights, subject Cylink to significant liabilities to third parties, require it to seek licenses from third parties or prevent Cylink from manufacturing or selling its products, any of which could have a material adverse effect on its business, financial condition or results of operations. Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults upon Senior Securities Not applicable 23 Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information. On October 9, 2002, Cylink Corporation moved trading of its common stock from The Nasdaq National Market to The Nasdaq Small Cap Market. Cylink continues to be traded under the symbol "CYLK". On October 16, 2002, Cylink entered into an agreement with all plaintiffs to settle several securities class action complaints that were filed against Cylink and certain of its current and former directors and officers in federal courts in California for $6.2 million. The securities class action lawsuits were ordered consolidated into a single action pending in the United States District Court for the Northern District of California, captioned In Re Cylink Securities Litigation, No. C98-4292 (VRW). The settlement amount will be paid entirely from insurance proceeds under insurance policies held by Cylink. The settlement agreement is subject to approval by the United States District Court for the Northern District of California. Cylink expects that the settlement agreement will be approved in March 2003. For more information on this lawsuit, see Part II, Item 1. "Legal Proceedings." The Stipulation and Agreement of Settlement filed on November 5, 2002 in the referenced action is attached as an exhibit to this Quarterly Report on Form 10-Q for the period ended September 29, 2002. On October 30, 2002, Cylink announced that it had entered into a definitive agreement to be acquired by SafeNet, Inc., a publicly traded Delaware corporation. SafeNet trades on The Nasdaq National market under the symbol "SFNT". Cylink will be acquired by SafeNet through a merger of Cylink with a wholly-owned subsidiary of SafeNet. If the merger is consummated each share of Cylink common stock outstanding as of the date of the closing of the merger will be converted into the right to receive 0.05 of a share of SafeNet common stock on a fixed exchange ratio basis. The transaction will be accounted for using the purchase method of accounting, whereby Cylink's net assets and operating results will be included in the consolidated financial statements of SafeNet from the date of the closing of the merger, and is intended to qualify as a tax-free reorganization under applicable U.S. tax laws and regulations. As of October 30, 2002 this represented an issuance by SafeNet of approximately 1.839 million of its shares, or approximately 16% of the outstanding stock of SafeNet. The merger agreement has been approved by the Boards of Directors of both Cylink and SafeNet and the merger is expected to formally close in the first quarter of 2003; however, there can be no assurances that the merger will be completed in that quarter, or at all. If the merger is consummated, Cylink will continue to operate as a wholly-owned subsidiary of SafeNet. The consummation of the merger is subject to the satisfaction of customary closing conditions, including the declaration by the Securities and Exchange Commission of the effectiveness of the registration statement to be filed by SafeNet in connection with the merger and the approval of both Cylink's and SafeNet's shareholders. The merger agreement is attached as an exhibit to this Quarterly Report on Form 10-Q for the period ended September 29, 2002. You are urged to read the merger agreement in its entirety for a complete description of the merger and related transactions. Directors, executive officers and certain affiliates of Cylink and Cylink's Directors have executed a voting agreement agreeing to approve the merger and the merger agreement and an irrevocable proxy in favor of SafeNet, Inc. in connection with such voting agreement. These Directors, executive officers and affiliates hold approximately 23% of all outstanding shares of Cylink common stock. A form of the voting agreement is attached as an exhibit to this Quarterly Report on Form 10-Q for the period ended September 29, 2002. You are urged to read the voting agreement in its entirety for a complete description of such agreement and the proxy. Also on October 30, 2002 Cylink entered into a lease modification agreement with its landlord for its Santa Clara headquarters and manufacturing facility to terminate its lease obligations on approximately 46,724 square feet effective November 1, 2002, and another 49,104 square feet effective March 1, 2003 in exchange for the payment of $3.2 million, $1.0 million to come from an existing security deposit held by the landlord, and a warrant to purchase 500,000 shares of Cylink common stock at a price of $0.3838 per share (the average closing price of Cylink's common stock for the 15 business days prior to the effective date of the lease modification agreement). Cylink will continue to lease approximately 46,724 square feet as its headquarters and manufacturing facility from the existing landlord at the previous rates set forth in its lease agreement. The Second Amendment to Lease and Partial Termination Agreement, Assignment of Sublease; Consent of Landlord and Warrant effecting the above are attached as exhibits to this Quarterly Report on Form 10-Q for the period ended September 29, 2002. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 2.1 Agreement and Plan of Reorganization By and Among SafeNet, Inc., Sapphire Acquisition Corp. and Cylink Corporation dated as of October 30, 2002. 4.1 Form of Voting Agreement, executed in connection with the Agreement and Plan of Reorganization By and Among SafeNet, Inc., Sapphire Acquisition Corp., and Cylink. 10.1 Stipulation and Agreement of Settlement filed on November 5, 2002, in the United States District Court for the Northern District of California, No. C98-4292 (VRW) 24 10.2 Second Amendment to Lease and Partial Termination Agreement between Orchard Jay Investors, LLC and Cylink Corporation dated as of October 30, 2002. 10.3 Assignment to Sublease; Consent of Landlord between Orchard Jay Investors, LLC and Cylink Corporation dated as of October 30, 2002. 10.4 Warrant to Purchase Common Stock of Cylink Corporation between Orchard Jay Investors, LLC and Cylink Corporation dated as of October 30, 2002. 99.1 Certification of William P. Crowell, President and Chief Executive Officer of Cylink Corporation dated November 14, 2002 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of R. Christopher Chillingworth Vice President of Finance and Chief Financial Officer of Cylink Corporation dated November 14, 2002 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: On September 30, 2002 Cylink filed a report on Form 8-K announcing that Cylink had submitted its application to Nasdaq on September 24, 2002 to move the trading of its common stock from The Nasdaq National Market to The Nasdaq Small Cap Market. On October 9, 2002 Cylink filed a report on Form 8-K announcing that Cylink had moved the trading of its common stock from The Nasdaq National Market to The Nasdaq Small Cap Market. 25 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, thereunto duly authorized. Date: November 13, 2002 CYLINK CORPORATION By: /s/ R. Christopher Chillingworth -------------------------------- R. Christopher Chillingworth Vice President of Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 26 CERTIFICATION Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, William P. Crowell, President and Chief Executive Officer of Cylink Corporation certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cylink Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ William P. Crowell ---------------------- Chief Executive Officer Cylink Corporation 27 CERTIFICATION Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, R. Christopher Chillingworth, Vice President of Finance and Chief Financial Officer of Cylink Corporation certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cylink Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ R. Christopher Chillingworth -------------------------------- Chief Financial Officer Cylink Corporation 28 EXHIBIT INDEX 2.1 Agreement and Plan of Reorganization By and Among SafeNet, Inc., Sapphire Acquisition Corp. and Cylink Corporation dated as of October 30, 2002. 4.1 Form of Voting Agreement, executed in connection with the Agreement and Plan of Reorganization By and Among SafeNet, Inc., Sapphire Acquisition Corp., and Cylink. 10.1 Stipulation and Agreement of Settlement filed on November 5, 2002, in the United States District Court for the Northern District of California, No. C98-4292 (VRW) 10.2 Second Amendment to Lease and Partial Termination Agreement between Orchard Jay Investors, LLC and Cylink Corporation dated as of October 30, 2002. 10.3 Assignment to Sublease; Consent of Landlord between Orchard Jay Investors, LLC and Cylink Corporation dated as of October 30, 2002. 10.4 Warrant to Purchase Common Stock of Cylink Corporation between Orchard Jay Investors, LLC and Cylink Corporation dated as of October 30, 2002. 99.1 Certification of William P. Crowell, President and Chief Executive Officer of Cylink Corporation dated November 13, 2002 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of R. Christopher Chillingworth Vice President of Finance and Chief Financial Officer of Cylink Corporation dated November 13, 2002 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 29 EX-2.1 3 ex2.txt AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG SAFENET, INC. SAPPHIRE ACQUISITION CORP. AND CYLINK CORPORATION Dated as of October 30, 2002 TABLE OF CONTENTS AGREEMENT AND PLAN OF REORGANIZATION...........................................1 TABLE OF CONTENTS .............................................................2 SECTION 1. THE MERGER...............................................2 1.1 MERGER OF MERGER SUB INTO THE COMPANY...........................2 1.2 EFFECT OF THE MERGER............................................2 1.3 CLOSING; EFFECTIVE TIME.........................................2 1.4 ARTICLES OF INCORPORATION AND BYLAWS............................2 1.5 CONVERSION OF SHARES IN THE MERGER..............................3 1.6 CLOSING OF THE COMPANY'S TRANSFER BOOKS.........................4 1.7 EXCHANGE OF CERTIFICATES........................................4 1.8 FURTHER ACTION..................................................6 1.9 TAX CONSEQUENCES................................................6 SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............6 2.1 DUE ORGANIZATION; SUBSIDIARIES..................................6 2.2 AUTHORITY; BINDING NATURE OF AGREEMENT..........................7 2.3 CAPITALIZATION, ETC.............................................7 2.4 SEC FILINGS; FINANCIAL STATEMENTS...............................9 2.5 ABSENCE OF CHANGES..............................................9 2.6 PROPRIETARY ASSETS.............................................11 2.7 CONTRACTS......................................................12 2.8 LIABILITIES....................................................15 2.9 COMPLIANCE WITH LEGAL REQUIREMENTS.............................15 2.10 GOVERNMENTAL AUTHORIZATIONS....................................15 2.11 TAX MATTERS....................................................15 2.12 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS......................17 2.13 ENVIRONMENTAL MATTERS..........................................21 2.14 LEGAL PROCEEDINGS; ORDERS......................................22 2.15 VOTE REQUIRED..................................................22 2.16 NON-CONTRAVENTION; CONSENTS....................................22 2.17 FAIRNESS OPINION...............................................23 2.18 FINANCIAL ADVISOR..............................................23 2.19 TAKEOVER STATUTES; NO DISCUSSIONS..............................23 2.20 INFORMATION TO BE SUPPLIED.....................................23 2.21 FOREIGN CORRUPT PRACTICES ACT..................................24 2.22 DISCLOSURE.....................................................24 SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.25 3.1 DUE ORGANIZATION; SUBSIDIARIES.................................25 2 3.2 AUTHORITY; BINDING NATURE OF AGREEMENT.........................25 3.3 CAPITALIZATION, ETC............................................26 3.4 SEC FILINGS; FINANCIAL STATEMENTS..............................26 3.5 LIABILITIES....................................................27 3.6 NON-CONTRAVENTION; CONSENTS....................................27 3.7 INTERIM OPERATIONS OF MERGER SUB...............................28 3.8 INFORMATION TO BE SUPPLIED.....................................28 3.9 ABSENCE OF CHANGES.............................................28 3.10 LEGAL PROCEEDINGS; ORDERS......................................28 3.11 VOTE REQUIRED..................................................29 3.12 DISCLOSURE.....................................................29 SECTION 4. CERTAIN COVENANTS OF THE COMPANY AND PARENT.............29 4.1 ACCESS AND INVESTIGATION.......................................29 4.2 OPERATION OF THE COMPANY'S BUSINESS............................30 4.3 NO SOLICITATION BY THE COMPANY.................................33 4.4 NO SOLICITATION OF EMPLOYEES PRIOR TO CLOSE....................35 4.5 INTEGRATION PLAN...............................................35 SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES.....................35 5.1 REGISTRATION STATEMENT AND PROXY STATEMENT FOR SHAREHOLDER APPROVAL................................................35 5.2 COMPANY SHAREHOLDERS' MEETING AND PARENT STOCKHOLDERS' MEETING.................................................36 5.3 REGULATORY APPROVALS...........................................38 5.4 ASSUMPTION OF STOCK OPTIONS; EMPLOYEE STOCK PURCHASE PLAN; 401(K) PLAN; EMPLOYEES AND BENEFITS.....................38 5.7 PUBLIC DISCLOSURE..............................................42 5.8 TAX MATTERS....................................................42 5.9 RESIGNATION OF DIRECTORS.......................................43 5.10 LISTING........................................................43 5.11 TAKEOVER LAWS; ADVICE OF CHANGES...............................43 5.12 FORM S-8; SECTION 16...........................................43 5.13 AFFILIATES.....................................................44 5.14 LITIGATION.....................................................44 5.15 KEY EMPLOYEES..................................................44 SECTION 6. CONDITIONS TO THE MERGER................................45 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION..........................45 6.2 ADDITIONAL CONDITIONS TO PARENT'S AND MERGER SUB'S OBLIGATIONS.............................................46 6.3 ADDITIONAL CONDITIONS TO THE COMPANY'S OBLIGATIONS.............47 SECTION 7. TERMINATION.............................................48 3 7.1 TERMINATION....................................................48 7.2 EFFECT OF TERMINATION..........................................49 7.3 EXPENSES; TERMINATION FEES.....................................49 SECTION 8. MISCELLANEOUS PROVISIONS................................51 8.1 AMENDMENT......................................................51 8.2 WAIVER.........................................................51 8.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES..................51 8.4 ENTIRE AGREEMENT; COUNTERPARTS.................................52 8.5 APPLICABLE LAW; JURISDICTION...................................52 8.6 ATTORNEYS' FEES................................................52 8.7 ASSIGNABILITY; THIRD PARTY BENEFICIARIES.......................52 8.8 NOTICES........................................................53 8.10 COOPERATION....................................................54 8.11 CONSTRUCTION...................................................54 EXHIBIT A CERTAIN DEFINITIONS EXHIBIT B-1 COMPANY SHAREHOLDERS SIGNING VOTING aGREEMENTS EXHIBIT B-2 FORM OF COMPANY SHARHEOLDER VOTING AGREEMENTS EXHIBIT B-3 PARENT STOCKHOLDER SIGNING VOTING AGREEMENTS EXHIBIT B-4 FORM OF PARENT STOCKHOLDER VOTING AGREEMENT EXHIBIT C AGREEMENT OF MERGER EXHIBIT D FORM OF WAIVER AGREEMENT EXHIBIT E FORM OF AFFILIATE AGREEMENT EXHIBIT F FORM OF NONCOMPETITION AGREEMENT EXHIBIT G FORM OF RELEASE EXHIBIT H FORM OF STIPULATION 4 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into on October 30, 2002, by and among SAFENET, INC., a Delaware corporation ("Parent"), SAPPHIRE ACQUISITION CORP., a California corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and CYLINK CORPORATION a California corporation (the "Company"). Certain capitalized terms used in this Agreement are defined in Exhibit A. RECITALS WHEREAS, Parent, Merger Sub and the Company intend to effect a merger (the "Merger") of Merger Sub into the Company in accordance with this Agreement and the General Corporation Law of the State of California (the "CGCL"). Upon consummation of the Merger, Merger Sub will cease to exist, and the Company will become a wholly owned subsidiary of Parent; WHEREAS, it is intended that the Merger shall qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, the Board of Directors of the Company (i) has determined that the Merger is in the best interests of the Company and its shareholders, (ii) has approved and adopted this Agreement, the Agreement of Merger, the Merger and the other transactions contemplated by this Agreement, and (iii) has determined to recommend that the shareholders of the Company adopt and approve this Agreement, the Agreement of Merger and the Merger; WHEREAS, the Board of Directors of Parent (i) has determined that the Merger is in the best interests of the Parent and its stockholders, (ii) has approved and adopted this Agreement, the Agreement of Merger, the Merger and the other transactions contemplated by this Agreement, and (iii) has determined to recommend that the stockholders of Parent adopt and approve this Agreement, the Agreement of Merger, the Merger and certain of the transactions contemplated by this Agreement; WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to Parent and Merger Sub to enter into this Agreement, Parent and certain shareholders of the Company listed on Exhibit B-1 (collectively, the "Shareholders") are entering into Voting Agreements in the form of Exhibit B-2 (the "Voting Agreements") pursuant to which the Shareholders have agreed to vote all of their shares of Company Common Stock in favor of the adoption and approval of this Agreement, the Agreement of Merger and the Merger and to take certain other actions in connection with the transactions contemplated hereby; and WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to the Company to enter into this Agreement, Company and the stockholder of the Parent listed in Exhibit B-3 are entering into a voting agreement in the form of Exhibit B-4 pursuant to which such stockholder has agreed to vote all of his shares of Parent Common Stock in favor of the adoption and approval of this Agreement, Agreement of Merger and the Merger and to take certain other actions in connection with the transactions contemplated hereby. AGREEMENT 1 The parties to this Agreement, intending to be legally bound, agree as follows: SECTION 1. THE MERGER 1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with and into the Company, and the separate existence of Merger Sub shall cease. The Company will continue as the surviving corporation in the Merger (the "Surviving Corporation") and will be a wholly owned subsidiary of Parent. 1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in this Agreement and the applicable provisions of the CGCL. 1.3 CLOSING; EFFECTIVE TIME. The consummation of the Merger (the "Closing") shall take place at the offices of Venable, Baetjer and Howard, LLP, 1800 Mercantile Bank & Trust Building, 2 Hopkins Plaza, Baltimore, Maryland 21201 at 10:00 a.m. on the date (the "Closing Date"), which date shall be no later than the second business day after the last to be satisfied or waived of the conditions set forth in Section 6 shall have been so satisfied or waived (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions), or such other date as Parent and the Company shall mutually agree; and provided that the Closing shall in no event take place prior to December 6, 2002. Subject to the provisions of this Agreement, the agreement of merger in the form attached hereto as Exhibit C (the "Agreement of Merger"), together with such other documents as may be required by the relevant provision of the CGCL, shall be duly executed on behalf of the Company and simultaneously with the Closing delivered to the Secretary of State of the State of California for filing. The Merger shall become effective upon the date and time of the filing of the Agreement of Merger with the Secretary of State of the State of California or such other date and time as may be mutually agreed upon by Parent and the Company and set forth in the Agreement of Merger (the "Effective Time"). 1.4 ARTICLES OF INCORPORATION AND BYLAWS. Unless otherwise determined by Parent prior to the Effective Time: (a) The articles of incorporation of the Surviving Corporation shall be amended and restated immediately after the Effective Time to conform to the articles of incorporation of the Merger Sub as in effect immediately prior to the Effective Time, except the name of the Surviving Corporation shall be "Crystal Corporation." 2 (b) The bylaws of the Surviving Corporation shall be amended and restated immediately after the Effective Time to conform to the bylaws of the Merger Sub as in effect immediately prior to the Effective Time. (c) The directors and officers of the Surviving Corporation immediately after the Effective Time shall be the respective individuals who are directors and officers of Merger Sub immediately prior to the Effective Time. 1.5 CONVERSION OF SHARES IN THE MERGER. (a) At the Effective Time, by virtue of the Merger and without any further action on the part of Parent, Merger Sub, the Company or any shareholder of the Company, subject to Sections 1.5(b) and 1.5(c), each share of Company Common Stock then issued and outstanding, other than Excluded Shares, if any, shall be converted into 0.05 of a share (the "Exchange Ratio") of Parent Common Stock, plus (B) any cash in lieu of fractional shares of Parent Common Stock as set forth in Section 1.5(c) (collectively, the "Merger Consideration"). (b) If, between the date of this Agreement and the Effective Time, the outstanding shares of Company Common Stock or Parent Common Stock are changed into a different number or class of shares by reason of any stock split, stock dividend, reverse stock split, reclassification, recapitalization or other like change, decrease or increase, then the Exchange Ratio shall be appropriately adjusted to the extent the record date for any such event is between the date of this Agreement and the Effective Time, so as to provide holders of Company Common Stock and Parent the same economic effect as contemplated by this Agreement prior to such stock split, reverse split, stock dividend, reorganization, recapitalization, or like change, decrease or increase. (c) No fractional shares of Parent Common Stock shall be issued in connection with the Merger, and no certificates or scrip for any such fractional shares shall be issued. Any holder of Company Common Stock who would otherwise be entitled to receive a fraction of a share of Parent Common Stock in the Merger (after aggregating all fractional shares of Parent Common Stock issuable to such holder) shall, in lieu of such fraction of a share and upon surrender of such holder's Company Stock Certificate(s) (as defined in Section 1.6), be paid in cash the dollar amount (rounded to the nearest whole cent), without interest equal to the product obtained by multiplying (A) that fraction of a share of Parent Common Stock to which such shareholder is entitled (after aggregating all fractional shares of Parent Common Stock issuable to such holder) by (B) the closing sales price of one (1) share of Parent Common Stock as reported on the Nasdaq National Market (as reported in the Wall Street Journal or, if not reported therein, any other authoritative source) on the trading day immediately preceding the Closing Date. (d) Notwithstanding anything to the contrary contained in this Agreement, to the extent that the provisions of Chapter 13 of the CGCL are or prior to the Effective Time may become applicable to the Merger by reason of a delisting of the Company Common Stock from the Nasdaq National Market, any shares of Company Common Stock that, as of the Effective Time, are or may become "dissenting shares" within the meaning of Section 1300(b) of the CGCL shall not be converted into or represent the right to receive Parent Common Stock in accordance with Section 1.5(a) (or cash in lieu of fractional shares in accordance with Section 1.5(c)), and the holder or holders of such shares shall be entitled only to such rights as may be granted to such holder or 3 holders in Chapter 13 of the CGCL; provided, however, that if the status of any such shares as "dissenting shares" shall not be perfected, or if any such shares shall lose their status as "dissenting shares", then, as of the later of the Effective Time or the time of the failure to perfect such status or the loss of such status, such shares shall automatically be converted into and shall represent only the right to receive (upon the surrender of the certificate or certificates representing such shares) Parent Common Stock in accordance with Section 1.5(a) (and cash in lieu of fractional shares in accordance with Section 1.5(c)). (e) The Company shall give Parent (i) prompt notice of any written demand received by the Company prior to the Effective Time to require the Company to purchase shares of Company Common Stock pursuant to Chapter 13 of the CGCL and of any other demand, notice or instrument delivered to the Company prior to the Effective Time pursuant to the CGCL, and (ii) the opportunity to participate in all negotiations and proceedings with respect to any such demand, notice or instrument upon the reasonable request of Parent. The Company shall not make any payment or settlement offer prior to the Effective Time with respect to any such demand unless Parent shall have consented in writing to such payment or settlement offer, which consent shall not be unreasonably withheld, and provided that Company may make payments or offers to settle such demands provided that (A) such settlement or payment is made in respect of "dissenting shares"; (B) the per share payment or settlement amount does not exceed the closing market price per share of the Company's Common Stock as of the last day of trading prior to the announcement of the Merger; and (C) the "dissenting shares" so settled do not exceed 10% of the outstanding Company Common Stock. 1.6 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time: (a) all shares of Company Common Stock ("Shares") outstanding immediately prior to the Effective Time shall automatically be canceled and retired and shall cease to exist, and all holders of certificates representing Shares that were outstanding immediately prior to the Effective Time shall cease to have any rights as shareholders of the Company; and (b) the stock transfer books of the Company shall be closed with respect to all Shares outstanding immediately prior to the Effective Time. No further transfer of any such Shares shall be made on such stock transfer books after the Effective Time. If, after the Effective Time, a valid certificate previously representing any Shares (a "Company Stock Certificate") is presented to the Exchange Agent (as defined in Section 1.7) or to the Surviving Corporation or Parent, such Company Stock Certificate shall be canceled and shall be exchanged as provided in Section 1.7. 1.7 EXCHANGE OF CERTIFICATES. (a) Prior to the Closing Date, Parent shall select a reputable bank or trust company to act as exchange agent in the Merger (the "Exchange Agent"). Within one (1) business day after the Effective Time, Parent shall deposit with the Exchange Agent, for the benefit of the holders of Shares, (i) certificates representing the shares of Parent Common Stock issuable pursuant to this Section 1, and (ii) cash sufficient to make payments in lieu of fractional shares in accordance with Section 1.5(c) (such cash and shares of Parent Common Stock, together with any dividends or distributions with respect thereto, being referred to as the "Exchange Fund"). 4 (b) Parent shall use its commercially reasonable best efforts to cause the Exchange Agent to mail, as soon as reasonably practicable after the Effective Time (but in any event within one (1) business day after the Effective Time), to the record holders of Company Stock Certificates (i) a letter of transmittal in customary form and containing such provisions as Parent and the Company may reasonably specify (including a provision confirming that delivery of Company Stock Certificates shall be effected, and risk of loss and title to Company Stock Certificates shall pass, only upon delivery of such Company Stock Certificates to the Exchange Agent), and (ii) instructions for use in effecting the surrender of Company Stock Certificates in exchange for the Merger Consideration. Upon surrender of a Company Stock Certificate to the Exchange Agent for exchange, together with a duly executed letter of transmittal and such other documents as may be reasonably required by the Exchange Agent or Parent, (A) the holder of such Company Stock Certificate shall be entitled to receive in exchange therefor the Merger Consideration, and (B) the Company Stock Certificate so surrendered shall be immediately canceled. Until surrendered as contemplated by this Section 1.7, each Company Stock Certificate shall be deemed, from and after the Effective Time, to represent only the right to receive the Merger Consideration and any distribution or dividend the record date for which is after the Effective Time. If any Company Stock Certificate shall have been lost, stolen or destroyed, Parent may, in its discretion and as a condition precedent to the issuance of any certificate representing Parent Common Stock, require the owner of such lost, stolen or destroyed Company Stock Certificate to provide an appropriate affidavit and, in the case of any shareholder of the Company holding at least 1,000 shares of Company Common Stock to deliver a bond (in such reasonable sum as Parent may reasonably direct), as indemnity against any claim that may be made against the Exchange Agent, Parent or the Surviving Corporation with respect to such Company Stock Certificate, and, in such case, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Company Stock Certificates the Merger Consideration. Parent shall use commercially reasonable best efforts to cause the Exchange Agent to issue shares of Parent Common Stock to the Company shareholders of record within three (3) business days after each such shareholder surrenders their Company Stock Certificate(s) and/or a duly executed letter of transmittal to the Exchange Agent. (c) No dividends or other distributions declared or made with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Company Stock Certificate with respect to the shares of Parent Common Stock that such holder has the right to receive in the Merger until such holder surrenders such Company Stock Certificate in accordance with this Section 1.7 (at which time such holder shall be entitled, subject to the effect of applicable escheat or similar Legal Requirements, to receive all such dividends and distributions, without interest). (d) Any portion of the Exchange Fund that remains undistributed to holders of Company Stock Certificates as of the date one (1) year after the Effective Time shall be delivered to Parent upon demand, and any holders of Company Stock Certificates who have not theretofore surrendered their Company Stock Certificates to the Exchange Agent in accordance with this Section 1.7 shall thereafter look only to Parent for satisfaction of their claims for the Merger Consideration to which such holder is entitled pursuant hereto, provided, however, that the failure of any Company shareholder to deliver its Company Stock Certificates and/or a duly executed letter of transmittal to the Exchange Agent within such year period shall in no way affect such Company shareholder's right to receive Merger Consideration in exchange for such Company Common Stock hereunder. 5 (e) Each of the Exchange Agent, Parent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement to any holder or former holder of Company Common Stock such amounts as may be required to be deducted or withheld therefrom under the Code or any provision of state, local or foreign tax law or under any other applicable Legal Requirement. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid. (f) Neither Parent nor the Surviving Corporation shall be liable to any holder or former holder of Company Common Stock or to any other Person with respect to any shares of Parent Common Stock (or dividends or distributions with respect thereto), or for any cash amounts, delivered to any public official in compliance with any applicable abandoned property law, escheat law or similar Legal Requirement. 1.8 FURTHER ACTION. If, at any time after the Effective Time, any further action is determined by Parent to be necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full right, title and possession of and to all rights and property of Merger Sub and the Company, the officers and directors of the Surviving Corporation and Parent shall be fully authorized (in the name of Merger Sub, in the name of the Company and otherwise) to take such action. Parent, Merger Sub and Surviving Corporation also shall take such further actions as may be necessary or desirable to ensure that the Exchange Agent sends out the letters of transmittal to the shareholders of the Company and issues certificates representing Parent Common Stock to such shareholders in accordance with Section 1.7. 1.9 TAX CONSEQUENCES. For federal income tax purposes, the Merger is intended to constitute a reorganization within the meaning of Section 368 of the Code. The parties to this Agreement hereby adopt this Agreement as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as specifically set forth in the Disclosure Schedule delivered by the Company to Parent and Merger Sub prior to the execution and delivery of this Agreement (the "Company Disclosure Schedule") and referenced in the Company Disclosure Schedule to the section(s) of this Section 2 to which such disclosure applies, the Company hereby represents and warrants to Parent and Merger Sub that: 2.1 DUE ORGANIZATION; SUBSIDIARIES. Each of the Acquired Corporations (as defined below) is a corporation duly organized, validly existing and in good standing under the Legal Requirements of the jurisdiction of 6 its incorporation. Each of the Acquired Corporations has all necessary power and authority: (a) to conduct its business in the manner in which its business is currently being conducted; (b) to own and use its assets in the manner in which its assets are currently owned and used; and (c) to perform its material obligations under all Company Material Contracts. Each of the Acquired Corporations is qualified to do business as a foreign corporation, and is in good standing, under the Legal Requirements of all jurisdictions where the failure to be so qualified would have a Material Adverse Effect on the Acquired Corporations. The Company has delivered to Parent accurate and complete copies of the articles of incorporation, bylaws and other charter or organizational documents of each of the Acquired Corporations, including all amendments thereto (collectively, the "Company Organization Documents"). The Company has no Subsidiaries, except for the corporations identified in Schedule 2.1 of the Company Disclosure Schedule. The Company and each of its Subsidiaries identified in Schedule 2.1 of the Company Disclosure Schedule are collectively referred to herein as the "Acquired Corporations". None of the Acquired Corporations has any equity interest or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any Entity, other than the Acquired Corporations' interests in their Subsidiaries identified in Schedule 2.1 of the Company Disclosure Schedule. 2.2 AUTHORITY; BINDING NATURE OF AGREEMENT. The Company has all requisite corporate power and authority to enter into and to perform its obligations under this Agreement. This Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to (a) Legal Requirements of general application relating to bankruptcy, insolvency and the relief of debtors, and (b) rules of law governing specific performance, injunctive relief and other equitable remedies. The Company hereby represents that its Board of Directors, at a meeting duly called and held on or prior to the date hereof, has by unanimous vote (i) determined that the Merger is in the best interests of the Company, (ii) approved and adopted the this Agreement, the Agreement of Merger, the Merger and the other transactions contemplated by this Agreement, and (iii) resolved to recommend that the shareholders of the Company adopt and approve this Agreement, the Agreement of Merger and the Merger (the unanimous recommendations referred to in this clause (iii) are collectively referred to in this Agreement as the "Company Recommendations"). 2.3 CAPITALIZATION, ETC. (a) The authorized capital stock of the Company consists of: 55,000,000 shares of Company Common Stock and 5,000,000 shares of Company Preferred Stock. As of October 29, 2002, 33,157,621 shares of Company Common Stock have been issued and are outstanding and no shares of the Company Preferred Stock have been issued and are outstanding. All of the outstanding shares of Company Common Stock have been duly authorized and validly issued, and are fully paid and nonassessable. There are no shares of Company Common Stock held by any of the Company's Subsidiaries. None of the outstanding shares of Company Common Stock is entitled or subject to any preemptive right, right of participation, right of maintenance or any similar right or subject to any right of first refusal in favor of the Company. There is no Contract to which the Company is a party and, to the Company's knowledge, there is no Contract between other Persons, relating to the voting or registration of, or restricting any Person from purchasing, selling, pledging or otherwise disposing of (or granting any option or similar right with respect to), any shares of Company 7 Common Stock, other than the Voting Agreements. None of the Acquired Corporations is under any obligation, or is bound by any Contract pursuant to which it may become obligated, to repurchase, redeem or otherwise acquire any outstanding shares of Company Common Stock. (b) As of October 29, 2002: (i) 12,424,000 shares of Company Common Stock are reserved for issuance pursuant to stock options under the Amended and Restated 1994 Flexible Stock Incentive Plan, as amended, of which options to acquire 5,844,523 shares of Company Common Stock are outstanding; (ii) 2,000,000 shares of Company Common Stock are reserved for issuance pursuant to stock options under the 2001 Non-Qualified Stock Incentive Plan, of which options to acquire 874,083 shares of Company Common Stock are outstanding; (iii) 300,000 shares of Company Common Stock are reserved for issuance pursuant to stock options under the ATM Technology Center 2000 Stock Option Plan, of which options to acquire 213,000 shares of Company Common Stock are outstanding; (iv) 410,000 shares of Company Common Stock are reserved for issuance pursuant to stock options under the Cylink/ARL 1997 Stock Option Plan, of which options to acquire 119,784 shares of Company Common Stock are outstanding; and (v) 322,430 shares of Company Common Stock remain available for purchase pursuant to the 2000 Employee Stock Purchase Plan of the Company (the "ESPP Plan"). The outstanding stock options listed above under the Amended and Restated 1994 Flexible Stock Incentive Plan include options exercisable for 1,000 shares of Company Common Stock that were granted under the 1987 Non-Qualified Stock Option Plan, with the shares reserved for such options having been rolled into the Amended and Restated 1994 Flexible Stock Incentive Plan. Stock options granted by the Company pursuant to the Company Stock Option Plans, as well as any stock options granted outside of the Company Stock Option Plans, are referred to collectively herein as "Company Options." Schedule 2.3(b) of the Company Disclosure Schedule sets forth the following information with respect to each Company Option outstanding as of October 29, 2002: (i) the particular plan pursuant to which such Company Option was granted; (ii) the name of the optionee; (iii) the number of shares of Company Common Stock subject to such Company Option; (iv) the current exercise price of such Company Option; (v) the date on which such Company Option was granted; (vi) the extent to which such Company Option is vested and exercisable as of the date of this Agreement; (vii) the vesting schedule of such Company Option including any acceleration of vesting upon a change in control of the Company; (viii) the expiration date of the Company Option; and (ix) the period of time following termination of employment during which the Company Option may be exercised if not expired. The Company has delivered to Parent accurate and complete copies of all stock option plans pursuant to which the Company has granted Company Options, and the forms of all stock option agreements evidencing such options. There have been no repricings of any Company Options through amendments, cancellation and reisssuance or other means during the current or prior two calendar years. (c) Except as set forth in Section 2.3(a) or Section 2.3(b) above, as of the date of this Agreement, there is no: (i) outstanding subscription, option, call, warrant or right (whether or not currently exercisable) to acquire any shares of the capital stock or other securities of any of the Acquired Corporations; (ii) outstanding security, instrument or obligation that is or may become convertible into or exchangeable for any shares of the capital stock or other securities of any of the Acquired Corporations; (iii) rights agreement, shareholder rights plan (or similar plan commonly referred to as a "poison pill") or Contract under which any of the Acquired Corporations are or may become obligated to sell or otherwise issue any shares of its capital stock or any other securities; or (iv) current investigation by the Company of any condition or circumstance that the Company reasonably believes would give rise to or provide a basis for the assertion of a claim by any Person to 8 the effect that such Person is entitled to acquire or receive any shares of capital stock or other securities of any of the Acquired Corporations (items (i) through (iv) above, collectively, "Company Stock Rights"). (d) All outstanding shares of Company Common Stock, all outstanding Company Options and all outstanding shares of capital stock of each Subsidiary of the Company have been issued and granted in compliance with (i) all applicable securities laws and other applicable Legal Requirements, and (ii) all requirements set forth in applicable Contracts. All of the outstanding shares of capital stock of each of the Company's Subsidiaries have been duly authorized and are validly issued, are fully paid and nonassessable and are owned beneficially and of record by the Company, free and clear of any Encumbrances. 2.4 SEC FILINGS; FINANCIAL STATEMENTS. (a) All registration statements, proxy statements and other statements, reports, schedules, forms (including exhibits thereto) and other documents filed by the Company with the SEC since January 1, 1999 (the "Company SEC Documents") have been made available to Parent. All statements, reports, schedules, forms, exhibits and other documents required to have been filed by the Company with the SEC since January 1, 1999 have been so filed. As of their respective dates (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such amendment or superseding filing): (i) each of the Company SEC Documents complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be); and (ii) none of the Company SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements (including related notes, if any) contained in the Company SEC Documents (the "Company Financial Statements"): (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods covered (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC, and except that the unaudited financial statements may not have contained footnotes and were subject to normal and recurring year-end adjustments which were not, or are not reasonably expected to be, individually or in the aggregate, material in amount); and (iii) fairly presented in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of the respective dates thereof and the consolidated results of operations and cash flows of the Company and its consolidated subsidiaries for the periods covered thereby. For purposes of this Agreement, "Company Balance Sheet" means that consolidated balance sheet of the Company and its consolidated subsidiaries as of June 30, 2002 set forth in the Company's Quarterly Report on Form 10-Q filed with the SEC and the "Company Balance Sheet Date" means June 30, 2002. 2.5 ABSENCE OF CHANGES. Except as set forth on Schedule 2.5 of the Disclosure Schedule, since the Company Balance Sheet Date (provided, that after the date hereof, nothing listed below shall be deemed to 9 prohibit the Company from conducting its business as permitted pursuant to Section 4.2 hereof and any actions taken by Company pursuant to Section 4.2 or upon written request of Parent shall not be a breach of this Section 2.5): (a) each of the Acquired Corporations has operated its respective business in all material respects in the ordinary course and consistent with past practices; (b) except for facts, events, circumstances or conditions which exist or have occurred which are reasonably attributable to general economic conditions or general conditions affecting similarly situated corporations in the same industry as the Acquired Corporations, there has not been any event that has had a Material Adverse Effect on the Acquired Corporations, and no fact, event, circumstance or condition exists or has occurred that could reasonably be expected to have a Material Adverse Effect on the Acquired Corporations; (c) none of the Acquired Corporations has (i) declared, accrued, set aside or paid any dividend or made any other distribution in respect of any shares of capital stock; (ii) repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities; (iii) sold, issued or granted, or authorized the issuance of, (A) any capital stock or other security (except for Company Common Stock issued upon the valid exercise of outstanding Company Options), (B) any option, warrant or right to acquire any capital stock or any other security (except for Company Options outstanding on the date hereof or issued in accordance with Section 4.2), or (C) any instrument convertible into or exchangeable for any capital stock or other security; (iv) made any capital expenditure which, when added to all other capital expenditures made on behalf of the Acquired Corporations since the Company Balance Sheet Date, exceeds $150,000 in the aggregate; (v) made any material Tax election; (vi) commenced or settled any Legal Proceeding; or (vii) entered into or consummated any transactions with any affiliate; (d) none of the Acquired Corporations has (i) sold or otherwise disposed of, or acquired, leased, licensed, waived or relinquished any material right or other material asset to, from or for the benefit of, any other Person except for rights or other assets sold, disposed of, acquired, leased, licensed, waived or relinquished in the ordinary course of business and consistent with past practice; (ii) mortgaged, pledged or subjected to any lien any of their respective property, business or assets, except for purchase money or similar security interests granted in connection with the purchase of equipment or supplies in the ordinary course of business in an amount not exceeding $100,000 in the aggregate; (iii) entered into or amended any lease of real property or material personal property (whether as lessor or lessee); or (iv) canceled or compromised any debt or claim other than accounts receivable in the ordinary course of business consistent with past practice; (e) none of the Acquired Corporations has (i) amended or waived any of its material rights under, or permitted the acceleration of vesting under, any provision of any of the Company Employee Plans or any provision of any agreement or Company Stock Option Plan evidencing any outstanding Company Option; (ii) established or adopted any Company Employee Plan; (iii) caused or permitted any Company Employee Plan to be amended in any material respect; or (iv) paid any bonus or made any profit-sharing or similar payment to, or materially increased the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers, employees, consultants or agents; 10 (f) there has been no material labor trouble (including any work slowdown, stoppage or strike) involving the Acquired Corporations or any material change in any of their respective personnel or the terms and conditions of the employment of such personnel; (g) none of the Acquired Corporations has made any change in (i) their respective methods of accounting or accounting practices or (ii) their respective pricing policies or payment or credit practices or failed to pay any creditor any amount owed to such creditor when due or granted any extensions or credit other than in the ordinary course of business consistent with past practice; (h) none of the Acquired Corporations has terminated or closed any material facility, business or operation; (i) none of the Acquired Corporations has made any loan, advance or capital contributions to, or any other investment in, any Person, except for travel and payroll advances made to employees in the ordinary course of business which are disclosed on Schedule 2.5(i); (j) none of the Acquired Corporations has written up or written down any of its respective material assets other than has been disclosed in subsequent financial reports or other filings made by the Company pursuant to the Securities Act or the Exchange Act; (k) there has been no loss, destruction or damage to any material item of property of the Acquired Corporations, whether or not insured, which has had or could reasonably be expected to have a Material Adverse Effect on the Acquired Corporations; and (l) none of the Acquired Corporations has entered into any contractual obligation to do any of the things referred to elsewhere in this Section 2.5. 2.6 PROPRIETARY ASSETS. (a) Schedule 2.6(a) of the Company Disclosure Schedule sets forth all U.S. and foreign patents, patent applications, trademarks, trademark applications, copyright registrations and copyright applications owned by any of the Acquired Corporations. Each Acquired Corporation has good, valid and marketable title to, or has a valid right to use, license or otherwise exploit, all of the Acquired Corporation Proprietary Assets necessary for the conduct of such Acquired Corporation's business as presently conducted, free and clear of all Encumbrances, except for any lien for current taxes not yet due and payable. None of the Acquired Corporations have developed jointly with any other Person any Acquired Corporation Proprietary Asset with respect to which such other Person has any rights. There is no Company Material Contract (with the exception of end user license agreements and software and maintenance agreements in the forms similar in all material respects to the forms previously delivered by the Company to Parent) pursuant to which any Person has any right (whether or not currently exercisable) to use, license or otherwise exploit any Acquired Corporation Proprietary Asset owned or exclusively licensed by any of the Acquired Corporations. (b) (i) To the Company's knowledge, all Acquired Corporation Proprietary Assets owned by any of the Acquired Corporations are valid and enforceable; (ii) all Acquired Corporation Proprietary Assets owned by any of the Acquired Corporations are subsisting and in 11 effect; (iii) to the Company's knowledge, none of the Acquired Corporation Proprietary Assets owned by any of the Acquired Corporations and no Proprietary Asset that is currently being developed by any of the Acquired Corporations (either by itself or with any other Person) infringes or misappropriates any Proprietary Asset owned or used by any other Person; (iv) (iv) to the knowledge of the Company, none of the products or services that are or have been designed, created, developed, assembled, performed, manufactured or sold by any of the Acquired Corporations is infringing, misappropriating or making any unlawful or unauthorized use of any Proprietary Asset owned or used by any other Person, and, to the knowledge of the Company, none of such products or services has at any time infringed, misappropriated or made any unlawful or unauthorized use of any Proprietary Asset owned or used by any other Person; (v) none of the Acquired Corporations has received any written notice or other communication of any actual, alleged, possible or potential infringement, misappropriation or unlawful or unauthorized use of, any Proprietary Asset owned or used by any other Person, (vi) to the Company's knowledge, the operation of the business of each Acquired Corporation as it currently is conducted does not infringe or misappropriate or make any unlawful or unauthorized use of any Proprietary Asset of any other Person; and (vii) to the Company's knowledge, no other Person is infringing, misappropriating or making any unlawful or unauthorized use of, and no Proprietary Asset owned or used by any other Person infringes or conflicts with, any Acquired Corporation Proprietary Asset owned by the Acquired Corporations. None of the Acquired Corporations has (A) except with respect to the Company Material Contracts and end user license agreements and software and maintenance agreements in the forms which are the same in all material respects to the forms previously delivered by the Company to Parent, licensed any of the Acquired Corporation Proprietary Assets to any Person, or (B) entered into any covenant not to compete or any Contract limiting its ability to exploit fully any Acquired Corporation Proprietary Assets owned or exclusively licensed by such Acquired Corporation. (c) Each Acquired Corporation has taken all reasonable steps that are required to protect such Acquired Corporation's rights in confidential information and trade secrets of the Acquired Corporation or provided by any other person to the Acquired Corporation. Without limiting the foregoing, each Acquired Corporation has, and enforces, a policy requiring each employee, consultant and contractor to execute a proprietary information and confidentiality agreement, substantially in the forms attached to the Company Disclosure Schedule as Schedule 2.6(c), and all current and former employees, consultants and contractors of such Acquired Corporation have executed such an agreement. (d) The Acquired Corporation Proprietary Assets owned by the Acquired Corporations do not contain any shareware, open source code or freeware. The Company has used commercially reasonable efforts to prohibit the public disclosure of any of its source code. 2.7 CONTRACTS. (a) For purposes of this Agreement, each of the following shall be deemed to constitute a "Company Material Contract" which Company Material Contracts are listed on Schedule 2.7 and copies of which have been made available to Parent: (i) any Acquired Corporation Contract that is required by the rules and regulations of the SEC to be filed as an exhibit to the Company SEC Documents; 12 (ii) any Acquired Corporation Contract relating to the employment of any employee, and any Contract pursuant to which any of the Acquired Corporations is or may become obligated to make any severance, termination, bonus or relocation payment or any other payment (other than payments in respect of salary) in excess of $20,000, to any current or former employee or director; (iii) any Acquired Corporation Contract relating to the acquisition, transfer, development, sharing or license of any material Proprietary Asset (except for any Acquired Corporation Contract pursuant to which (A) any material Proprietary Asset is licensed to the Acquired Corporations under any third party software license generally available for sale to the public, or (B) any material Proprietary Asset is licensed by any of the Acquired Corporations to any Person on a non-exclusive basis); (iv) any Acquired Corporation Contract which provides for indemnification of any current or former officer, director or employee; (v) any Acquired Corporation Contract creating or relating to any partnership or joint venture or any sharing of revenues, profits, losses, costs or liabilities; (vi) any Acquired Corporation Contract that involves the payment or expenditure of in excess of $50,000 that may not be terminated by the applicable Acquired Corporation (without penalty) within sixty (60) days after the delivery of a termination notice by the applicable Acquired Corporation; (vii) any Acquired Corporation Contract contemplating or involving (A) the payment or delivery of cash or other consideration in an amount or having a value in excess of $100,000 in the aggregate, or (B) the performance of services having a value in excess of $100,000 in the aggregate; (viii) any Government Contract (A) creating or relating to the creation of any Encumbrance with respect to any asset owned or used by any Acquired Corporation having a value in excess of $50,000; (B) involving or incorporating any liability, obligation, guaranty, pledge, performance or completion bond, indemnity (other than customary intellectual property indemnities for hardware and software sold by any Acquired Corporation), right of contribution or surety arrangement, any of which obligations involve or may reasonably be expected to involve an Acquired Corporation obligation in excess of $50,000 per year; or (C) contemplating or involving (1) the payment or delivery of cash or other consideration in an amount or having a value in excess of $50,000 in the aggregate, or (2) the performance of services having a value in excess of $50,000 in the aggregate; and (ix) any Acquired Corporation Contract imposing any restriction on the right or ability of any Acquired Corporation to (A) compete with any other Person, (B) acquire any material product or other material asset or any services from any other Person, sell any material product or other material asset to or perform any services for any other Person or transact business or deal in any other manner with any other Person, or (C) develop or distribute any material technology. 13 (x) any other Acquired Corporation Contract, if a breach of such Acquired Corporation Contract would have a Material Adverse Effect on the Acquired Corporations by itself, and specifically excluding any Acquired Corporation Contract which would have been disclosed under (ii) or (vi)-(viii) above, but for the thresholds set forth in such subsections. (b) (i) As against the Company, each Company Material Contract is valid and in full force and effect, and is enforceable in accordance with its terms subject to (A) Legal Requirements of general application relating to bankruptcy, insolvency and the relief of debtors, and (B) rules of law governing specific performance, injunctive relief and other equitable remedies; and (ii) to the knowledge of Company, as against the other parties thereto, each Company Material Contract is valid and in full force and effect, and enforceable in accordance with its terms subject to (A) Legal Requirements of general application relating to bankruptcy, insolvency and the relief of debtors, and (B) rules of law governing specific performance, injunctive relief and other equitable remedies. (c) None of the Acquired Corporations has materially violated or breached, or committed any material default under, any Company Material Contract. To the Company's knowledge, no other Person has violated or breached, or committed any default under, any Company Material Contract. (d) To the Company's knowledge, no event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) could reasonably be expected to (i) result in a material violation or material breach of any provision of any Company Material Contract by any of the Acquired Corporations; (ii) give any Person the right to declare a default or exercise any material remedy under any Company Material Contract; (iii) give any Person the right to receive or require a rebate, chargeback, penalty or change in delivery schedule under any Company Material Contract; (iv) give any Person the right to accelerate the maturity or performance of any Company Material Contract; or (v) give any Person the right to cancel or terminate, or modify in any material respect, any Company Material Contract. (e) To the knowledge of the Acquired Corporations, with respect to Government Contracts, there is, as of the date hereof, no (i) civil fraud or criminal investigation by any Governmental Body, (ii) Acquired Corporation, or current officers, employees or affiliates thereof, currently suspended or debarred, or suspension of debarment proceeding (or equivalent proceeding) against any of the Acquired Corporations, their current officers, employees or affiliates, (iii) request by any Governmental Body for a contract price adjustment based on a claimed disallowance by any Governmental Body or at the direction of any Governmental Body or written notice of defective pricing other than as reserved for on the Company Financial Statements in accordance with GAAP, (iv) claim or equitable adjustment by the Acquired Corporations against the U.S. Government or any third party in excess of $50,000 in the aggregate, (v) written notice challenging, questioning or disallowing any cost(s) in excess of $50,000 in the aggregate, (vi) notice of contract termination, cure notice or show cause notice, or (vii) violation of any statutory, regulatory or contractual provision that could result in any fine or penalty of a criminal, civil or administrative nature. 14 2.8 LIABILITIES. None of the Acquired Corporations has any material accrued, contingent or other liabilities of any nature, either matured or unmatured (whether or not required to be reflected in financial statements prepared in accordance with GAAP and whether due or to become due), except for: (a) liabilities that are reflected in the "Liabilities" column of the Company Balance Sheet and the notes thereto, and (b) normal and recurring liabilities that have been incurred by the Acquired Corporations since the Company Balance Sheet Date in the ordinary course of business and consistent with past practices that, individually or in the aggregate, are not material in nature. 2.9 COMPLIANCE WITH LEGAL REQUIREMENTS. Each of the Acquired Corporations is, and at all times since September 30, 1997, has been, in compliance in all material respects with all applicable Legal Requirements. Since September 30, 1997, none of the Acquired Corporations has received any written notice or, to the Company's knowledge, other communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any Legal Requirement. 2.10 GOVERNMENTAL AUTHORIZATIONS. Each of the Acquired Corporations holds all Governmental Authorizations necessary to enable such Acquired Corporation to conduct its business in the manner in which such business is currently being conducted except where the failure to hold such Governmental Authorizations would not be reasonably likely to have a Material Adverse Effect on the Acquired Corporations. All such Governmental Authorizations are valid and in full force and effect. Each Acquired Corporation is, and at all times since September 30, 1997 has been, in compliance in all material respects with the terms and requirements of such Governmental Authorizations. Since September 30, 1997, none of the Acquired Corporations has received any notice or other communication from any Governmental Body regarding (a) any actual or possible violation of or failure to comply with any term or requirement of any Governmental Authorization, or (b) any actual or possible revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization. 2.11 TAX MATTERS. (a) The Acquired Corporations have paid or reserved for all Taxes, due and payable by any of them (whether or not shown on any Tax Return) for or with respect to all periods up to and including the date hereof (without regard to whether or not such Taxes are or were disputed), whether or not shown on any Tax Return. (b) Each of the Acquired Corporations has filed on a timely basis (taking into account any extensions of time an Acquired Corporation was granted) all material Tax Returns that it was required to file except for Tax Returns for the year which includes the Closing Date. All such Tax Returns were accurate and complete in all material respects. None of the Acquired Corporations currently is the beneficiary of any extension of time within which to file any Tax Return. No claim that has not been resolved has ever been made to an Acquired Corporation by an authority in a 15 jurisdiction where the Acquired Corporations do not file Tax Returns that any one of them is or may be subject to taxation by that jurisdiction. None of the Acquired Corporations has given any currently effective waiver of any statute of limitations in respect of Taxes or agreed to any currently effective extension of time with respect to a Tax assessment or deficiency. There are no security interests on any of the assets of any of the Acquired Corporations that arose in connection with any failure (or alleged failure) to pay any Tax (other than liens for Taxes not yet due and payable). (c) The Acquired Corporations have withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party except for such withholding or payments to be made at or before Closing. (d) The Company is not currently investigating any facts or circumstances which the Company reasonably believes could give rise to an expectation that any relevant taxing authority may assess additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any liability for Taxes of the Acquired Corporations either (i) claimed or raised by any authority in writing or (ii) as to which such Acquired Corporation has knowledge based upon personal contact with any agent of such authority. Schedule 2.11(d) to the Company Disclosure Schedule sets forth a complete and accurate list of all federal and state income and franchise Tax Returns filed by or on behalf of the Acquired Corporations with any Governmental Body with respect to the taxable periods of the Acquired Corporations ended on or after December 31, 2001 (the "Company Tax Returns"); and Schedule 2.11(d) to the Company Disclosure Schedule indicates those Company Tax Returns that have been audited and indicates those Company Tax Returns that currently are the subject of an audit. (e) The unpaid Taxes of the Acquired Corporations (i) did not, as of the date of the most recent Company Financial Statements, exceed the aggregate reserve for Tax Liability (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth in the Company Balance Sheet and (ii) will not, as of the Closing Date, exceed that aggregate reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Acquired Corporations in filing their Tax Returns. (f) None of the Acquired Corporations is a party to any Tax allocation or sharing agreement. None of the Acquired Corporations has made any distribution of any "Controlled Corporation" as that term is defined in Section 355(a)(1) of the Code. None of the Acquired Corporations (i) has been a member of an "affiliated group," as defined in Section 1504(a) of the Code, filing a consolidated federal income Tax Return other than an affiliated group the common parent of which is the Company or (ii) has any Liability for the Taxes of any Person (other than any of the Acquired Corporations) under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract or otherwise. (g) None of the Acquired Corporations have filed a consent under Section 341(f) of the Code concerning collapsible corporations. None of the acquired corporations will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period or portion thereof ending after the Closing Date as a result of any (i) change in method of accounting for a taxable period ending on or prior to the Closing Date under Section 481 of the Code, (ii) closing agreement as described in Section 7121 of the Code executed on or prior to 16 the Closing Date, (iii) deferred intercompany gain on any excess loss account described in regulations under Section 1502 of the Code or (iv) installment sale or open transaction disposition made on or prior to the Closing Date. 2.12 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS. (a) Schedule 2.12(a) of the Company Disclosure Schedule lists (i) all employee pension benefit plans (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), (ii) all employee welfare benefit plans (as defined in Section 3(1) of ERISA), (iii) all other pension, bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance, fringe benefits and other similar benefit plans (including, without limitation, any fringe benefit under Section 132 of the Code and any foreign plans), programs, Contracts, arrangements or policies (including a specific identification of those which contain change of control provisions or pending change of control provisions), and (iv) any employment, executive compensation or severance agreements (including a specific identification of those which contain change of control provisions or pending change of control provisions), whether written or otherwise, as amended, modified or supplemented, of any Acquired Corporation or any other Entity (whether or not incorporated) which is a member of a controlled group which includes any of the Acquired Corporations or which is under common control with any of the Acquired Corporations within the meaning of Sections 414(b), (c), (m) or (o) of the Code or Section 4001(a) (14) or (b) of ERISA ("ERISA Affiliates") (all such plans, programs, Contracts, agreements, arrangements or policies as described in this Section 2.12 (a) shall be collectively referred to as the "Company Employee Plans") for the benefit of, or relating to, any former or current employee, officer or director (or any of their beneficiaries) of any Acquired Corporation or any other ERISA Affiliate. The Company has made available to Parent, in a reasonable time, place and manner, true and complete copies of (i) each such written Company Employee Plan (or a written description of any Company Employee Plan which is not written) and all related trust agreements, insurance and other contracts (including policies), summary plan descriptions, summaries of material modifications, registration statements (including all attachments), prospectuses and communications distributed to plan participants, (ii) the three most recent annual reports on Form 5500 series, with accompanying schedules and attachments, filed with respect to each Company Employee Plan required to make such a filing, (iii) the most recent actuarial valuation for each Company Employee Plan subject to Title IV of ERISA, (iv) the latest reports which have been filed with the U.S. Department of Labor with respect to each Company Employee Plan required to make such filing, (v) the most recent favorable determination letters issued for each Company Employee Plan and related trust which is intended to be qualified under Section 401(a) of the Code (and, if an application for such determination is pending, a copy of the application for such determination), and (vi) financial and other information regarding current and projected liabilities, if any, with respect to each Company Employee Plan for which the filings described in (ii), (iii) or (iv) above are not required under ERISA. (b) (i) None of the Company Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person (other than continuation coverage to the extent required by law, whether pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 or otherwise), (ii) none of the Company Employee Plans is a "Multiple Employer Welfare 17 Arrangement" (as defined in Section 3(40) of ERISA), or a "Multiemployer Plan" (as defined in Section 3(37) of ERISA), (iii) no party in interest or disqualified person (as defined in Section 3(14) of ERISA and Section 4975 of the Code, respectively) has at any time engaged in a transaction with respect to any Company Employee Plan which could subject any of the Acquired Corporations, directly or indirectly, to any material tax, material penalty or other material liability for prohibited transactions under ERISA or Section 4975 of the Code; (iv) no fiduciary of any Company Employee Plan has breached any of the responsibilities or obligations imposed upon fiduciaries under Title I of ERISA which shall subject any of the Acquired Corporations, directly or indirectly, to any material penalty or liability for breach of fiduciary duty; (v) all Company Employee Plans have been established and maintained in accordance with their terms and have been operated in substantial compliance with all applicable Legal Requirements; (vi) all Company Employee Plans may by their terms be amended and/or terminated at any time without the consent of any other Person subject to applicable Legal Requirements and the terms of each Company Employee Plan; (vii) each of the Acquired Corporations has performed all obligations required to be performed by them under, and are not in any material respect in default under or in violation of, any Company Employee Plan; (viii) none of the Acquired Corporations has any knowledge of any default or violation by any other Person with respect to any of the Company Employee Plans; (ix) each Company Employee Plan which is intended to be qualified under Section 401(a) of the Code is the subject of a favorable determination letter from the Internal Revenue Service as to such plan's qualified status under Section 401(a) of the Code (or comparable letter, such as an opinion or notification letter as to the form of plan adopted by one or more Acquired Corporations) or has time remaining under applicable Treasury guidance to seek such a determination, and nothing has occurred to the knowledge of the Company since the issuance of such letter (or could reasonably be expected to occur) which might impair such favorable determination or otherwise impair the qualified status of such plan; (x) no Acquired Corporation is currently subject to any penalty or tax with respect to any Company Employee Plan under Section 502(i) of ERISA or 4975 through 4980 F of the Code, or has any outstanding liability for any such penalty or tax which is not otherwise reserved for or reflected on the Company Financial Statements; and (xi) all contributions required to be made or reserved, and all premiums required to be paid by the Acquired Corporations, as appropriate, with respect to any Company Employee Plan pursuant to the terms of the Company Employee Plan, any Legal Requirements or any collective bargaining agreement, have been made, paid or reserved on or before their due dates (including any extensions thereof). (c) None of the Acquired Corporations or any other ERISA Affiliate currently maintains, sponsors or participates in, or within the last five years has maintained, sponsored or participated in, any "Employee Benefit Plan" (as defined in Section 3(3) of ERISA) that is subject to Section 412 of the Code or Title IV of ERISA. (d) The consummation of the transactions contemplated by this Agreement will not cause or result in an increase in the amount of compensation or benefits or accelerate the vesting or timing of payment of any benefits or compensation payable in respect of any former or current employee, independent contractor or consultant (or any of their beneficiaries) of any of the Acquired Corporations. (e) There are no Legal Proceedings pending or, to the knowledge of the Company, threatened in respect of or relating to any Company Employee Plan. 18 (f) The Company is not currently investigating any facts or circumstances which the Company reasonably believes could be expected to give rise to any such Legal Proceeding (other than routine, uncontested benefit claims) in respect of or relating to any Company Employee Plan. (g) (i) None of the Acquired Corporations has ever maintained an employee stock ownership plan (within the meaning of Section 4975(e)(7) of the Code) or any other Company Employee Plan that invests in Company capital stock; (ii) since August 23, 2002, none of the Acquired Corporations has proposed or agreed to any increase in benefits under any Company Employee Plan (or the creation of new benefits) or change in employee coverage which would materially increase the expense of maintaining any Company Employee Plan; and (iii) except as disclosed on Schedule 2.12(g), no person will be entitled to any severance benefits or the acceleration of any options under the terms of any Company Employee Plan as a result of the consummation of the transactions contemplated by this Agreement. (h) To the extent that any Company Employee Plan is required by any applicable Legal Requirement to be covered by any bond (e.g., fidelity or otherwise) in any particular amount, each such Company Employee Plan required to be covered by such bond has at all times been covered by such bond in accordance and compliance with all applicable Legal Requirements. (i) (i) There are no controversies pending or, to the knowledge of the Company, threatened, between any of the Acquired Corporations and any of their respective foreign or domestic former or current employees, officers, directors, independent contractors or consultants (or any of their beneficiaries); (ii) there is no labor strike, dispute, slowdown, work stoppage or lockout actually pending or, to the knowledge of the Company, threatened against or affecting any Acquired Corporation; (iii) none of the Acquired Corporations is a party to or bound by any collective bargaining or similar agreement with any labor organization, or work rules or practices agreed to with any labor organization or employee association applicable to employees of the Acquired Corporations, (iv) none of the employees of the Acquired Corporations are represented by any labor organization and none of the Acquired Corporations have any knowledge of any current union organizing activities among the employees of the Acquired Corporations, (v) the Acquired Corporations have each at all times been in compliance in all material respects with all applicable Legal Requirements respecting employment, employment and labor practices, and with any collective bargaining agreements (both foreign and domestic), (vi) there is no unfair labor practice charge or complaint against any of the Acquired Corporations pending or, to the knowledge of the Company, threatened before the National Labor Relations Board or any similar state or foreign agency, (vii) there is no grievance or arbitration proceeding arising out of any collective bargaining agreement or other grievance procedure relating to the Acquired Corporations pending, or to the knowledge of the Company, threatened, before the National Labor Relations Board or any similar state or foreign agency, (viii) to the knowledge of the Company, neither the Occupational Safety and Health Administration nor any corresponding state agency is threatening to file any citation, and there are no pending citations, relating to the Acquired Corporations, and (ix) there are no pending or, to the knowledge of the Company, threatened claims by any current or former employee of the Acquired Corporations or any employment-related claims or investigations by any Governmental Authority, including any charges to the Equal Employment Opportunity Commission or state employment practice agency, investigations regarding compliance with federal, state or local wage and hour Legal Requirements, audits by the Office of Federal Contractor Compliance Programs, 19 complaints of sexual harassment or any other form of unlawful harassment, discrimination, or retaliation. (j) No Company Employee Plan is a Voluntary Employees' Beneficiary Association within the meaning of Section 501(c)(9) of the Code. (k) All Welfare Plans and the related trusts that are "group health plans" as defined under the respective provision comply with and have been administered in substantial compliance with the health care continuation-coverage requirements under Section 4980B(f) of the Code (formerly Section 162(k) of the Code), Sections 601 through 607 of ERISA, and all final Treasury regulations under Section 4890B of the Code explaining those requirements, and all other applicable Legal Requirements regarding continuation and/or conversion coverage and with Code Section 4980D and ERISA Sections 701 through 734. (l) Set forth on Schedule 2.12(l) is a list of all employees of each Acquired Corporation as of the date of the Agreement. Schedule 2.12(l) also contains, with respect to each such employee: (i) the employee's base salary, whether such employee is a bonus or commission employee, an approximate calculation of any bonus payable to such employee as of the date of this Agreement, and any commission schedule applicable to such employee; (ii) accrued paid time off payable to such employee as of October 29, 2002; (iii) any amounts payable to any employee as salary, severance or bonus which were withheld under an austerity program for fiscal years ending before the date of this Agreement, and (iv) any severance that would be due upon termination with or without cause of such employee. Copies of all loans and commission plans have been made available to Parent. (m) None of the Acquired Corporations has effectuated (i) a "plant closing" (as defined in the Worker Adjustment and Retraining Notification Act) ("WARN Act") affecting any site of employment or one or more facilities or operating units within any site of employment or facility of any of the Acquired Corporations or (ii) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or facility of the Acquired Corporations, nor has the Acquired Corporations been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar state or local law. (n) None of the Acquired Corporations has received a written notice, or to the Company's knowledge any other communication, of any violation of any immigration and naturalization laws relating to employment and employees and all of the Acquired Corporations have properly completed and maintained in all material respects all applicable forms (including, but not limited to, I-9 forms) and each of the Acquired Corporations is in compliance in all material respects with all such immigration and naturalization Legal Requirements and there are no citations, investigations, administrative proceedings or formal complaints of violations of immigration or naturalization Legal Requirements pending or, to the knowledge of the Company threatened, before the Immigration and Naturalization Service of any federal, state or administrative agency or court against or involving the Acquired Corporations. 20 2.13 ENVIRONMENTAL MATTERS. (a) Each of the Acquired Corporations is in compliance in all material respects with all applicable Environmental Laws, which compliance includes the possession by each of the Acquired Corporations of all material permits and other Governmental Authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof. None of the Acquired Corporations has received any written notice or, to its knowledge other communication, whether from a Governmental Body, citizens group, employee or otherwise, that alleges that any of the Acquired Corporations is not in compliance with any Environmental Law. The Company is not currently investigating any circumstances that the Company reasonably believes could prevent or interfere with the material compliance by any of the Acquired Corporations with any Environmental Law. To the Company's knowledge, no current or prior owner of any property leased or controlled by any of the Acquired Corporations has received any written notice or other communication, whether from a Governmental Body, citizens group, employee or otherwise, that alleges that such current or prior owner or any of the Acquired Corporations is not in compliance with any Environmental Law. To the Company's knowledge, all property that is or has been leased to, controlled by or used by the Acquired Corporations, and all surface water, groundwater and soil associated with or adjacent to such property is in clean and healthful condition and is free of any material environmental contamination of any nature and none of the Acquired Corporations has any liability for any clean-up or remediation under any Environmental Law. To the Company's knowledge, all property that is leased to, controlled by or used by any of the Acquired Corporations is free of any friable asbestos or asbestos-containing material. (b) For purposes of this Section 2.13: (i) "Environmental Law" shall mean any foreign, federal, state or local statute, law, rule, regulation, ordinance, treaty, code, policy or rule of common law now or from time to time in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, natural resources, health, safety or Hazardous Materials, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; the Resource Conservation and Recovery Act, as amended; the Hazardous Materials Transportation Act, as amended; the Clean Water Act, as amended; the Toxic Substances Control Act, as amended; the Clean Air Act, as amended; the Safe Drinking Water Act, as amended; the Atomic Energy Act, as amended; the Federal Insecticide, Fungicide and Rodenticide Act, as amended; and the Occupational Safety and Health Act, as amended; and (ii) "Hazardous Materials" shall mean (A) petroleum or petroleum products (including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas useable for fuel, or any mixture thereof), polychlorinated biphenyls (PCBs), asbestos or asbestos containing materials, urea formaldehyde foam insulation, and radon gas; (B) any substance defined as or included in the definition of "hazardous substance," "hazardous waste," "hazardous material," "extremely hazardous waste," "restricted hazardous waste," "waste," "special waste," "toxic substance," "toxic pollutant," "contaminant" or "pollutant," or words of similar import, under any applicable Environmental Law (as defined below); (C) infectious materials and other regulated medical wastes; (D) any substance which is toxic, explosive, corrosive, flammable, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental 21 agency; and (E) any other substance, material or waste the presence of which requires investigation or remediation under any Environmental Law. 2.14 LEGAL PROCEEDINGS; ORDERS. Except as set forth in the Company SEC Documents, there is no pending material Legal Proceeding and, to the Company's knowledge, no Person has threatened to commence any material Legal Proceeding, that involves any of the Acquired Corporations or any of the material assets owned or used by any of the Acquired Corporations; and there is no Order, writ, injunction, judgment or decree to which any of the Acquired Corporations, or any of the material assets owned or used by any of the Acquired Corporations, is subject. 2.15 VOTE REQUIRED. The affirmative vote of the holders of a majority of the shares of Company Common Stock outstanding on the record date for the Company Shareholders' Meeting is the only vote of the holders of any class or series of the Company's capital stock necessary to adopt this Agreement and otherwise approve the Merger. 2.16 NON-CONTRAVENTION; CONSENTS. Neither the execution, delivery or performance of this Agreement nor the consummation of the Merger, or any of the other transactions contemplated by this Agreement, will directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with or result in a violation of any of the provisions of the Company Organization Documents or any resolution adopted by the shareholders, the Board of Directors or any committee of the Board of Directors of any of the Acquired Corporations; (b) contravene, conflict with or result in a violation of, or give any Governmental Body the right to challenge the Merger or any of the other transactions contemplated by this Agreement or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order, writ, injunction, judgment or decree to which any of the Acquired Corporations, or any of the material assets owned or used by any of the Acquired Corporations, is subject; (c) contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by any of the Acquired Corporations or is otherwise material to the business of any of the Acquired Corporations or to any of the assets owned or used by any of the Acquired Corporations; or (d) contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Company Material Contract, or give any Person the right to (i) declare a default or exercise any remedy under any Company Material Contract, (ii) a rebate, chargeback, penalty or change in delivery schedule under any Company Material Contract, (iii) accelerate the maturity or performance of any Company Material Contract, or (iv) cancel, terminate 22 or modify any term of any Company Material Contract, except in each case to the extent that such violations, breaches or defaults would not result in a Material Adverse Effect. Except as may be required by the Exchange Act, the CGCL and the rules and regulations of the Nasdaq Stock Market (as such rules and regulations relate to the Registration Statement and the Proxy Statement), and such filings as may be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR") none of the Acquired Corporations was, is or will be required to make any filing with or give any notice to, or obtain any Consent from, any Person in connection with (x) the execution, delivery or performance of this Agreement, or (y) the consummation of the Merger or any of the other transactions contemplated by this Agreement, except in each case, where the failure to obtain any Consent would not, individually or in the aggregate, have a Material Adverse Effect on the Acquired Corporations. 2.17 FAIRNESS OPINION. The Company's Board of Directors has received the written opinion of First Analysis Securities Corporation, financial advisor to the Company, as of the date of this Agreement, to the effect that the consideration to be received by the shareholders of the Company in the Merger is fair to the shareholders of the Company from a financial point of view. The Company will furnish an accurate and complete copy of said opinion to Parent. 2.18 FINANCIAL ADVISOR. Except with respect to First Analysis Securities Corporation, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or any of the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of any of the Acquired Corporations. The Company has furnished to Parent accurate and complete copies of all agreements under which any such fees, commissions or other amounts have been paid or may become payable and all indemnification and other agreements related to any such engagement. 2.19 TAKEOVER STATUTES; NO DISCUSSIONS No Takeover Laws are applicable to the Merger, this Agreement or any of the transactions contemplated hereby. As of the date of this Agreement, none of the Acquired Corporations, and no Representative of any of the Acquired Corporations, is engaged, directly or indirectly, in any discussions or negotiations with any other Person relating to any Company Acquisition Proposal. 2.20 INFORMATION TO BE SUPPLIED. None of the information supplied or to be supplied by or on behalf of the Company for inclusion or incorporation by reference in the Registration Statement will, at the time the Registration Statement is filed with the SEC or becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which 23 they are made, not misleading. None of the information supplied or to be supplied by or on behalf of the Company for inclusion or incorporation by reference in the Proxy Statement will, at the time the Proxy Statement is mailed to the shareholders of the Company or at the time of the Company Shareholders' Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. The Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations promulgated by the SEC thereunder. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Merger Sub that is contained in the foregoing documents. 2.21 FOREIGN CORRUPT PRACTICES ACT. Neither the Company, any other Acquired Corporation, any of the Acquired Corporation's officers, directors, nor, to the Company's knowledge, any employees or agents (or shareholders), distributors, representatives or other persons acting on the express, implied or apparent authority of any Acquired Corporation, have paid, given or received or have offered or promised to pay, give or receive, any bribe or other unlawful payment of money or other thing of value, any unlawful discount, or any other unlawful inducement, to or from any person or Governmental Body in the United States or elsewhere in connection with or in furtherance of the business of any of the Acquired Corporations (including, without limitation, any unlawful offer, payment or promise to pay money or other thing of value (a) to any foreign official, political party (or official thereof) or candidate for political office for the purposes of influencing any act, decision or omission in order to assist any Acquired Corporation in obtaining business for or with, or directing business to, any person, or (b) to any person, while knowing that all or a portion of such money or other thing of value will be offered, given or promised unlawfully to any such official or party for such purposes). Neither the business of the Company nor any other Acquired Corporation is in any manner dependent upon the making or receipt of such unlawful payments, discounts or other inducements. Neither the Company nor any other Acquired Corporation has otherwise taken any action that could cause the Company or any other Acquired Corporation to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, the regulations thereunder, or any applicable Legal Requirements of similar effect. 2.22 DISCLOSURE. Between the Company Balance Sheet Date and the date of this Agreement, no event has occurred which has not been disclosed to Parent which the Company would have been required to disclose in a registration statement for the offering of securities under the Securities Act. The representations and warranties of the Company contained in Section 2 of this Agreement (as modified by the Company Disclosure Schedule) do not contain any representation or warranty that is materially false or misleading with respect to any material fact, and the Company Disclosure Schedule does not omit to state any material fact necessary in order to make the representations and warranties of the Company contained in Section 2 of this Agreement (in the light of the circumstances under which such representations and warranties were or will be made or provided) not materially false or misleading. 24 SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Except as disclosed in the Disclosure Schedule delivered by Parent and Merger Sub to the Company prior to the execution and delivery of this Agreement (the "Parent Disclosure Schedule") and referenced in the Parent Disclosure Schedule to the section(s) of this Section 3 to which such disclosure applies, Parent and Merger Sub represent and warrant to the Company as follows: 3.1 DUE ORGANIZATION; SUBSIDIARIES. Parent is a corporation duly organized, validly existing and in good standing under the Legal Requirements of the State of Delaware. Merger Sub is a corporation duly organized, validly existing and in good standing under the Legal Requirements of the State of California. Each Subsidiary is an Entity duly organized, validly existing and in good standing under the Legal Requirements of its state of incorporation or formation. Each of Parent and Merger Sub has all necessary corporate power and authority to conduct its business in the manner in which its business is currently being conducted and to own and use its assets in the manner in which its assets are currently owned and used. Each of Parent and Merger Sub is qualified to do business as a foreign corporation, and is in good standing, under the Legal Requirements of all jurisdictions where the nature of its business requires such qualification and where the failure to be so qualified would have a Material Adverse Effect on Parent. Parent has made available to the Company accurate and complete copies of the certificate of incorporation and bylaws of each of Parent and Merger Sub, including all amendments thereto (collectively, the "Parent Organization Documents"). 3.2 AUTHORITY; BINDING NATURE OF AGREEMENT. Each of Parent and Merger Sub has all requisite corporate power and authority, subject to stockholder approval, to enter into and to perform its obligations under this Agreement. The Board of Directors of Parent (at a meeting duly called and held) has authorized and approved the execution, delivery and performance of this Agreement by Parent and approved the Merger. This Agreement constitutes the legal, valid and binding obligation of Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance with its terms, subject to (a) Legal Requirements of general application relating to bankruptcy, insolvency and the relief of debtors, and (b) rules of law governing specific performance, injunctive relief and other equitable remedies and (c) the approval of the stockholders of Parent. Parent hereby represents that its Board of Directors, at a meeting duly called and held on or prior to the date hereof, has by unanimous vote (i) determined that the Merger is in the best interests of Parent, (ii) approved and adopted this Agreement, the Agreement of Merger, the Merger and the other transactions contemplated by this Agreement, and (iii) resolved to recommend that the stockholders of Parent adopt and approve this Agreement, the Agreement of Merger, the Merger and the issueance of Parent Common Stock in accordance herewith (the unanimous recommendations referred to in this clause (iii) are collectively referred to in this Agreement as the "Parent Recommendations"). 25 3.3 CAPITALIZATION, ETC. (a) As of September 26, 2002, the authorized capital stock of Parent consists of: (i) 50,000,000 shares of Parent Common Stock and (ii) 500,000 shares of Parent Preferred Stock. As of September 26, 2002, 7,772,285 shares of Parent Common Stock have been issued and are outstanding, no shares of Parent Preferred Stock have been issued or are outstanding. No shares of Parent Common Stock are held in Parent's treasury. All of the outstanding shares of Parent Common Stock have been duly authorized and validly issued, and are fully paid and nonassessable. None of the outstanding shares of Parent Common Stock is entitled or subject to any preemptive right, right of participation, right of maintenance or any similar right or subject to any right of first refusal in favor of Parent. (b) All outstanding shares of Parent Common Stock and all outstanding shares of capital stock of each Subsidiary of Parent have been issued and granted in compliance with (i) all applicable securities laws and other applicable Legal Requirements, and (ii) all requirements set forth in applicable Parent Contracts. All of the outstanding shares of capital stock of each of the Subsidiaries of Parent have been duly authorized and are validly issued, are fully paid and nonassessable and are owned beneficially and of record by Parent, free and clear of any Encumbrances. The Parent Common Stock to be issued in the Merger will, when issued in accordance with the provisions of this Agreement, be validly issued, fully paid and nonassessable and in compliance with all applicable securities laws and other applicable Legal Requirements. The shares of Parent Common Stock to be issued upon exercise of Company Options assumed by Parent in connection with the Merger will, when issued, be issued and granted in compliance with (i) all applicable securities laws and other applicable Legal Requirements, and (ii) all requirements set forth in applicable Parent Contracts. (c) Parent owns directly all of the outstanding stock of Merger Sub. 3.4 SEC FILINGS; FINANCIAL STATEMENTS. (a) All registration statements, proxy statements and other statements, reports, schedules, forms (including exhibits) and other documents filed by Parent with the SEC since January 1, 1999 (the "Parent SEC Documents") are available to Company on EDGAR. All statements, reports, schedules, forms and other documents required to have been filed by Parent with the SEC since January 1, 1999 have been so filed. As of their respective dates (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such amendment or superseding filing): (i) each of the Parent SEC Documents complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be); and (ii) none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements (including any related notes) contained in the Parent SEC Documents (the "Parent Financial Statements"): (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with GAAP applied on a consistent basis throughout the periods covered (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as 26 permitted by Form 10-Q of the SEC, and except that the unaudited financial statements may not have contained footnotes and were subject to normal and recurring year-end adjustments which were not, or are not reasonably expected to be, individually or in the aggregate, material in amount), and (iii) fairly presented in all material respects the consolidated financial position of Parent and its consolidated subsidiaries as of the respective dates thereof and the consolidated results of operations and cash flows of Parent and its consolidated subsidiaries for the periods covered thereby. For purposes of this Agreement, "Parent Balance Sheet" means that consolidated balance sheet of the Company and its consolidated subsidiaries as of June 30, 2002 set forth in the Company's Quarterly Report on Form 10-Q filed with the SEC and the "Parent Balance Sheet Date" means June 30, 2002. 3.5 LIABILITIES. Neither of Parent nor any Subsidiary of Parent has any accrued, contingent or other liabilities of any nature, either matured or unmatured (whether or not required to be reflected in financial statements prepared in accordance with generally accepted accounting principles, and whether due or to become due), except for: (a) liabilities required to be identified as such in the "Liabilities" column of the Parent Balance Sheet, including the notes thereto; (b) normal and recurring liabilities that have been incurred by Parent and its Subsidiaries since the Parent Balance Sheet Date in the ordinary course of business and consistent with past practices that, individually or in the aggregate, have not had or could not reasonably be expected to have, a Material Adverse Effect on Parent; and (c) liabilities incurred under this Agreement. 3.6 NON-CONTRAVENTION; CONSENTS. Neither the execution, delivery or performance of this Agreement nor the consummation of the Merger or any of the other transactions contemplated by this Agreement, will directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with or result in a violation of any of the provisions of the Parent Organization Documents or any resolution adopted by the stockholders, the Board of Directors or any committee of the Board of Directors of Parent or any Subsidiary of Parent; or (b) contravene, conflict with or result in a violation of, or give any Governmental Body the right to challenge the Merger or any of the other transactions contemplated by this Agreement or to exercise any remedy or obtain any relief under, any Legal Requirement or any order, writ, injunction, judgment or decree to which Parent, or any of the material assets owned or used by Parent, is subject. Except as may be required by the Securities Act, the Exchange Act, and the rules and regulations of the Nasdaq Stock Market (as it relates to the approval of the Merger by stockholders of Parent and Registration Statement and the Proxy Statement), and such filings as may be required under HSR, none of Parent or any Subsidiary of Parent was, is or will be required to make any filing with or give any notice to, or obtain any Consent from, any Person in connection with (x) the execution, delivery or performance of this Agreement, or (y) the consummation of the Merger or any of the other transactions contemplated by this Agreement, except in each case, where the failure to 27 make any filing, give any notice or obtain any Consent would not have a Material Adverse Effect on Parent. 3.7 INTERIM OPERATIONS OF MERGER SUB. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, has engaged in no other business activities and has conducted its operations only as contemplated by this Agreement. 3.8 INFORMATION TO BE SUPPLIED. None of the information supplied or to be supplied by or on behalf of Parent for inclusion or incorporation by reference in the Registration Statement will, at the time the Registration Statement is filed with the SEC or becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. None of the information supplied or to be supplied by or on behalf of Parent for inclusion or incorporation by reference in the Proxy Statement will, at the time the Proxy Statement is mailed to the shareholders of the Company or at the time of the Company Shareholders' Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, Parent makes no representation or warranty with respect to any information supplied by the Company that is contained in the foregoing documents. 3.9 ABSENCE OF CHANGES. Since June 30, 2002 and except as set forth in any documents filed by Parent or any Subsidiary with the SEC since June 30, 2002: (a) Each of Parent and its Subsidiaries has operated its business in all material respects in the ordinary course and consistent with past practices; and (b) Except for facts, events, circumstances or conditions which exist or have occurred which are reasonably attributable to general economic conditions or general conditions affecting similarly situated corporations in the same industry as the Parent, there has not been any event that has had a Material Adverse Effect on Parent, and no fact, event, circumstance or condition exists or has occurred that could reasonably be expected to have a Material Adverse Effect on Parent. 3.10 LEGAL PROCEEDINGS; ORDERS. Except as set forth in the Parent SEC Documents, there is no pending material Legal Proceeding and, to the Parent's knowledge, no Person has threatened to commence any material Legal Proceeding, that involves any of Parent, the Merger Sub or any material subsidiary of Parent or any of the material assets owned or used by the same; and there is no Order, writ, injunction, 28 judgment or decree to which any of Parent, the Merger Sub or any material subsidiary of Parent, or any of the material assets owned or used by any of the same, is subject. 3.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of the shares of Parent Common Stock outstanding on the record date for the Parent Shareholders' Meeting is the only vote of the holders of any class or series of the Parent's capital stock necessary to approve the Merger and the issuance of Parent Common Stock as Merger Consideration pursuant to this Agreement and otherwise allow Parent to consummate the Merger as set forth herein. 3.12 DISCLOSURE. Between the Parent Balance Sheet Date and the date of this Agreement, no event has occurred which has not been disclosed to Company which Parent would have been required to disclose in a registration statement for the offering of securities under the Securities Act. The representations and warranties of Parent contained in Section 3 of this Agreement (as modified by the Parent Disclosure Schedule) do not contain any representation or warranty that is materially false or misleading with respect to any material fact, and the Parent Disclosure Schedule does not omit to state any material fact necessary in order to make the representations and warranties of Parent contained in Section 3 of this Agreement (in the light of the circumstances under which such representations and warranties were or will be made or provided) not materially false or misleading. SECTION 4. CERTAIN COVENANTS OF THE COMPANY AND PARENT 4.1 ACCESS AND INVESTIGATION. During the period from the date of this Agreement through the Effective Time unless this Agreement shall be terminated in accordance with Section 7 (the "Pre-Closing Period"), subject to applicable antitrust laws and regulations relating to the exchange of information, (a) the Company shall, and shall cause the respective Representatives of the Acquired Corporations to: (i) provide Parent and Parent's Representatives with reasonable access during normal business hours to the Acquired Corporations' Representatives, personnel and assets and to all existing books, records, Tax Returns, work papers and other documents and information relating to the Acquired Corporations; and (ii) provide Parent and Parent's Representatives with such copies of the existing books, records, Tax Returns, work papers and other documents and information relating to the Acquired Corporations, and with such additional financial, operating and other data and information regarding the Acquired Corporations, in each case, as Parent may reasonably request. Each party acknowledges that the Company and Parent have previously entered into a Mutual Nondisclosure Agreement dated July 5, 2001, as amended by an amendment dated July 5, 2002 which will continue in full force and effect in accordance with its terms. 29 4.2 OPERATION OF THE COMPANY'S BUSINESS. (a) During the Pre-Closing Period the Company shall: (i) ensure that each of the Acquired Corporations conducts its business and operations (A) in the ordinary course in accordance with past practices, and (B) in material compliance with all applicable Legal Requirements and the requirements of all Company Material Contracts; (ii) use reasonable efforts to ensure that each of the Acquired Corporations preserves intact its current business organization, keeps available the services of its current officers and employees and maintains its relations and goodwill at least as favorable as at the date of this Agreement with all suppliers, customers, distributors, landlords, creditors, licensors, licensees and other Persons having business relationships with the respective Acquired Corporations; (iii) provide all notices, assurances and support required by any Company Material Contract relating to any Proprietary Asset to prevent the occurrence of a condition under such Contract which would result in any transfer of a material Proprietary Asset or disclosure of material source code by any Acquired Corporation; and (iv) keep in full force and effect (with the same scope and limits of coverage) all insurance policies in effect as of the date of this Agreement covering all material assets of the Acquired Corporations. (b) During the Pre-Closing Period, except as set forth in Schedule 4.2(b) of the Company Disclosure Schedule, the Company shall not (without the prior written consent of Parent), and shall not permit any of the other Acquired Corporations to: (i) declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of capital stock or repurchase, redeem or otherwise reacquire any shares of capital stock or other securities; (ii) sell, issue, grant or authorize the issuance or grant of (A) any capital stock, other security (including the sale, transfer or grant of any treasury shares) or any obligation convertible or exchangeable for capital stock or (B) any Company Stock Right (except that, prior to the Effective Time, the Company may issue Company Common Stock upon the valid exercise of Company Options outstanding as of the date of this Agreement and in connection with issuances of shares previously authorized under the ESPP Plan); (iii) amend or waive any of its rights under, or accelerate the vesting under, any provision of any of the Company Stock Option Plans, any provision of any agreement evidencing any outstanding stock option or any restricted stock purchase agreement, or otherwise modify any of the terms of any outstanding option, warrant, or other security or any related Contract; (iv) amend or permit the adoption of any amendment to the Company Organization Documents, or effect or become a party to any Company Acquisition Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction; (v) form any Subsidiary or acquire any equity interest or other interest in any other Entity; (vi) make any capital expenditure to the extent such new capital expenditures exceed $200,000 in the aggregate; 30 (vii) enter into or become bound by, or permit any of the assets owned or used by it to become bound by, any Contract with obligations in excess of $100,000, or waive, release, or assign any rights or claims, or modify or terminate any Company Material Contract with obligations in excess of $100,000, except for standard purchase agreements with no minimum quantity requirements entered into in the ordinary course of business; (viii) acquire or agree to acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person (other than the purchase of assets from suppliers or vendors in the ordinary course of business); (ix) sell, lease, exchange, mortgage, pledge, transfer or otherwise subject to any Encumbrance or dispose of any of its assets, except for sales, dispositions or transfers in the ordinary course of business; (x) (A) incur any indebtedness for borrowed money or guarantee any such indebtedness of another Person, issue or sell any debt securities or warrants or other rights to acquire any debt securities, guarantee any debt securities of another Person, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any agreement having the economic effect of any of the foregoing, except for borrowings incurred in the ordinary course of business, or (B) make any loans, advances or capital contributions to, or investments in, any other person other than travel and payroll advances made to employees in the ordinary course of business; (xi) pay, discharge, settle or satisfy any claims, liabilities or obligations (whether absolute or contingent, matured or unmatured, known or unknown), other than the payments, discharges or satisfactions (A) of less than $75,000 or (B) in the ordinary course of business which are materially in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the Company Financial Statements or waive any material benefits of, or agree to modify in any material respect, any confidentiality, standstill or similar agreements to which any Acquired Company is a party; (xii) (A) except as set forth in Schedule 4.2.(b)(ii) increase in any manner the compensation or fringe benefits of, or pay any bonus to, any director, officer or employee; (B) grant any severance or termination pay (other than pursuant to the normal severance practices or existing agreements of the Company in effect on the date of this Agreement) to, or enter into any severance agreement with, any director, officer or employee, or enter into any employment agreement with any director, officer or employee or otherwise without the prior written consent of Parent; (C) establish, adopt, enter into or amend any Company Benefit Plan or other arrangement, except as may be required to comply with Applicable Legal Requirements; (D) pay any benefit not provided for under any Company Benefit Plan or other arrangement; (E) grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or Company Benefit Plan or other arrangement (including the grant of stock options, stock appreciation rights, stock-based or stock-related awards, performance units or restricted stock, or the removal of existing restrictions in any Company Benefit Plan or other arrangement or agreement or awards made thereunder); (F) take any action to fund prior to when due or in any other way secure the payment of compensation or 31 benefits under any agreement; or (G) hire or promote any director, officer or employee, or fire any employee without first giving Parent 24 hours prior notice and an opportunity to discuss the termination with the Company; (xiii) change any of its methods of accounting or accounting practices in any respect, except as required by GAAP; (xiv) make or rescind any material election relating to Taxes, settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes which would reasonably be expected to result in a Material Adverse Effect on the Acquired Corporations, or change any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the federal income tax returns; (xv) commence or settle any Legal Proceeding; (xvi) take any other material action outside the ordinary course of business or inconsistent with past practices; (xvii) except as otherwise disclosed in this Agreement or the Company Disclosure Schedule, or as otherwise directed by Parent or the terms of this Agreement, take, or permit the taking of any action, which could reasonably be expected to cause the vesting of any Company Options to be accelerated in accordance with the terms of any of the Company Stock Option Plans; (xviii) take, agree to take, or omit to take any action which would cause the Company not to be able to satisfy any of the conditions set forth in Section 6 prior to the Termination Date; or (xix) agree or commit to take any of the actions described in clauses (i) through (xviii) of this Section 4.2(b). The Parent shall respond promptly to a request by the Company for consent to take any action contemplated in this Section 4.2. (c) During the Pre-Closing Period, the Company shall promptly notify Parent in writing of: (i) the discovery by the Company of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes a material inaccuracy in any representation or warranty made by the Company in this Agreement; (ii) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that would cause or constitute a material inaccuracy in any representation or warranty made by the Company in this Agreement if (A) such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition, fact or circumstance, or (B) such event, condition, fact or circumstance had occurred, arisen or existed on or prior to the date of this Agreement; (iii) any material breach of any covenant or obligation of the Company; (iv) any employee who resigns, voluntarily terminates, or otherwise gives the Company notice of his intent to resign, or voluntarily terminate his employment with the Company; and (v) any event, condition, fact 32 or circumstance that would make the timely satisfaction of any condition set forth in Section 6 impossible or unlikely or that has had or could reasonably be expected to have a Material Adverse Effect on the Acquired Corporations. No notification given to Parent pursuant to this Section 4.2(c) shall limit or otherwise affect any of the representations, warranties, covenants or obligations of the Company contained in this Agreement. (d) During the Pre-Closing Period, Parent shall promptly notify the Company in writing of: (i) the discovery by Parent or Merger Sub of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes a material inaccuracy in any representation or warranty made by Parent or Merger Sub in this Agreement; (ii) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that would cause or constitute a material inaccuracy in any representation or warranty made by Parent in this Agreement if (A) such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition, fact or circumstance, or (B) such event, condition, fact or circumstance had occurred, arisen or existed on or prior to the date of this Agreement; (iii) any material breach of any covenant or obligation of Parent or Merger Sub; and (iv) any event, condition, fact or circumstance that would make the timely satisfaction of any condition set forth in Section 6 impossible or unlikely or that has had or could reasonably be expected to have a Material Adverse Effect on Parent. No notification given to the Company pursuant to this Section 4.2(d) shall limit or otherwise affect any of the representations, warranties, covenants or obligations of Parent or Merger Sub contained in this Agreement. 4.3 NO SOLICITATION BY THE COMPANY. (a) During the Pre-Closing Period, the Company shall not directly or indirectly, and shall not authorize or permit any of the other Acquired Corporations or any Representative of any of the Acquired Corporations directly or indirectly to, (i) take any action to solicit, initiate, induce or seek to facilitate the making, submission or announcement of any Company Acquisition Proposal, (ii) furnish any nonpublic information regarding any of the Acquired Corporations to any Person (other than Parent or Merger Sub) in connection with or in response to a Company Acquisition Proposal or an inquiry or indication of interest that the Company reasonably believes could be expected to lead to a Company Acquisition Proposal, (iii) engage in discussions or negotiations with any Person with respect to any Company Acquisition Proposal, (iv) approve, endorse or recommend any Company Acquisition Proposal, or (v) enter into any letter of intent or similar document or any Contract contemplating or otherwise relating to any Company Acquisition Transaction; provided, however, that this Section 4.3 shall not prohibit (A) the Company, or the Board of Directors of the Company, from furnishing nonpublic information regarding the Acquired Corporations to, or entering into discussions or negotiations with, any Person in response to a Company Superior Offer that is submitted to the Company by such Person (and not withdrawn) if (1) neither the Company nor any Representative of any of the Acquired Corporations shall have violated any of the restrictions set forth in this Section 4.3, (2) the Board of Directors of the Company concludes in good faith, after consultation with its outside legal counsel, that such action with respect to such Company Superior Offer is required to comply with the fiduciary duties of the Board of Directors of the Company to the Company shareholders under applicable Legal Requirements, and (3) the Board of Directors determines in good faith, after consultation with its outside legal counsel, that taking such action would be reasonably likely to lead to the consummation of a Company 33 Superior Offer, (4) the Company gives Parent prompt written notice (in any event, within 24 hours of receipt of any Company Acquisition Proposal) of the identity of such Person and of the Company's intention to furnish nonpublic information to, or enter into discussions with, such Person, and the Company receives from such Person an executed confidentiality agreement containing customary limitations on the use and disclosure of all nonpublic written and oral information furnished to such Person or any of such Person's Representatives by or on behalf of the Company, and (5) the Company furnishes such nonpublic information to such Person and to Parent at substantially the same time (to the extent such nonpublic information has not been previously furnished by the Company to Parent); or (B) the Company from complying with Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any Company Acquisition Proposal. Without limiting the generality of the foregoing, the Company acknowledges and agrees that any violation of any of the restrictions set forth in the preceding sentence by any Representative of any of the Acquired Corporations, whether or not such Representative is purporting to act on behalf of any of the Acquired Corporations, shall be deemed to constitute a breach of this Section 4.3 by the Company. (b) The Company shall promptly (and in no event later than twenty four (24) hours after receipt of any Company Acquisition Proposal, any indication of interest that the Company reasonably believes could result in a Company Acquisition Proposal, or any request for nonpublic information relating to any of the Acquired Corporations) advise Parent orally and in writing of such Company Acquisition Proposal, such indication of interest or request (including providing the identity of the Person making or submitting such Company Acquisition Proposal, indication of interest or request, and a summary of the material terms thereof, if the Company Acquisition Proposal is not in writing, or a copy of the Company Acquisition Proposal if it is in writing) that is made or submitted by any Person during the Pre-Closing Period. The Company shall keep Parent fully informed on a reasonably prompt basis with respect to the status of any such Company Acquisition Proposal, indication of interest or request and any modification or proposed modification thereto. (c) Upon the execution of this Agreement, the Company shall immediately cease and cause to be terminated any discussions existing as of the date of this Agreement with any Person (other than Parent) that relate to any Company Acquisition Proposal. (d) Except with respect to the execution of a definitive agreement with respect to a Company Superior Offer, the Company agrees not to release any Person (other than Parent) from or waive any provision of any confidentiality, "standstill" or similar agreement to which the Company is a party and will use its reasonable best efforts to enforce each such agreement at the request of Parent. (e) Notwithstanding anything in this Agreement to the contrary, the Board of Directors of the Company may withhold, withdraw or modify the Company Recommendations in a manner adverse to Parent if: (i) an unsolicited, bona fide offer is made to the Company by a third party for a Company Acquisition Transaction, and such offer is not withdrawn; (ii) the Company's Board of Directors determines in good faith, after consultation with its financial advisor, that such offer constitutes a Company Superior Offer and that such offer is reasonably likely to be consummated; (iii) following consultation with outside legal counsel, the Company's Board of Directors determines that the withdrawal or modification of such Company Recommendations is required to comply with the fiduciary duties of the Board of Directors of Company to the 34 shareholders of Company under applicable Legal Requirements; (iv) the Company Recommendations are not withdrawn or modified in a manner adverse to Parent at any time prior to three (3) business days after Parent receives written notice from the Company confirming that the Company's Board of Directors has determined that such offer is a Company Superior Offer, and (v) for a period of three (3) business days after notifying Parent of such determination, the Company, if requested by Parent, shall negotiate in good faith with Parent to make such adjustments to the terms and conditions of this Agreement as would enable the Board of Directors of the Company to continue to recommend the Merger on such adjusted terms. 4.4 NO SOLICITATION OF EMPLOYEES PRIOR TO CLOSE Without the prior written consent of the Company or Parent, as the case may be, during the Pre-Closing Period or prior to August 23, 2003, neither the Parent or Company, directly or indirectly, shall solicit for employment any employee of the other party, provided that the foregoing restriction shall not prevent Parent from employing any Company employees upon the consummation of this Merger or prevent either party from making general solicitations for employment or employing any person who either responds to such general solicitations or otherwise contacts such party on his or her own initiative without solicitation by such party in contravention of the above restrictions. 4.5 INTEGRATION PLAN The Parent shall direct its representatives no later than two (2) weeks subsequent to the date hereof to present as fully developled a plan as commercially reasonably possible with respect to the integration of the business of the Company with the Parent to the Company's management (the "Integration Plan"). The Integration Plan shall, at a minimum, identify (i) Parent's overall integration strategy, (ii) functional areas that are not critical to the initial integration period, (iii) integration initiatives and synergy identification by functional area, (iv) integration focus areas and (v) the integration management team that will provide centralized oversight and coordination of the Integration Plan. Parent and the Company shall cooperate and use their reasonable combined efforts to implement the Integration Plan prior to Closing. SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES 5.1 REGISTRATION STATEMENT AND PROXY STATEMENT FOR SHAREHOLDER APPROVAL. As soon as practicable following the execution of this Agreement, Parent and the Company shall jointly prepare, and Parent shall file with the SEC, a joint registration and proxy statement consisting of a proxy statement of the Company in connection with the Merger complying with applicable Legal Requirements and including the opinion of First Analysis Securities (the "Company Proxy Statement"), a proxy statement of Parent in connection with the Merger and issuance of Parent Common Stock in the Merger and complying with applicable Legal Requirements (the "Parent Proxy Statement") and a registration statement on Form S-4 (such registration statement, together with the amendments thereto being the "Registration Statement") for the offer 35 and sale of Parent Common Stock pursuant to the Merger and in which the Company Proxy Statement and the Parent Proxy Statement will be included as a prospectus. Each of the Company and Parent shall use commercially reasonable efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable after its filing. The Company and Parent will use reasonable efforts to cause the Company Proxy Statement to be mailed to the Company's shareholders, the Parent Proxy Statement to be mailed to the Parent's stockholders, as promptly as practicable after the Registration Statement is declared effective under the Securities Act. Parent shall also take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified or filing a general consent to service of process) required to be taken under any applicable state securities laws and other applicable Legal Requirements in connection with the issuance of Parent Common Stock in the Merger and the Company shall furnish all information concerning the Company and the holders of capital stock of the Company as may be reasonably requested in connection with any such action and the preparation, filing and distribution of the Company Proxy Statement. No filing of, or amendment or supplement to, or correspondence to the SEC or its staff with respect to, the Registration Statement or Parent Proxy Statement will be made by Parent, or with respect to the Company Proxy Statement will be made by the Company, without providing the other party a reasonable opportunity to review and comment thereon. Parent will advise the Company, promptly after it receives notice thereof, of the time when the Registration Statement has become effective or any supplement or amendment has been filed, the issuance of any stop order, the suspension of the qualification of the Parent Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Registration Statement or comments thereon and responses thereto or requests by the SEC for additional information. The Company will advise Parent, promptly after it receives notice thereof, of any request by the SEC for the amendment of the Company Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information. Parent will advise the Company, promptly after it receives notice thereof, of any request by the SEC for the amendment of the Registration Statement or the Parent Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information. If at any time prior to the Effective Time any information relating to the Company or Parent, or any of their respective affiliates, officers or directors, is discovered by the Company or Parent which should be set forth in an amendment or supplement to either the Registration Statement, the Company Proxy Statement or the Parent Proxy Statement, so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party which discovers such information shall promptly notify the other parties hereto and an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by applicable Legal Requirements, disseminated to the shareholders of the Company or the stockholders of Parent, as the case may be. 5.2 COMPANY SHAREHOLDERS' MEETING AND PARENT STOCKHOLDERS' MEETING. (a) Parent and the Company shall take all action necessary under all applicable Legal Requirements to call, give notice of and hold a meeting of the holders of Company Common Stock to vote on a proposal to adopt this Agreement, the Agreement of Merger and the Merger (the "Company Shareholders' Meeting"). The Company Shareholders' Meeting shall be held as soon 36 as reasonably practicable after the Registration Statement is declared effective under the Securities Act. Subject to Section 4.3, the Company shall use reasonable efforts to take all actions necessary or advisable to solicit proxies in favor of the Merger and shall ensure that all proxies solicited in connection with the Company Shareholders' Meeting are solicited in compliance with all applicable Legal Requirements. Once the Company Shareholders' Meeting has been called and noticed, the Company shall not postpone or adjourn the Company Shareholders' Meeting (other than for the absence of a quorum) without the consent of Parent. (b) The Company Proxy Statement shall include the Company Recommendations, and, subject to Section 4.3(e), the Company Recommendations shall not be withdrawn or modified in a manner adverse to Parent, and no resolution by the Board of Directors of the Company or any committee thereof to withdraw or modify the Company Recommendations in a manner adverse to Parent shall be adopted or proposed. (c) The Company's obligation to call, give notice of and hold the Company Shareholders' Meeting in accordance with Section 5.2(a) shall not be limited or otherwise affected by the commencement, disclosure, announcement or submission of any Company Superior Offer or other Company Acquisition Proposal, or by any withdrawal or modification of the Company Recommendations. (d) The Company and Parent shall cooperate with one another (i) in connection with the preparation of the Company Proxy Statement, the Parent Proxy Statement and the Registration Statement, (ii) in determining whether any action by or in respect of, or filing with, any Governmental Body is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement and (iii) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith or with the Company Proxy Statement, the Parent Proxy Statement and the Registration Statement and seeking timely to obtain any such actions, consents, approvals or waivers. (e) Parent shall take all action necessary under all applicable Legal Requirements to call, give notice of and hold a meeting of the holders of Parent Common Stock to vote on a proposal to adopt this Agreement, the Merger and the issuance of Parent Common Stock pursuant to the Merger (the "Parent Stockholders' Meeting"). The Parent Stockholders' Meeting shall be held as soon as reasonably practicable after the Registration Statement is declared effective under the Securities Act. The Parent Proxy Statement shall include the Parent Recommendations, and such Parent Recommendations shall not be withdrawn or modified in a manner adverse to the Company and no resolution by the Board of Directors of the Parent or any committee thereof to withdraw or modify such Parent Recommendations in a manner adverse to the Company shall be adopted or proposed. Parent shall use reasonable efforts to take all actions necessary or advisable to solicit proxies in favor of the Merger and shall ensure that all proxies solicited in connection with the Parent Stockholders' Meeting are solicited in compliance with all applicable Legal Requirements. Once the Parent's Stockholders' Meeting has been called and noticed, the Company shall not postpone or adjourn the Parent Stockolders' Meeting (other than for the absence of a quorum) without the consent of Company or unless otherwise required by applicable Legal Requirements. 37 5.3 REGULATORY APPROVALS. Each of the Company and Parent shall use its reasonable efforts to file, as soon as practicable after the date of this Agreement, all notices, reports and other documents required to be filed with any Governmental Body with respect to the Merger and the other transactions contemplated by this Agreement, and to submit promptly any additional information requested by any such Governmental Body. Each of the Company and Parent shall (i) give the other party prompt notice of the commencement or threat of commencement of any Legal Proceeding by or before any Governmental Body with respect to the Merger or any of the other transactions contemplated by this Agreement, (ii) keep the other party informed as to the status of any such Legal Proceeding or threat, and (iii) promptly inform the other party of any communication to or from any Governmental Body regarding the Merger. 5.4 ASSUMPTION OF STOCK OPTIONS; EMPLOYEE STOCK PURCHASE PLAN; 401(K) PLAN; EMPLOYEES AND BENEFITS (a) (i) At the Effective Time (A) the Warrant to purchase shares of Company Common Stock issuable to Orchard Gateway Investors, LLC described in Section 4.2(b) of the Disclosure Schedule (the "Warrant"), (B) all Company Options then outstanding under all Company Stock Option Plans held by individuals who are employees (including officers) of the Company at any time within 30 days of the Effective Time which are then vested and would have, if then exchanged in the Merger on the terms described below, an exercise price equal to or less than the greater of (I) the average of the closing sales prices of the Parent Common Stock for the five (5) trading days ending on the fifth business day prior to the date of the Company Stockholders' Meeting or (II) $12.50 ("Option Price") and (C) all outstanding Company Options issued under the Cylink/ARL 1997 Stock Option Plan, shall be assumed by Parent and each such Company Option and Warrant shall be converted into an option (or warrant with respect to the Warrant) to purchase shares of Parent Common Stock. Except as provided herein, each such assumed, vested Company Option shall be subject to the other terms and conditions (as in effect as of the date of this Agreement) of the Company Stock Option Plan under which it was issued and the terms and conditions of its respective stock option agreement, if any, by which it is evidenced. All remaining Company Options shall terminate as of the Effective Time and shall not be assumed by Parent. From and after the Effective Time, (i) each Company Option and Warrant assumed by Parent may be exercised solely for shares of Parent Common Stock, (ii) the number of shares of Parent Common Stock subject to each such Company Option or Warrant shall be equal to the number of shares of Company Common Stock subject to such Company Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounding down to the nearest whole share, (iii) the per share exercise price under each such Company Option or Warrant shall be adjusted by dividing the per share exercise price under such Company Option or Warrant by the Exchange Ratio and rounding up to the nearest cent, and (iv) any restriction on the exercise of any such Company Option or Warrant shall continue in full force and effect and, except as set forth in Section 5.4(a)(ii) the term, exercisability and other provisions of such Company Option or Warrant shall otherwise remain unchanged; provided, however, that reference to service for the Company in any such Company Option shall mean service for the Surviving Corporation after the Effective Time. As soon as practicable following Closing, but in any event, within three (3) business days thereof, Parent shall deliver to each holder of a Company Option assumed by Parent hereunder (i) a duly executed 38 replacement option agreement which replacement option agreement shall exactly mirror the terms of the holder's option agreement with the Company except for the adjustments to (A) vesting as provided under Section 5.4(a)(ii), (B) the number of shares of Parent Common Stock subject to each such Company Option; and (C) the per share exercise price under each such Company Option to reflect the Exchange Ratio or (ii) an amendment to such Company Option having the same effect. (ii) Immediately prior to the Effective Time, all Company Options then outstanding under all Company Stock Option Plans (whether vested or unvested) with an exercise price equal to or less than the Option Price which are held by individuals who are at that time employees (including officers) of any Acquired Corporation and who have been offered and accepted employment with the Parent or the Surviving Corporation effective after the Closing and who have executed a nondisclosure agreement satisfactory to Parent, shall, notwithstanding anything to the contrary regarding vesting in any Company Stock Option Plan or any stock option agreement, with respect thereto, become one hundred percent (100%) vested as of immediately prior to the Effective Time. (b) Prior to the Effective Time, the Company and Parent shall take all action that may be necessary (under the plans pursuant to which Company Options are outstanding and otherwise) to effectuate the provisions of this Section 5.4. Such actions shall include without limitation notice to holders of Company Options not being assumed by Parent in such form reasonably satisfactory to Parent and Company as to the termination of such option at the Effective Time of the Merger. Such actions shall also include the Company's using its best efforts to obtain from holders of all outstanding Company Options granted under the Company 1987 Non-Qualified Stock Option Plan signed written consents to the termination of such Company Options on or before the Closing Date in such form and for such consideration as is satisfactory to Parent. The Company shall, if requested by Parent, take all action that may be necessary (under the plans pursuant to which Company Options are outstanding and otherwise) to accelerate the vesting of Company Options as provided in Section 5.4 (a)(ii) or otherwise provided in the respective Company Option. (c) Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery under the Company Stock Options Plans assumed in accordance with this Section 5.4. (d) Parent shall not assume the ESPP Plan or any outstanding options to purchase shares of the Company under the ESPP Plan. The Company shall take all actions necessary to cause all outstanding purchase rights under the ESPP Plan to be exercised upon the earlier of (i) the next scheduled purchase date under the Company ESPP, or (ii) immediately prior to the date of the Company Shareholders Meeting, and each participant in the Company ESPP Plan shall accordingly be issued shares of Company Common Stock at that time in accordance with the provisions of the ESPP which shall be converted into shares of Parent Common Stock in the Merger. The Company shall take all actions necessary to terminate the Company ESPP immediately following such exercise date (including without limitation providing notice to ESPP participants as to the termination in such form reasonably satisfactory to Parent), and no purchase rights shall be subsequently granted or exercised under the Company ESPP. (e) The Company shall terminate, effective as of the day immediately preceding the Effective Time, any and all 401(k) plans sponsored or maintained by Company and any other 39 Acquired Corporation unless Parent provides written notice to Company prior to the Effective Time that any such 401(k) plan shall not be terminated. Parent shall receive from Company evidence that Company's plan(s) and/or program(s) have been terminated pursuant to resolutions of Company's Board of Directors (the form and substance of such resolutions shall be subject to review and approval of Parent), effective as of the day immediately preceding the Effective Time. The Company shall cause any such 401(k) plan to be filed with the IRS for a determination letter as to the qualification of the plan under Code Sections 401(a) and (k) at its termination and shall cause such plan to provide for final distributions to participants after receipt of such determination letter. Company employees shall be eligible to participate in a 401(k) plan sponsored by Parent as soon as administratively practicable after the Effective Time in the event the respective company 401(k) plan is terminated under this Section. (f) If the Parent or the Surviving Corporation terminates any Company employee without cause (provided that a failure to sign Parent's form of nondisclosure/proprietary information agreement will not be considered a reason for Parent to terminate with cause) within one (1) year of the Effective Time, Parent shall pay, or shall cause the Surviving Corporation to pay, any such terminated employee severance pursuant to the Company's severance policies set forth on Schedule 5.4(f) and provided that any such terminated employee signs a release reasonably satisfactory to Parent. (g) If requested by Parent, Company shall, immediately prior to the Closing Date, terminate the Company Employee Plans and no further contributions shall be made to the Company Employee Plans. Parent and/or Surviving Corporation shall provide or cause to be provided that under each employee benefit plan, policy, program or arrangement where service is relevant to a determination of an employee's eligibility to participate, vesting, or level or amount of benefits (other than benefit accruals under a pension plan), employees of Company who become employees of Parent and/or Surviving Corporation shall be credited with their period of service with Company prior to the Closing, to the extent permitted by applicable law and applicable tax qualification requirements, and subject to any generally applicable break in service or similar rules. Subject to the approval of any insurance carrier and to the extent consistent with applicable law and applicable tax qualification requirements, Parent and/or Surviving Corporation shall make available, or cause to be made available, to those employees of Company who become employees of Parent and/or Surviving Corporation, employee benefit plans and programs, without regard to any preexisting condition limitation, actively-at-work requirement or similar limitation, provided, and only to the extent, that any analogous restriction applied to such employee under an analogous plan of Company had been satisfied as of the Closing Date. In determining an employee's share of the cost of coverage under any plan or program of Parent and/or Surviving Corporation for the year in which the Closing occurs, Parent and/or Surviving Corporation shall make commercially reasonable efforts to credit the employee with any pre-Closing co-pays and deductibles made by or on behalf of such employee under each comparable plan maintained by Company prior to the Effective Time for such year. Parent shall not be required to have any preexisting condition limitation, actively-at-work requirement or similar limitation waived or to credit any pre-Closing co-pays and deductibles made by or on behalf of such employee unless Company (or its successor entity) or the applicable insurance carrier makes available a HIPAA Certificate evidencing prior coverage under the corresponding or analogous Company plan. Company shall provide to Parent (i) executed resolutions by the Board of Directors of Company authorizing the termination of any of its Company Employee Plans that are to be terminated and (ii) an executed amendment to the Plans sufficient to 40 assure compliance with all applicable requirements of the Code and regulations thereunder so that the tax-qualified status of the Plan will be maintained at the time of termination. Nothing in this subsection 5.4(g) shall be construed to prohibit or restrict Parent or Surviving Corporation from amending, suspending or terminating any of its employee benefit plans following the Closing Date or terminating any of its employees or modifying their pay or employee benefits following such date. (h) Company shall obtain a release, in substantially the form attached hereto as Exhibit G, from each of its employees to the extent a release is required under any written employment agreement with such employees with respect to the payment of any severance, benefit or other compensation due upon Closing as the result of this Agreement or otherwise. The Company shall obtain releases in substantially the form attached hereto as Exhibit G from all other employees with respect to the payment of any severance, benefit or other compensation due on or prior to the Closing in accordance with the Company's severance practices as described in Schedule 2.12. The Company shall arrange for tax withholding as required by applicable Legal Requirements with respect to any such payment, benefit, compensation or severance (regardless of whether a release is required or obtained) and shall provide evidence of such arrangement(s) to Parent upon request. 5.5 INDEMNIFICATION OF OFFICERS AND DIRECTORS. (a) The Surviving Corporation shall cause all rights to indemnification existing in favor of those Persons (i) who are named as an insured party in any officers' and directors' liability insurance policy held by the Company as of the date of this Agreement (the "Indemnified Persons") and (ii) who have indemnification agreements with the Company as of the date of this Agreement, for acts and omissions occurring prior to or at the Effective Time, as provided in the Company's articles of incorporation and bylaws and under each indemnification agreement with the Indemnified Persons to which the Company is a party (as each is in effect as of the date of this Agreement), to continue in effect without modification or amendment after the consummation of the Merger and to be observed by the Surviving Corporation to the fullest extent permitted by California law. (b) The Surviving Corporation shall provide officers' and directors' liability insurance for the benefit of each such Person (other than the Company) named as an insured party in any officers' and directors' liability insurance policy held by the Company as of the date of this Agreement, covering only those acts or omissions occurring prior to or at the Effective Time provided that the Surviving Corporation will not be required to maintain such policies except to the extent that the aggregate cost of maintaining such policy is not in excess of one hundred fifty percent (150%) of the current annual cost, in which case the Surviving Corporation shall obtain and maintain as much comparable insurance for an annual cost equal to one hundred fifty percent (150%) of the current annual amount. (c) The provisions of this Section 5.5 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Person, his or her heirs and representatives. (d) In the event Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, then, and in each case, proper provision shall be made so that the 41 successors and assigns of Surviving Corporation, as the case may be, honor the indemnification obligations set forth in this Section 5.5. (e) All current employees and directors of the Company who have indemnification agreements with the Company as of the date of this Agreement or who are entitled to enter into indemnity agreements under the Company's standard form shall execute a waiver in the form attached hereto as Exhibit D pursuant to which such employees waive their rights to the establishment of a trust pursuant to Section 7 of such agreements and agree that such Agreement shall not be binding upon Parent as a direct or indirect successor of the Company. 5.6 ADDITIONAL AGREEMENTS. Each of Parent and the Company shall use its reasonable best efforts to take, or cause to be taken, all actions necessary to consummate the Merger and make effective the other transactions contemplated by this Agreement. Without limiting the generality of the foregoing each party to this Agreement (a) 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 Merger and the other transactions contemplated by this Agreement; (b) shall use its reasonable best efforts to obtain each Consent (if any) required to be obtained (pursuant to any applicable Legal Requirement or Contract, or otherwise) by such party in connection with the Merger or any of the other transactions contemplated by this Agreement; and (c) shall use its reasonable best efforts to lift any restraint, injunction or other legal bar to the Merger. The Company shall promptly deliver to Parent a copy of each such filing made, each such notice given and each such Consent obtained by it during the Pre-Closing Period. 5.7 PUBLIC DISCLOSURE. The initial press release relating to this Agreement shall be a joint press release prepared jointly by both Parent and Company. Thereafter Parent and the Company shall consult with each other and use reasonable efforts to agree upon the text of any press release or public statement before issuing any press release or otherwise making any public statements with respect to the transactions contemplated hereunder and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by Legal Requirements or any listing agreement with, or the rules of, Nasdaq. 5.8 TAX MATTERS. At or prior to the filing of the Registration Statement, the Company and Parent shall execute and deliver to Morrison and Foerster LLP and to Venable, Baetjer and Howard, LLP tax representation letters in customary form satisfactory to such counsel. Parent, Merger Sub and the Company shall each confirm to Morrison and Foerster LLP and to Venable, Baetjer and Howard, LLP on such dates as shall be reasonably requested by Morrison and Foerster LLP and Venable, Baetjer and Howard, LLP, the accuracy and completeness of the tax representation letters delivered pursuant to the immediately preceding sentence. Upon the request of counsel, the Company and Parent shall execute and deliver updated tax representation letters in customary form satisfactory to such counsel on or before the Closing Date in connection with the opinions of counsel referred to in Section 6.2(g) and Section 6.3(e). Each of Parent and the Company shall use its reasonable best 42 efforts prior to and following the Effective Time to cause the Merger to qualify as a reorganization under Section 368(a) of the Code. Following delivery of the tax representations letters pursuant to the first sentence of this Section 5.8, each of Parent and the Company shall use its reasonable efforts to cause Morrison and Foerster LLP and Venable, Baetjer and Howard, LLP, respectively, to deliver to it a tax opinion satisfying the requirements of Item 601 of Regulation S-K promulgated under the Securities Act. In rendering such opinions, each of such counsel shall be entitled to rely on the tax representation letters referred to in this Section 5.8. 5.9 RESIGNATION OF DIRECTORS. The Company shall use its best efforts to obtain and deliver to Parent prior to the Closing the resignation of each director of each of the Acquired Corporations, effective as of the Effective Time. 5.10 LISTING. Parent shall use its best efforts to cause the shares of Parent Common Stock being issued in the Merger to be approved for listing (subject to official notice of issuance) on the Nasdaq National Market. 5.11 TAKEOVER LAWS; ADVICE OF CHANGES. (a) If any Takeover Law may become, or may purport to be, applicable to the transactions contemplated in this Agreement, each of Parent and the Company and the members of their respective Boards of Directors will grant such approvals and take such actions as are necessary so that the transactions contemplated by this Agreement may be consummated as promptly as practicable, and in any event prior to the Termination Date, on the terms and conditions contemplated hereby and thereby and otherwise act to eliminate the effect of any Takeover Law on any of the transactions contemplated by this Agreement. (b) Each of the Company and Parent will give prompt notice to the other (and will subsequently keep the other informed on a current basis of any developments related to such notice) upon its becoming aware of the occurrence or existence of any fact, event or circumstance that (i) is reasonably likely to result in any Material Adverse Effect on the Acquired Corporations or on Parent and its Subsidiaries, respectively, (ii) would cause or constitute a breach of any representations, warranties or covenants contained herein or (iii) is reasonably likely to result in any of the conditions set forth in Section 6 not being able to be satisfied prior to the Termination Date. 5.12 FORM S-8; SECTION 16. (a) Parent agrees to file one or more registration statements on Form S-8 for the shares of Parent Common Stock issuable with respect to assumed Company Options within five (5) days subsequent to the Effective Time and keep any such registration statements effective until all shares registered thereunder have been issued, provided, however, that it shall not be considered a breach of this Section 5.13 by Parent if Parent cannot file such S-8 within five (5) days due to the fact that Parent does not receive a required independent auditors consent within five (5) days after 43 using commercially reasonable efforts to obtain such consent; and provided that Parent continues to use commercially reasonable efforts to obtain such consent and file such S-8 promptly after such consent is obtained. (b) Parent shall, prior to the Effective Time, cause Parent's Board of Directors to approve the issuance of shares of Parent Common Stock in connection with the Merger (including shares of Parent Common Stock to be issued in connection with the exercise of any Company Options assumed by Parent under Section 5.4), with respect to any employees of the Company who as of the Effective Time are subject or will become subject to the reporting requirements of Section 16 of the Exchange Act to the extent necessary for such issuance to be an exempt acquisition pursuant to SEC Rule 16b-3, provided, however, that Parent shall not be deemed to have violated this covenant if the Company does not provide to the Board of Directors of Parent at least five (5) business days prior to the Effective Time, all information reasonably requested by Parent for the purpose of effecting such exemption. Prior to the Effective Time, the Board of Directors of the Company shall approve the disposition of Company Common Stock in connection with the Merger by those directors and officers of the Company subject to the reporting requirements of Section 16 of the Exchange Act to the extent necessary for such disposition to be an exempt disposition pursuant to SEC Rule 16b-3. 5.13 AFFILIATES. Attached as Schedule 5.13 to this Agreement is a list of all Persons who are, to the Company's knowledge, affiliates of the Company for purposes of Rule 145 under the Securities Act. Prior to the effectiveness of the Registration Statement, the Company shall deliver or cause to tbe delivered an executed Rule 145 affiliate agreement in the form attached hereto as Exhibit E from each of the persons listed on Schedule 5.13. Parent shall place the appropriate Rule 145 legend on the stock certificates representing Parent Common Stock issued in the Merger to such affiliates. Parent shall use its reasonable efforts to remove such legends promptly when such legends are no longer required by applicable Legal Requirements. 5.14 LITIGATION. The Company shall give Parent the opportunity to participate in the defense of any litigation against the Company and/or its directors relating to the transactions contemplated by this Agreement and the Voting Agreements. 5.15 KEY EMPLOYEES (a) Each of the Key Company Employees shall have entered into noncompetition agreements in substantially the form attached hereto as Exhibit F. (b) Parent shall, or shall cause Surviving Corporation to, expressly assume each of the employment or severance agreements listed on Schedule 5.15(b). Prior to Closing, Parent shall notify each party to the agreements listed on Schedule 5.15(b) whether the Surviving Company will continue their employment pursuant to such agreements following the Closing. Prior to Closing, with respect to each party that is not offered continuing employment, or is otherwise 44 entitled to terminate his employment upon a change of control, the Company shall pay all amounts (subject to the receipt of an executed release substantially in the form attached hereto as Exhibit G by such party) and take all action due under such agreements with respect to each party that is not offered continuing employment pursuant to such agreements immediately prior to the consummation of the Merger. Effective as of the Closing, Parent hereby unconditionally guarantees the payment when due of all amounts set forth on Schedule 5.15(b). (c) Parent will create a pool of funds equal to the amount of reduction taken by certain executive officers in their bonus for the year ended December 31, 2002 to be available for any payments that Parent, in its sole discretion, deems advisable to employees who agree to continue employment with the Company if asked by Parent and who complete established transition objectives. Parent has no obligation to make any such payments. SECTION 6. CONDITIONS TO THE MERGER 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION. The respective obligations of the Company, Parent and Merger Sub to consummate the Merger are subject to the satisfaction or, to the extent permitted by Legal Requirements, the waiver by each party on or prior to the Effective Time of each of the following conditions: (a) This Agreement, the Agreement of Merger and the Merger shall have been adopted and approved by requisite vote of the shareholders of the Company and this Agreement, the Merger and the issuance of shares of Parent Common Stock issuable pursuant to the Merger shall have been adopted and approved by requisite vote of the stockholders of the Parent; (b) No provision of any applicable Legal Requirements and no judgment, injunction, Order or decree shall prohibit the consummation of the Merger or the other transactions contemplated by this Agreement; (c) The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order, and any material "blue sky" and other state securities laws applicable to the registration and qualification of the Parent Common Stock shall have been complied with; (d) The shares of Parent Common Stock to be issued in the Merger shall have been authorized for listing on the Nasdaq National Market (subject to official notice of issuance); and (e) Parent, Merger Sub and Company shall have timely obtained from each Governmental Body all approvals, waivers and consents, if any, necessary for consummation of the Merger and any material transaction contemplated hereby, including but not limited to such approvals, waivers and consents as may be required under HSR. 45 6.2 ADDITIONAL CONDITIONS TO PARENT'S AND MERGER SUB'S OBLIGATIONS. The respective obligations of the Parent and Merger Sub to consummate the Merger are subject to the satisfaction or, to the extent permitted by Legal Requirements, the waiver by Parent and Merger Sub on or prior to the Effective Time of each of the following conditions: (a) there shall not be pending or threatened any Legal Proceeding in which a Governmental Body is: (i) challenging or seeking to restrain or prohibit the consummation of the Merger or any other material transactions contemplated by this Agreement; or (ii) seeking to prohibit or limit in any material respect Merger Sub's or Parent's ability to vote, receive dividends with respect to or otherwise exercise ownership rights with respect to the stock of the Surviving Corporation; (iii) seeking to materially and adversely affect the right of Parent, the Surviving Corporation or any Subsidiary of Parent to own the assets or operate the business of the Acquired Corporations; or (iv) seeking to compel Parent or the Company, or any subsidiary of Parent or the Company, to dispose of or hold separate any material assets, as a result of the Merger or any of the other transactions contemplated by this Agreement; (b) the Company shall have performed or complied in all material respects with its covenants, obligations or agreements required to be performed or complied with under the Agreement prior to the Effective Time; (c) (i) the representations and warranties of the Company contained in this Agreement not qualified with any "materiality" or "Material Adverse Effect" qualifiers and (ii) the representations and warranties of the Company contained in this Agreement qualified with any "materiality" or "Material Adverse Effect" qualifiers, shall be accurate in all respects, in the case of each of (i) and (ii) above, as of the date of this Agreement and as of the date of the Effective Time; except to the extent such representations and warranties speak as of an earlier date, in which case such representations and warranties shall be accurate as of such date; and except in each case, (A) for changes contemplated by this Agreement, or (B) where the failure to be accurate has not had, and would not reasonably be expected to have, a Material Adverse Effect on the Company; (d) there shall not have been a Material Adverse Effect on the Acquired Corporations; and (e) Holders of less than ten percent (10%) in the aggregate of the Company Common Stock shall have filed demands for payment under Chapter 13 of the CGCL or shall otherwise continue to have dissenters' rights under Chapter 13 of the CGCL; (f) Parent shall have received a certificate from an executive officer of the Company certifying as to the matters set forth in paragraphs (b), (c), (d) and (e) of this Section 6.2; and (g) Parent shall have received and Venable, Baetjer and Howard, LLP shall not have subsequently rescinded an opinion of Venable, Baetjer and Howard, LLP, in form and substance reasonably satisfactory to Parent, on the basis of customary facts, representations and assumptions set forth in such opinion, to the effect that the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code. In connection with the 46 opinion referred to in this Section 6.2(g), Venable, Baetjer and Howard, LLP shall be entitled to request and rely upon the tax representation letters of Parent and the Company referred to in Section 5.8. (h) The Stipulation and Settlement Agreement substantially in the form attached hereto as Exhibit H shall be executed by Defendant's Counsel (as defined therein) and Plaintiff's Counsel (as defined therein) and the Company shall have entered into agreements with insurance carriers which agreements provide for the payment of all amounts due under the Settlement Agreement to be made by such insurance carriers. (i) The amendment to the Orchard Jay lease and Warrant shall have been approved by all required parties on terms and conditions no less favorable to the Company set forth in the draft amendment and warrant provided by the Company to Parent. The foregoing conditions are for the sole benefit of Parent and Merger Sub and may, subject to the terms of the Agreement, be waived by Parent and Merger Sub, in whole or in part at any time and from time to time, in the sole discretion of Parent and Merger Sub. The failure by Parent and Merger Sub at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. 6.3 ADDITIONAL CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of the Company to consummate the Merger are subject to the satisfaction or, to the extent permitted by Legal Requirements, the waiver by the Company on or prior to the Effective Time of each of the following conditions: (a) Parent or Merger Sub shall have performed or complied in all material respects with all of its covenants, obligations or agreements required to be performed or complied with under the Agreement prior to the Effective Time; (b) (i) the representations and warranties of Parent and Merger Sub contained in this Agreement not qualified with any "materiality" or "Material Adverse Effect" qualifiers, and (ii) the representations and warranties of Parent and Merger Sub contained in this Agreement qualified with any "materiality" or "Material Adverse Effect" qualifiers, shall be accurate in all respects, in the case of each of (i) and (ii) above, as of the date of this Agreement and as of the date of the Effective Time; except to the extent such representations and warranties speak as of an earlier date, in which case such representations and warranties shall have been accurate as of such date; and except in each case, (A) for changes contemplated by this Agreement, or (B) where the failure to be accurate has not had, and would not reasonably be expected to have, a Material Adverse Effect on the Parent; (c) there shall have not been a Material Adverse Effect on the Parent; (d) the Company shall have received a certificate from an executive officer of Parent certifying as to the matters set forth in paragraphs (a), (b) and (c) of this Section 6.3; and 47 (e) the Company shall have received and Morrison and Foerster LLP shall not have subsequently rescinded an opinion of Morrison and Foerster LLP in form and substance reasonably satisfactory to the Company, on the basis of customary facts, representations and assumptions set forth in such opinion, to the effect that the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code. In connection with the opinion referred to in this Section 6.3(e), Morrison and Foerster LLP shall be entitled to request and rely upon the tax representation letters of Parent and the Company referred to in Section 5.8. The foregoing conditions are for the sole benefit of the Company and may, subject to the terms of the Agreement, be waived by the Company, in whole or in part at any time and from time to time, in the sole discretion of the Company. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. SECTION 7. TERMINATION 7.1 TERMINATION. This Agreement may be terminated prior to the Effective Time, whether before or after adoption of this Agreement by the Company's shareholders: (a) by mutual written consent of Parent and the Company; (b) by either Parent or the Company if (i) the Merger shall not have been consummated by the date which is one hundred and fifty (150) days after the date of this Agreement (provided, a later date may be agreed upon in writing by the parties hereto, and provided further that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose action or failure to act has been the cause of the failure of the Merger to occur on or before such date and such action or failure to act constitutes a breach of this Agreement); or (ii) a Company Shareholders Meeting is held and the holders of Company Common Stock do not approve this Agreement and the Merger; or (iii) a Parent Stockholder Meeting is held and the holders of Parent Securities do not approve the issuance of Parent Common Stock pursuant to the terms hereof; (c) by either Parent or the Company if a court of competent jurisdiction or other Governmental Body shall have issued a final and nonappealable Order, decree or ruling, or shall have taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; (d) by Parent, at any time prior to the Effective Time, if a Company Triggering Event shall have occurred; (e) by Parent, at any time prior to the Effective Time, if (i) any of the Company's representations and warranties contained in this Agreement shall be inaccurate as of the date of this Agreement, or shall have become inaccurate as of a date subsequent to the date of this Agreement (as if made on such subsequent date), such that the condition set forth in paragraph (c) of Section 6.2 would not be satisfied and such inaccuracy shall not have been cured within twenty (20) days of 48 receipt by Company of written notice of such breach (describing the details of such breach) provided that the right to terminate this Agreement by Parent under this Section 7.1(e)(i) shall not be available to Parent where Parent is at that time in breach of this Agreement, (ii) any of the Company's covenants contained in this Agreement shall have been breached (except for a breach of Sections 4.3 and 5.7 which by the terms cannot be cured) such that the condition set forth in paragraph (b) of Section 6.2 would not be satisfied and such breach shall not have been cured within twenty (20) days of receipt by Company of written notice of such breach (describing the details of such breach) provided that the right to terminate this Agreement by Parent under this Section 7.1(e)(ii) shall not be available to Parent where Parent is at that time in breach of this Agreement, or (iii) there shall have been a Material Adverse Effect on the Acquired Corporations; and (f) by Company, at any time prior to the Effective Time, if (i) any of the Parent's representations and warranties contained in this Agreement shall be inaccurate as of the date of this Agreement, or shall have become inaccurate as of a date subsequent to the date of this Agreement (as if made on such subsequent date), such that the condition set forth in paragraph (c) of Section 6.3 would not be satisfied and such inaccuracy shall not have been cured within twenty (20) days of receipt by Parent of written notice of such breach (describing the details of such breach) provided that the right to terminate this Agreement by Company under this Section 7.1(f)(i) shall not be available to Company where Company is at that time in breach of this Agreement, (ii) any of the Parent's covenants contained in this Agreement shall have been breached (except for a breach of Section 5.7 which by its terms cannot be cured) such that the condition set forth in paragraph (b) of Section 6.3 would not be satisfied and such breach shall not have been cured within twenty (20) days of receipt by Parent of written notice of such breach (describing the details of such breach) provided that the right to terminate this Agreement by Company under this Section 7.1(f)(ii) shall not be available to Company where Company is at that time in breach of this Agreement, or (iii) there shall have been a Material Adverse Effect on Parent. 7.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided in Section 7.1, this Agreement shall be of no further force or effect; provided, however, that (i) this Section 7.2, Section 7.3 and Section 8 shall survive the termination of this Agreement and shall remain in full force and effect, and (ii) the termination of this Agreement shall not relieve any party from any liability or damages for any breach of any provision contained in this Agreement. 7.3 EXPENSES; TERMINATION FEES. (a) Expenses. Except as set forth in this Section 7.3, all fees and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such expenses, whether or not the Merger is consummated. (b) Expense Reimbursement. (i) If Parent terminates this Agreement pursuant to Section 7.1(e), then Company shall promptly (and within two (2) business days of its receipt of such termination notice from Parent) reimburse Parent for all of the actual, documented, reasonable out-of-pocket costs and 49 expenses incurred by Parent in connection with this Agreement and the transactions contemplated hereby (including, without limitation, the fees and expenses of its outside advisors, outside accountants and outside legal counsel). (ii) If Company terminates this Agreement pursuant to Section 7.1(f), then Parent shall promptly (and within two (2) business days of its receipt of such termination notice from Company) reimburse the Company for all of the actual, documented, reasonable out-of-pocket costs and expenses incurred by the Company in connection with this Agreement and the transactions contemplated hereby (including, without limitation, the fees and expenses of its outside advisors, outside accountants and outside legal counsel). (iii) In addition to the right to receive the above expense reimbursement, the Party invoking the right to terminate under Section 7.1(e) or 7.1(f), as appropriate, shall also have the right to seek recovery of any actual damages incurred by such Party, provided that actual damages shall not include damages in the nature of speculative, consequential or incidental damages, including damage to reputation or goodwill or other items of a speculative nature. The right to receive an expense reimbursement and to seek actual damages shall be such Party's sole and exclusive remedies in connection with the termination of the Agreement pursuant to the above Sections. (b) Termination Fee. (i) If (A) this Agreement is terminated by Parent or the Company pursuant to Section 7.1(b) (i) or (ii) and at or prior to the time of such termination a Company Acquisition Proposal shall have been disclosed, announced, commenced, submitted or made, and within nine (9) months after such termination pursuant to Section 7.1(b) (i) or (ii) the Company enters into a definitive agreement for, or consummates, a Company Acquisition Transaction with any Person, or (B) this Agreement is terminated by Parent pursuant to Section 7.1(d), then, in the case of each of (A) and (B), the Company shall pay to Parent, in immediately available funds a nonrefundable fee in the amount of five percent (5%) of the total value of the Merger Consideration based upon the closing price of the Parent's Common Stock as reported on the Nasdaq National Market on the business day prior to the execution of this Agreement (the "Termination Fee"). (ii) Upon a termination of this Agreement by Parent or Company pursuant to Section 7.1(b) (i) or (ii), the Termination Fee shall be paid to Parent by the Company within fifteen (15) business days of the consummation of the transactions contemplated by the Company Acquisition Proposal. In the case of termination of this Agreement by Parent pursuant to Section 7.1(d), the Termination Fee shall be paid to Parent by the Company within fifteen (15) business days of such termination. (iii) The above payments shall be made to the applicable parties in immediately available funds and shall be such party's sole and exclusive remedy in connection with its termination of the Agreement pursuant to the above Sections. (c) The Company acknowledges that the agreements contained in this Section 7.3 are an integral part of the transaction contemplated by this Agreement, and that, without these agreements, Parent would not enter into this Agreement. Accordingly, if either party fails to pay the 50 Termination Fee or other amounts due under Section 7.3 in a timely manner and if a party makes a claim against the other party in order to obtain payment of such amounts and the claim results in a judgment against such for the amounts due under this Section 7.3, the non-prevailing party shall pay to the prevailing party its actual, documented, reasonable out-of-pocket costs and expenses incurred by the prevailing party (including attorneys' fees and expenses) in connection with such suit, together with interest on the amounts due from and including the date on which such payment was to be made in accordance with Section 7.3 but excluding the date of payment thereof, at the prime rate published by The Wall Street Journal, as that rate may vary from time to time, or if no longer published, a comparable rate. Payment of the fees and expenses described in this Section 7.3 shall not be in lieu of damages incurred in the event of a fraudulent breach of this Agreement. SECTION 8. MISCELLANEOUS PROVISIONS 8.1 AMENDMENT. This Agreement may be amended with the approval of the respective boards of directors of the Company and Parent at any time (whether before or after adoption of the Agreement of Merger by the shareholders of the Company); provided, however, that after any such adoption of the Plan of Merger by the Company's shareholders, no amendment shall be made which by law requires further approval of the shareholders of the Company without the further approval of such shareholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 8.2 WAIVER. (a) No failure on the part of any party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. (b) No party shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such party; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. 8.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the representations, warranties or agreements contained in this Agreement or in any certificate delivered pursuant to this Agreement shall survive the Effective Time, except for agreements which by their terms survive the Effective Time. This Section 8.3 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. 51 8.4 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement constitutes the entire agreement among the parties hereto and all other prior agreements and understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof and thereof. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. 8.5 APPLICABLE LAW; JURISDICTION. This Agreement shall be governed by, and construed in accordance with, the Legal Requirements of the State of Delaware, regardless of the Legal Requirements that might otherwise govern under applicable principles of conflicts of laws thereof; provided that the applicable provisions of the CGCL and the Legal Requirements of the State of California shall govern the Merger. In any action between any of the parties arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement: (a) each of the parties irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of courts in the State of Maryland; (b) if any such action is commenced in a state court, then, subject to applicable law, no party shall object to the removal of such action to any federal court located in the State of Maryland; (c) each of the parties irrevocably waives the right to trial by jury; and (d) each of the parties irrevocably consents to service of process by first class certified mail, return receipt requested, postage prepaid, to the address at which such party is to receive notice in accordance with Section 8.8. 8.6 ATTORNEYS' FEES. In any action at law or suit in equity to enforce this Agreement or the rights of any of the parties hereunder, the prevailing party in such action or suit shall be entitled to receive a reasonable sum for its attorneys' fees and all other reasonable costs and expenses incurred in such action or suit. 8.7 ASSIGNABILITY; THIRD PARTY BENEFICIARIES. This Agreement shall be binding upon, and shall be enforceable by and inure solely to the benefit of, the parties hereto and their respective successors and permitted assigns; provided, however, that neither this Agreement nor any of the Company's rights hereunder may be assigned by the Company without the prior written consent of Parent, and any attempted assignment of this Agreement or any of such rights by the Company without such consent shall be void and of no effect; provided, further, however, that, except for assignments by Merger Sub to a wholly owned Subsidiary of Parent, neither this Agreement nor any of Parent's or Merger Sub's rights hereunder may be assigned by Parent or Merger Sub without the prior written consent of the Company, and any attempted assignment of this Agreement or any of such rights by the Company without such consent shall be void and of no effect. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person (other than the parties hereto) any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, except for rights, benefits and remedies granted to 52 Company employees and option holders under Section 5.4, to the Indemnified Persons under Section 5.5 and to the Company employees under Section 5.15. 8.8 NOTICES. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when actually delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto); provided, however, that a written notice delivered via facsimile shall be deemed delivered only if at the time of, or shortly after, such facsimile transmission the party giving the notice confirms by telephone the actual receipt by the other party of such facsimile transmission: If to Parent or Merger Sub: SafeNet, Inc. 8029 Corporate Drive Baltimore, Maryland 21236 Facsimile No. (410) 931-2229 Attention: Anthony Caputo, Chief Executive Officer with a copy to (which copy shall not constitute notice hereunder): Venable, Baetjer and Howard, LLP 8010 Towers Crescent Drive Vienna, Virginia 22182 Facsimile No. (703) 821-8949 Attention: Elizabeth R. Hughes, Esq. If to the Company: Cylink Corporation 3131 Jay Street Santa Clara, California 95056-0952 Facsimile No.: (408) 855-6106 Attention: Robert B. Fougner, Esq. with a copy to (which copy shall not constitute notice hereunder): Morrison & Foerster LLP 755 Page Mill Road Palo Alto, California 94304-1018 Facsimile No.: (650) 494-0792 Attention: Paul "Chip" Lion, III, Esq. 53 8.10 COOPERATION. The parties agree to cooperate fully with each other and to execute and deliver such further documents, certificates, agreements and instruments and to take such other actions as may be reasonably requested by the other party to evidence or reflect the transactions contemplated by this Agreement and to carry out the intent and purposes of this Agreement. In addition, Company shall take such actions prior to the Closing with respect to employees, employee benefits and accounting matters as may be reasonably requested by Parent, subject to the prior approval of Company, not to be unreasonably withheld. 8.11 CONSTRUCTION. (a) For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include masculine and feminine genders. (b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. (c) As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." (d) Except as otherwise indicated, all references in this Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement and Exhibits to this Agreement. 54 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written. SAFENET, INC. By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: Secretary SAPPHIRE ACQUISITION CORP. By: ------------------------------------ Name: Title: By: ----------------------------------- Name: Title: Secretary CYLINK CORPORATION By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: Secretary 55 EXHIBIT A CERTAIN DEFINITIONS For purposes of the Agreement (including this Exhibit A): "Acquired Corporation Contract" shall mean any Contract: (a) to which any of the Acquired Corporations is a party; (b) by which any of the Acquired Corporations or any asset of any of the Acquired Corporations is or may become bound or under which any of the Acquired Corporations has, or may become subject to, any obligation; or (c) under which any of the Acquired Corporations has or may acquire any right or interest. "Acquired Corporation Proprietary Asset" shall mean any Proprietary Asset owned by or licensed to any of the Acquired Corporations or otherwise used by any of the Acquired Corporations. "Acquired Corporations" is defined in Section 2.1 to this Agreement. "Agreement" is defined in the Preamble to this Agreement. "Agreement of Merger" is defined in Section 1.3 to this Agreement. "CGCL" is defined in the Recitals to this Agreement. "Closing" is defined in Section 1.3 to this Agreement. "Closing Date" is defined in Section 1.3 to this Agreement. "Code" is defined in the Recitals to this Agreement. "Company" is defined in the Preamble to this Agreement. "Company Acquisition Proposal" shall mean any bona fide offer, proposal or indication of interest received from a third party (other than an offer, proposal, inquiry or indication of interest by Parent) contemplating or otherwise relating to any Company Acquisition Transaction. "Company Acquisition Transaction" shall mean any transaction or series of transactions involving: (a) any merger, consolidation, share exchange, business combination, issuance of securities, direct or indirect acquisition of securities, tender offer, exchange offer or other similar transaction in which (i) any of the Acquired Corporations is a constituent corporation, (ii) a Person or "Group" (as defined in the Exchange Act and the rules promulgated thereunder) of Persons directly or indirectly acquires beneficial or record ownership of securities representing more than 20% of the outstanding securities of any class of voting securities of any of the Acquired Corporations, or (iii) any of the Acquired Corporations issues securities representing more than 56 20% of the outstanding securities of any class of voting securities of any of the Acquired Corporations; (b) any direct or indirect sale, lease, exchange, transfer, license, acquisition or disposition of any business or businesses or of assets or rights that constitute or account for 20% or more of the consolidated net revenues, net income or assets of the Acquired Corporations; or (c) any liquidation or dissolution of any of the Acquired Corporations. "Company Balance Sheet" is defined in Section 2.4(b) to this Agreement. "Company Balance Sheet Date" is defined in Section 2.4(b) to this Agreement. "Company Common Stock" shall mean the Common Stock, $.01 par value, of the Company. "Company Disclosure Schedule" is defined in Section 2 to this Agreement. "Company Employee Plans" is defined in Section 2.12(a) to this Agreement. "Company Financial Statements" is defined in Section 2.4(b) to this Agreement. "Company Material Contract" is defined in Section 2.7(a) to this Agreement. "Company Options" is defined in Section 2.3(b) to this Agreement. "Company Organization Documents" is defined in Section 2.1 to this Agreement. "Company Preferred Stock" shall mean the Preferred Stock, $.01 par value per share, of the Company. "Company Proxy Statement" is defined in Section 5.1 to this Agreement. "Company Recommendations" is defined in Section 2.2 to this Agreement. "Company SEC Documents" is defined in Section 2.4(a) to this Agreement. "Company Shareholders' Meeting" is defined in Section 5.2(a) to this Agreement. "Company Stock Certificate" is defined in Section 1.6 to this Agreement. "Company Stock Option Plans" shall mean the Company, as amended, 1994 Flexible Stock Incentive Plan, 2001 Non-Qualified Stock Incentive Plan, the 1987 Non-Qualified Stock Option Plan, the ATM Technology Center 2000 Stock Option Plan and the Cylink/ARL 1997 57 Stock Option Plan, and all stock option agreements evidencing option grants under each of the foregoing stock option plans. "Company Superior Offer" shall mean a Company Acquisition Proposal on terms that the Board of Directors of the Company determines, in good faith, after consultation with its outside legal counsel and its independent financial advisor, if accepted, is reasonably likely to be consummated, taking into account all legal, financial and regulatory aspects of the offer and the Person making the offer, and would, if consummated, be in the best interests of the Company when compared to the Merger; provided, however, that any such Company Acquisition Proposal shall not be deemed to be a "Company Superior Offer" if any financing required to consummate the transaction contemplated by such offer is not committed or is not, in the good faith judgment of the Company, reasonably capable of being obtained by such third party on a timely basis. "Company Tax Returns" is defined in Section 2.11(d) to this Agreement. A "Company Triggering Event" shall be deemed to have occurred if: (i) the Board of Directors of the Company shall have failed to make the Company Recommendations or shall have withdrawn or modified in a manner adverse to Parent or Merger Sub the Company Recommendations (including by issuing a public announcement or other public release that makes it reasonably apparent that the Board of Directors of the Company desires to withdraw, modify or amend the Company Recommendations); (ii) the Company shall have failed to include the Company Recommendations in the Registration Statement or the Proxy Statement; (iii) the Board of Directors of the Company shall have approved, endorsed or recommended any Company Acquisition Proposal or shall have resolved or announced an intention to do so; (iv) the Company shall have entered into a letter of intent or similar document or any Contract relating to any Company Acquisition Proposal; (v) a tender or exchange offer relating to securities of the Company shall have been commenced and (A) the Company shall have recommended such tender offer, or (B) the Company shall not have sent to its securityholders, within ten (10) business days after the commencement of such tender or exchange offer, a statement disclosing that the Company recommends rejection of such tender or exchange offer (it being understood that taking no position or indicating its inability to take a position does not constitute recommending a rejection of such tender or exchange offer), or (C) the Board of Directors of the Company fails to reaffirm in writing the Company Recommendations within five (5) business days after Parent requests in writing that such Company Recommendations be reaffirmed, (vi) a Company Acquisition Proposal is publicly announced, and the Company (A) fails to issue a press release announcing its opposition to such Company Acquisition Proposal within five (5) business days after such Company Acquisition Proposal is announced, or (B) the Board of Directors of the Company fails to reaffirm in writing the Company Recommendations within five (5) business days after Parent requests in writing that such Company Recommendations be reaffirmed; or (vii) the Company breaches its obligations under Section 4.3 of this Agreement, except for any inadvertent breach of any notice provision contained in Section 4.3 which breach has been cured within forty-eight (48) hours of its occurrence. "Consent" shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization). 58 "Contract" shall mean any written, oral or other agreement, contract, subcontract, lease, understanding, instrument, note, option, warranty, purchase order, license, sublicense, insurance policy, benefit plan or legally binding commitment or undertaking of any nature. "Effective Time" is defined in Section 1.3 to this Agreement. "Encumbrance" shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim, option, right of first refusal, preemptive right, community property interest or restriction of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset); provided that the term Encumbrance shall not be deemed to include (a) liens for current Taxes or income Taxes not yet due and payable, (b) such imperfections of title and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby or otherwise materially impair the operations of the Acquired Corporations involving such properties, and (c) liens of mechanics or materialmen securing obligations incurred in the ordinary course of business that are not yet due and payable. Notwithstanding the foregoing, encumbrances, claims, options, rights of first refusal, licenses and other rights and restrictions relating to intellectual property rights do not constitute Encumbrances. "Entity" shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity. "Environmental Law" is defined in Section 2.13(b)(i) to this Agreement. "ERISA" is defined in Section 2.12(a) to this Agreement. "ERISA Affiliates" is defined in Section 2.12(a) to this Agreement. "ESPP Plan" is defined in Section 2.3(b) to this Agreement. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder. "Exchange Agent" is defined in Section 1.7(a) to this Agreement. "Exchange Fund" is defined in Section 1.7(a) to this Agreement. "Exchange Ratio" is defined in Section 1.5(a) of this Agreement. "Excluded Shares" shall mean any shares of Company Common Stock held as of the Effective Time (a) by Parent, Merger Sub or any Subsidiary of Parent or Merger Sub, (b) by any Subsidiary. or (c) by the Company as treasury shares. 59 "GAAP" is defined in Section 2.4(b) to this Agreement. "Government Contract" shall mean any prime contract, subcontract, letter contract, purchase order or delivery order, task order, or other agreement of any kind executed or submitted to or on behalf of any Governmental Body or any prime contractor or higher-tier subcontractor, or under which any Governmental Body or any such prime contractor otherwise has or may acquire any right or interest. "Governmental Authorization" shall mean any: (a) permit, license, certificate, franchise, permission, variance, clearance, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body. "Governmental Body" shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or Entity and any court or other tribunal). "Hazardous Materials" is defined in Section 2.13(b)(ii) to this Agreement. "Indemnified Persons" is defined in Section 5.6(a) to this Agreement. "Key Company Employee" shall mean the executive officers of the Company and the following employees of the Company: Terry Hirsh, Mel Snyder, Kane Hardy and Gary Bacon. "Legal Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel. "Legal Requirement" shall mean any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body (or under the authority of the NYSE, NASD or Nasdaq), including, without limitation, any Environmental Law. "Liability" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes. An event, violation, inaccuracy, circumstance or other matter will be deemed to have a "Material Adverse Effect" on, or shall be deemed to be "material" to, the Acquired Corporations, taken as a whole, if such event, violation, inaccuracy, circumstance or other matter had or could reasonably be expected to have a material adverse effect on (i) the business, condition, capitalization, 60 assets, liabilities, operations or financial performance of the Acquired Corporations taken as a whole, or (ii) the ability of the Company to consummate the Merger or any of the other transactions contemplated by this Agreement or to perform any of its obligations under this Agreement prior to the Termination Date such that the conditions in Section 6 would not be satisfied by the Company; provided, however, that none of the following shall be deemed in themselves, either alone or in combination, to constitute, and none of the following shall be taken into account in determining whether there has been or will be, a Material Adverse Effect on the Acquired Corporations: (a) any change in the market price or trading volume of Company's stock after the date hereof; (b) the delisting of the Company from the Nasdaq National Market or the Nasdaq SmallCap Market of Nasdaq; (c) any adverse change attributable to conditions affecting the industries as a whole in which the Acquired Corporations have material operations, the U.S. economy as a whole or the foreign economies as a whole in any locations where any of the Acquired Corporations has material operations; or (d) any adverse change due to compliance with the terms of, or the taking of any action required by, this Agreement. An event, violation, inaccuracy, circumstance or other matter will be deemed to have a "Material Adverse Effect" on, or shall be deemed to be "material" to, Parent and its Subsidiaries, taken as a whole, if such event, violation, inaccuracy, circumstance or other matter had or could reasonably be expected to have or give rise to a material adverse effect on (i) the business, condition, capitalization, assets, liabilities, operations or financial performance of Parent and its Subsidiaries taken as a whole or (ii) the ability of Parent to consummate the Merger or any of the other transactions contemplated by this Agreement or to perform any of its obligations under this Agreement prior to the Termination Date provided, however, that none of the following shall be deemed in themselves, either alone or in combination, to constitute, and none of the following shall be taken into account in determining whether there has been or will be, a Material Adverse Effect on the Parent and its Subsidiaries: (a) any change in the market price or trading volume of Parent's stock after the date hereof; or (b) any adverse change attributable to conditions affecting the industries as a whole in which the Parent and its Subsidiaries have material operations, the U.S. economy as a whole or the foreign economies as a whole in any locations where any of the Parent and its Subsidiaries has material operations. "Merger" is defined in the Recitals to this Agreement. "Merger Consideration" is defined in Section 1.5(a)(i) to this Agreement. "Merger Sub" is defined in the Preamble to this Agreement. "Multiemployer Plan" is defined in Section 2.12(b) to this Agreement. "Multiple Employer Welfare Arrangement" is defined in Section 2.12(b) to this Agreement. "NASD" shall mean the National Association of Securities Dealers, Inc. "Nasdaq" shall mean the National Association of Securities Dealers automated quotation system. 61 "Order" shall mean any: (a) order, judgment, injunction, edict, decree, ruling, pronouncement, determination, decision, opinion, verdict, sentence, subpoena, writ or award issued, made, entered, rendered or otherwise put into effect by or under the authority of any court, administrative agency or other Governmental Body or any arbitrator or arbitration panel; or (b) Contract with any Governmental Body entered into in connection with any Legal Proceeding. "Parent" is defined in the Preamble to this Agreement. "Parent Balance Sheet Date" shall mean June 30, 2002. "Parent Common Stock" shall mean the Common Stock, $0.01 par value per share, of Parent. "Parent Contract" shall mean any Contract: (a) to which Parent or any Subsidiary of Parent is a party; (b) by which Parent or any Subsidiary of Parent or any asset of Parent or any Subsidiary of Parent is or may become bound or under which Parent or any Subsidiary of Parent has, or may become subject to, any obligation; or (c) under which Parent or any Subsidiary of Parent has or may acquire any right or interest. "Parent Disclosure Schedule" is defined in Section 3 to this Agreement. "Parent Preferred Stock" shall mean the Preferred Stock, $.01 par value, of Parent. "Parent Financial Statements" is defined in Section 3.4(b) to this Agreement. "Parent Organization Documents" is defined in Section 3.1 to this Agreement. "Parent Proxy Statement" is defined in Section 5.1 to this Agreement. "Parent Recommendations" is defined in Section 3.2 to this Agreement. "Parent SEC Documents" is defined in Section 3.4(a) to this Agreement. "Parent Stockholders' Meeting" is defined in Section 5.2(e) to this Agreement. "Person" shall mean any individual, Entity or Governmental Body. "Pre-Closing Period" is defined in Section 4.1 to this Agreement. "Proprietary Asset" shall mean any: (a) patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), domain name, copyright application, copyright registration, maskwork right, maskwork right application, trade secret, or any other intellectual property right, including any of the foregoing rights relating to any know-how, customer list, franchise, system, computer 62 software, source code, algorithm, invention, design, blueprint, engineering drawing, proprietary product, technology or other intangible asset; or (b) right to use or exploit any of the foregoing. "Registration Statement" is defined in Section 5.1 of this Agreement. "Representatives" shall mean officers, directors, employees, agents, attorneys, accountants, advisors, consultants and representatives. "SEC" shall mean the U.S. Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended and the regulations promulgated thereunder. "Shareholders" is defined in the Recitals to this Agreement. "Shares" is defined in Section 1.6 of this Agreement. An entity shall be deemed to be a "Subsidiary" of another Person if such Person directly or indirectly owns, beneficially or of record, (a) an amount of voting securities of other interests in such Entity that is sufficient to enable such Person to elect at least a majority of the members of such Entity's Board of Directors or other governing body, or (b) at least 50% of the outstanding equity or financial interests of such Entity. "Surviving Corporation" is defined in Section 1.1 to this Agreement. "Takeover Laws" means any "Moratorium," "Control Share Acquisition," "Fair Price," "Supermajority," "Affiliate Transactions," or "Business Combination Statute or Regulation" or other similar state antitakeover laws and regulations. "Tax" shall mean any tax (including any income tax, franchise tax, capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including any customs duty), deficiency or other fee in the nature of a tax, and any related charge or amount (including any fine, penalty or interest), imposed, assessed or collected by or under the authority of any Governmental Body. "Tax Return" shall mean any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax. "Termination Date" is defined in Section 7.1(b) to this Agreement. "Termination Fee" is defined in Section 7.3(b)(i) to this Agreement. 63 "U.S. Government" shall mean the federal government of the United States of America and any of its branches and instrumentalities, including its departments, agencies, bureaus, commissions, boards, courts, corporations, offices, and other entities, and any divisions or units thereof. "Voting Agreements" is defined in the Recitals to this Agreement. 64 EXHIBIT B-1 COMPANY SHAREHOLDERS SIGNING VOTING AGREEMENTS Leo A. Guthart James H. Simons Topspin Associates, L.P. Topspin Partners, L.P. William P. Crowell Robert B. Fougner R. Christopher Chillingworth Shining Sea Limited Paul Gauvreau Regis McKenna Howard Morgan William Harris Richard Walsh Philip Breeden 65 EXHIBIT B-3 PARENT STOCKHOLDER SIGNING VOTING AGREEMENTS Anthony Caputo 66 EX-4.1 4 p16275_4-1.txt FORM OF VOTING AGREEMENT FORM OF VOTING AGREEMENT THIS VOTING AGREEMENT is entered into as of October __, 2002, by and between Sapphire, a Delaware corporation ("Parent"), Sapphire Acquisition Corp., a California corporation and wholly-owned subsidiary of Parent ("Merger Sub"), and each of the undersigned shareholders (each a "Shareholder" and collectively, the "Shareholders") of Crystal, a California corporation (the "Company"). RECITALS A. Parent, Merger Sub and the Company are entering into an Agreement and Plan of Reorganization of even date herewith (the "Reorganization Agreement") which provides (subject to the conditions set forth therein) among other things, for the merger (the "Merger") of Merger Sub with and into the Company pursuant to the terms and conditions of the Agreement of Merger (the "Agreement of Merger") thereto, and the terms and conditions of the Reorganization Agreement. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Reorganization Agreement. Certain capitalized terms are defined in Section 5 herein. B. In order to induce Parent and Merger Sub to enter into the Reorganization Agreement, the Shareholders, solely in their individual capacities as Shareholders of the Company, are entering into this Voting Agreement. AGREEMENT The parties to this Voting Agreement, intending to be legally bound, agree as follows: SECTION 1. VOTING OF SHARES 1.1. Voting. Each Shareholder hereby agrees to appear, or cause the holder of record of any Subject Securities on any applicable record date (the "Record Holder") to appear, in person or by proxy, for the purpose of obtaining a quorum at any annual or special meeting of stockholders of the Company and at any adjournment thereof for the purpose of voting on each of the Agreement of Merger and the Reorganization Agreement and the transactions contemplated thereby (a "Meeting"). Each Shareholder agrees that, during the period from the date of this Voting Agreement through the Expiration Date, at any Meeting, however called, and in any action by written consent of the shareholders of the Company, each Shareholder shall vote the Subject Securities or cause the Subject Securities to be voted (to the extent such securities are entitled to be voted) in such Shareholder's sole capacity as a shareholder of the Company: (a) in favor of the Merger and the adoption of the Agreement of Merger, Reorganization Agreement and the transactions contemplated thereby (including any amendments or modifications of the terms thereof approved by the Board of Directors of the Company and by Parent) in connection with any meeting of, or solicitation of consents from, the shareholders of the Company at which or in connection with which the Merger, the Agreement of Merger or the Reorganization Agreement are submitted for the consideration and vote of the shareholders of the Company; (b) against any action or agreement that would result in a breach of any representation, warranty, covenant or obligation of the Company in the Reorganization Agreement; (c) against any action or agreement that would cause any provision contained in Section 6 of the Reorganization Agreement to not be satisfied; (d) against approval or adoption of any extraordinary corporate transaction (other than the Merger, Agreement of Merger, the Reorganization Agreement or the transactions contemplated thereby) including, without limitation, any transaction involving (i) the sale or transfer of all or substantially all of the capital stock of the Company, whether by merger, consolidation or other business combination, (ii) a sale or transfer of all or substantially all of the assets of the Company or its subsidiaries, (iii) a reorganization, recapitalization or liquidation of the Company or its subsidiaries, or (iv) any amendment to the Company's governing instruments creating any new class of securities of the Company or otherwise affecting the rights of any class of security as currently in effect; and (e) against the following actions (other than the Merger, Agreement of Merger and the transactions contemplated by the Reorganization Agreement): (i) any Company Acquisition Proposal; (ii) any change in a majority of the members of the board of directors of the Company; or (iii) any other action which is intended to, or could reasonably be expected to, impede, interfere with, delay, postpone, discourage or adversely affect the consummation of the Merger, the Agreement of Merger or any of the other transactions contemplated by the Reorganization Agreement or this Voting Agreement. To the extent inconsistent with any of the foregoing provisions of this Section 1.1, each Shareholder revokes any and all previous proxies with respect to Subject Securities owned beneficially and/or of record by such Shareholder and such Shareholder agrees not to grant any proxy inconsistent with any of the foregoing provisions of this Section 1.1 with respect to any other voting interests in the Company owned or hereafter acquired beneficially or of record by such Shareholder 1.2. Proxy; Further Assurances. Contemporaneously with the execution of this Voting Agreement: (i) each Shareholder shall execute and deliver to Parent a proxy in the form attached to this Voting Agreement as Exhibit A, which shall be irrevocable to the fullest extent permitted by law, with respect to the shares referred to therein (the "Proxy"); and (ii) each Shareholder shall cause to be delivered to Parent an additional proxy (in the form attached hereto as Exhibit A) executed on behalf of the record owner of any outstanding shares of Company Common Stock that are Owned by such Shareholder, if applicable, which proxy shall be irrevocable to the fullest extent permitted by law, with respect to the shares referred to therein, and which shall also be considered the "Proxy" for purposes of Section 2.2. The proxy granted herein is intended to comply with the requirements of Section 705 of the California Corporations Code applicable to irrevocable proxies. SECTION 2. TRANSFER OF SUBJECT SECURITIES 2.1. Transferee of Subject Securities to Be Bound By this Agreement. Each Shareholder agrees that, during the period from the date of this Voting Agreement through the Expiration Date, such Shareholder shall not (i) cause or permit any Transfer of any of the Subject Securities to be effected; (ii) tender any of the Subject Securities to any Person or (ii) create or permit to exist any Encumbrance with respect to any Subject Securities (other than Encumbrances which do 2 not affect, directly or indirectly, the right of the Shareholder or Parent to vote the Subject Securities as provided herein ("Permitted Encumbrances")). 2.2. Transfer of Voting Rights. Each Shareholder agrees that, during the period from the date of this Voting Agreement through the Expiration Date, such Shareholder shall ensure that: (a) none of the Subject Securities are deposited into a voting trust with voting instructions inconsistent with any of the foregoing provisions of Section 1.1; and (b) other than the Proxy, no proxy is granted, and no voting agreement or similar agreement is entered into, with respect to any of the Subject Securities that is inconsistent with any of the foregoing provisions of Section 1.1. 2.3. Stop-Transfer Instructions. Each Shareholder agrees and consents to the entry of stop transfer instructions by the Company against the transfer of any Subject Securities consistent with the terms of Section 2.1. SECTION 3. Representations And Warranties Of ShareholderS Each Shareholder hereby, severally and not jointly, represents and warrants to Parent as follows: 3.1. Authorization, Etc. Such Shareholder has the legal capacity and absolute and unrestricted right, power, authority and capacity to execute and deliver this Voting Agreement and the Proxy and to perform its obligations hereunder and thereunder. This Voting Agreement and the Proxy have been duly executed and delivered by such Shareholder and constitute legal, valid and binding obligations of such Shareholder, enforceable against such Shareholder in accordance with their terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. 3.2. No Conflicts or Consents. (a) The execution and delivery of this Voting Agreement and the Proxy by such Shareholder do not, and the performance of this Voting Agreement and the Proxy by such Shareholder will not: (i) conflict with or violate any law, rule, regulation, order, decree or judgment applicable to such Shareholder or by which it or any of its properties is or may be bound or affected; or (ii) result in or constitute (with or without notice or lapse of time) any breach of or default under, or give to any other Person (with or without notice or lapse of time) any right of termination, amendment, acceleration or cancellation of, or result (with or without notice or lapse of time) in the creation of any Encumbrance or restriction (other than Permitted Encumbrances) on any of the Subject Securities pursuant to, any contract to which such Shareholder is a party or by which such Shareholder or any of his affiliates or properties is or may be bound or affected. (b) The execution and delivery of this Voting Agreement and the Proxy by such Shareholder do not, and the performance of this Voting Agreement and the Proxy by such Shareholder will not, require any consent or approval of any Person. 3.3. Title To Securities. As of the date of this Voting Agreement: (a) such Shareholder holds of record free and clear of any Encumbrances or restrictions (other than Permitted Encumbrances) the number of outstanding shares of Company Common Stock reflected on Schedule A as being Owned by such Shareholder under the heading "Shares Held of Record"; (b) 3 such Shareholder holds free and clear of any Encumbrances or restrictions (other than Permitted Encumbrances) the options, warrants and other rights to acquire shares of Company Common Stock reflected on Schedule A as being Owned by such Shareholder under the heading "Options, Warrants and Other Rights"; (c) such Shareholder Owns the additional securities of the Company reflected on Schedule A as being Owned by such Shareholder under the heading "Additional Securities Beneficially Owned"; and (d) such Shareholder does not directly or indirectly Own any shares of Company Common Stock or other securities of the Company, or any option, warrant or other right to acquire (by purchase, conversion or otherwise) any shares of Company Common Stock or other securities of the Company, other than the shares and options, warrants and other rights reflected on Schedule A as being Owned by such Shareholder. SECTION 4. MISCELLANEOUS 4.1. Survival of Representations, Warranties and Agreements. All representations, warranties, covenants and agreements made by the Shareholders in this Voting Agreement shall survive until the Expiration Date. 4.2. Expenses. All costs and expenses incurred in connection with the transactions contemplated by this Voting Agreement shall be paid solely by the party incurring such costs and expenses. 4.3. Notices. Any notice or other communication required or permitted to be delivered to any party under this Voting Agreement shall be in writing and shall be deemed properly delivered, given and received when actually delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto); provided, however, that a written notice delivered via facsimile shall be deemed delivered only if at the time of, or shortly after, such facsimile transmission the party giving the notice confirms by telephone the actual receipt by the other party of such facsimile transmission: IF TO PARENT: SafeNet, Inc. 8029 Corporate Drive Baltimore, Maryland 21236 Facsimile No. _______________ Attention: _____________________ WITH COPIES TO (WHICH COPIES SHALL NOT CONSTITUTE NOTICE): Venable, Baetjer and Howard, LLP 8010 Towers Crescent Drive Suite 300 Vienna, Virginia 22182 Facsimile No. (703) 821-8949 Attention: Elizabeth R. Hughes, Esq. 4 IF TO ANY SHAREHOLDER: at the address set forth below such Shareholder's signature on the signature page hereof WITH A COPY TO (WHICH COPY SHALL NOT CONSTITUTE NOTICE): CRYSTAL Corporation 3131 Jay Street Santa Clara, California 95056-0952 Facsimile No.: (408) 855-6106 Attention: Robert B. Fougner Morrison & Foerster LLP 755 Page Mill Road Palo Alto, California 94304-1018 Facsimile No.: (650) 494-0792 Attention: Paul "Chip" Lion, III, Esq. 4.4. Waiver of Appraisal Rights. Each Shareholder hereby irrevocably and unconditionally waives, and agrees to cause to be waived and to prevent the exercise of, any rights of appraisal, any dissenters' rights (including under Sections 1300 through 1309 of the California Corporations Code) and any similar rights relating to the Merger or any related transaction that such Shareholder or any other Person may have by virtue of the ownership of any outstanding shares of Company Common Stock Owned by Shareholder. 4.5. No Solicitation. Each Shareholder agrees that, during the period from the date of this Voting Agreement through the Expiration Date, such Shareholder shall not, directly or indirectly, and such Shareholder shall ensure that his Representatives (as defined in the Reorganization Agreement) do not, directly or indirectly: (i) take any action to solicit, initiate, induce or seek to facilitate the making, submission or announcement of any Company Acquisition Proposal (as defined in the Reorganization Agreement) or take any action that could reasonably be expected to lead to a Company Acquisition Proposal; (ii) furnish any nonpublic information regarding any of the Acquired Corporations to any Person (other than Parent or Merger Sub) in connection with or in response to a Company Acquisition Proposal or an inquiry or indication of interest that the Shareholder reasonably believes could be expected to lead to a Company Acquisition Proposal, (iii) engage in discussions or negotiations with any Person with respect to any Company Acquisition Proposal. Each Shareholder shall immediately cease and discontinue, and such Shareholder shall ensure that his Representatives immediately cease and discontinue, any existing discussions with any Person (except Parent and Merger Sub) that relate to any Company Acquisition Proposal. 4.6. Severability. If any provision of this Voting Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof 5 under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Voting Agreement. Each provision of this Voting Agreement is separable from every other provision of this Voting Agreement, and each part of each provision of this Voting Agreement is separable from every other part of such provision. 4.7. Entire Agreement. This Voting Agreement, the Proxy and any other documents delivered by the parties in connection herewith constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings between the parties with respect thereto. No addition to or modification of any provision of this Voting Agreement shall be binding upon either party unless made in writing and signed by both parties. 4.8. Assignment; Binding Effect. Except as provided herein, neither this Voting Agreement nor any of the interests or obligations hereunder may be assigned or delegated by any Shareholder or Parent without the prior written consent of the non-assigning parties, which consent shall not be unreasonably withheld, and any attempted or purported assignment or delegation of any of such interests or obligations shall be void. Subject to the preceding sentence, this Voting Agreement shall be binding upon, and inure to the benefit of, the Shareholders and their respective heirs, estate, executors, Representatives, successors and assigns (as the case may be), and shall be binding upon, and inure to the benefit of, Parent and its successors and assigns. Without limiting any of the restrictions set forth in Section 2 or elsewhere in this Voting Agreement, this Voting Agreement shall be binding upon any Person to whom any Subject Securities are Transferred. Nothing in this Voting Agreement is intended to confer on any Person (other than Parent and its successors and assigns) any rights or remedies of any nature. Each Shareholder specifically agrees that the obligation of such Shareholder hereunder shall not be terminated by operation of law, whether by death or incapacity of such Shareholder or otherwise. 4.9. Specific Performance. The parties agree that irreparable damage would occur in the event that any provision of this Voting Agreement or the Proxy was, or is, not performed in accordance with its specific terms or was, or is, otherwise breached. Each Shareholder agrees that, in the event of any breach or threatened breach by such Shareholder of any covenant or obligation contained in this Voting Agreement or in the Proxy, Parent and Merger Sub shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. Each Shareholder further agrees that neither Parent nor any other Person shall be required to obtain, furnish or post any bond or similar instrument in connection with or as a condition to obtaining any remedy referred to in this Section 4.9, and each Shareholder irrevocably waives any objection to the imposition of such relief or any right he may have to require the obtaining, furnishing or posting of any such bond or similar instrument. 4.10. Non-Exclusivity. The rights and remedies of Parent under this Voting Agreement are not exclusive of or limited by any other rights or remedies which it may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of Parent under this Voting Agreement, and the obligations and liabilities of Shareholder under this Voting 6 Agreement, are in addition to their respective rights, remedies, obligations and liabilities under common law requirements and under all applicable statutes, rules and regulations. Nothing in this Voting Agreement shall limit any of Shareholder's obligations, or the rights or remedies of Parent, under any agreement between Parent and Shareholder; and nothing in any such agreement shall limit any of Shareholder's obligations, or any of the rights or remedies of Parent, under this Voting Agreement. 4.11. Governing Law; Venue. (a) This Voting Agreement and the Proxy shall be construed in accordance with, and governed in all respects by, the laws of the State of Delaware (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Voting Agreement or the Proxy or the enforcement of any provision of this Voting Agreement or the Proxy may be brought or otherwise commenced in any state or federal court located in the State of Maryland. Shareholder and Parent each: (i) expressly and irrevocably consents and submits to the exclusive jurisdiction and venue of any state or federal court in the State of Maryland and the applicable courts of appeals therefrom, in connection with any such legal proceeding; (ii) agree that if any action is commenced in a state court, then subject to applicable law, no party shall object to the removal of such action to any federal court located in the State of Maryland; (iii) agrees that service of any process, summons, notice or document by U.S. mail addressed to him at the address set forth in Section 4.3 shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iv) agrees that each state and federal court located in the State of Maryland, shall be deemed to be a convenient forum; and (v) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in the State of Maryland, any claim by either Shareholder or Parent that it is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Voting Agreement or the subject matter of this Voting Agreement may not be enforced in or by such court. Nothing contained in this Section 4.11 shall be deemed to limit or otherwise affect the right of either party to commence any legal proceeding or otherwise proceed against the other party in any other forum or jurisdiction. (c) SHAREHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY TRIAL IN CONNECTION WITH ANY LEGAL PROCEEDING RELATING TO THIS VOTING AGREEMENT OR THE PROXY OR THE ENFORCEMENT OF ANY PROVISION OF THIS VOTING AGREEMENT OR THE PROXY. 7 4.12. Counterparts. This Voting Agreement may be executed by the parties in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. 4.13. Captions. The captions contained in this Voting Agreement are for convenience of reference only, shall not be deemed to be a part of this Voting Agreement and shall not be referred to in connection with the construction or interpretation of this Voting Agreement. 4.14. Waiver. No failure on the part of Parent to exercise any power, right, privilege or remedy under this Voting Agreement, and no delay on the part of Parent in exercising any power, right, privilege or remedy under this Voting Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. Parent shall not be deemed to have waived any claim available to Parent arising out of this Voting Agreement, or any power, right, privilege or remedy of Parent under this Voting Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of Parent; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. 4.15. Construction. (a) For purposes of this Voting Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include masculine and feminine genders. (b) The parties agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Voting Agreement. (c) As used in this Voting Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." (d) Except as otherwise indicated, all references in this Voting Agreement to "Schedules," "Sections" and "Exhibits" are intended to refer to Schedules of this Voting Agreement, Sections of this Voting Agreement and Exhibits to this Voting Agreement. 4.16. Shareholder Capacity. No person executing this Voting Agreement who is a director or officer of the Company makes any agreement or understanding herein in his capacity as such director or officer. Without limiting the generality of the foregoing, Shareholder executes this Voting Agreement solely in its capacity as the Owner of Subject Securities and nothing herein shall limit, restrict or otherwise affect in any way any actions taken by the Shareholder in its capacity as an officer or director of the Company, in exercising the Company's rights under the Reorganization Agreement or in exercising its fiduciary duties and responsibilities, it being agreed and understood that this Voting Agreement shall apply to Shareholder solely in his or her capacity as a shareholder of Company and shall not apply to his actions, judgements or decisions as a director or officer of the Company, but provided further, that no obligation of Shareholder to the Company as an officer or director of the Company shall affect, impair or impede Shareholder's obligations under this Voting 8 Agreement, including Shareholder's obligation to vote the Subject Securities in accordance with Section 1.2 hereof. 4.17. Amendment. This Agreement shall not be amended, altered or modified except by an instrument in writing duly executed and delivered on behalf of each of the parties hereto. SECTION 5. CERTAIN DEFINITIONS For purposes of this Voting Agreement: (a) "Company Common Stock" shall mean the common stock, $.01 par value, of the Company. (b) "Expiration Date" shall mean the date upon which the Reorganization Agreement is terminated or upon the Effective Date. (c) Each Shareholder shall be deemed to "Own" or to have acquired "Ownership" of a security if such Shareholder is the: (i) record owner of such security; or (ii) "beneficial owner" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of such security; provided, however, that each Shareholder shall not be deemed to Own a security solely because of such Shareholder's status as an executive officer, director, partner or member of a Person that owns such security. (d) "Person" shall mean any (i) individual, (ii) corporation, limited liability company, partnership or other entity, or (iii) Governmental Body. (e) "Subject Securities" with respect to each Shareholder shall mean: (i) all securities of the Company (including all shares of Company Common Stock and all options, warrants and other rights to acquire shares of Company Common Stock) Owned by such Shareholder as of the date of this Agreement; and (ii) all additional securities of the Company (including all additional shares of Company Common Stock and all additional options, warrants and other rights to acquire shares of Company Common Stock) of which such Shareholder acquires Ownership during the period from the date of this Agreement through the Expiration Date. A Person shall be deemed to have effected a "Transfer" of a security if such Person directly or indirectly: (i) sells, assigns, pledges, mortgages, encumbers, grants an option with respect to, transfers or disposes of such security or any interest in such security; (ii) enters into an agreement or commitment contemplating the possible sale of, assignment of, pledge of, mortgage of, encumbrance of, grant of an option with respect to, transfer of or disposition of such security or any interest therein; or (iii) reduces such Person's beneficial ownership interest in or risk relating to any such security. [SIGNATURE PAGE TO FOLLOW] 9 IN WITNESS WHEREOF, Parent, Merger Sub and each Shareholder have caused this Voting Agreement to be executed as of the date first written above. PARENT: ----------------------------------- By: -------------------------------- [Name] [Title] MERGER SUB: ----------------------------------- By: -------------------------------- [Name] [Title] SHAREHOLDERS: ----------------------------------- [NAME] Address: -------------------------- -------------------------- -------------------------- Facsimile: -------------------------- ----------------------------------- [NAME] Address: -------------------------- -------------------------- -------------------------- Facsimile: -------------------------- 10 ----------------------------------- [NAME] Address: -------------------------- -------------------------- -------------------------- Facsimile: -------------------------- ----------------------------------- [NAME] Address: -------------------------- -------------------------- -------------------------- Facsimile: -------------------------- 11 SCHEDULE A - ---------- - ------------ ---------------------- ---------------------- --------------------- Options, Shareholder Shares Held of Warrants and Additional Securities Record Other Rights Beneficially Owned - ------------ ---------------------- ---------------------- --------------------- - ------------ ---------------------- ---------------------- --------------------- - ------------ ---------------------- ---------------------- --------------------- - ------------ ---------------------- ---------------------- --------------------- - ------------ ---------------------- ---------------------- --------------------- - ------------ ---------------------- ---------------------- --------------------- - ------------ ---------------------- ---------------------- --------------------- 12 IRREVOCABLE PROXY The undersigned shareholder of Crystal, a California corporation (the "Company"), hereby irrevocably (to the fullest extent permitted by law) appoints Anthony A. Caputo or Bruce R. Thaw of Sapphire, a Delaware corporation ("Parent"), and each of them, the attorneys and proxies of the undersigned with full power of substitution and resubstitution, to the full extent of the undersigned's rights with respect to (i) the outstanding shares of Company Common Stock or other securities owned of record by the undersigned as of the date of this proxy, which shares are specified on the final page of this proxy, and (ii) any and all other shares of Company Common Stock or other securities which the undersigned may acquire on or after the date hereof. (The shares of the Company Common Stock or other securities referred to in clauses "(i)" and "(ii)" of the immediately preceding sentence, except for shares which are not Subject Securities (as defined in the Voting Agreement), are collectively referred to in this proxy as the "Shares"). Upon the execution hereof, all prior proxies given by the undersigned with respect to any of the Shares are hereby revoked, and the undersigned agrees that no subsequent proxies will be given with respect to any of the Shares. This proxy is irrevocable, is coupled with an interest and is granted in connection with the Voting Agreement, dated as of the date hereof, between Parent and the undersigned (the "Voting Agreement"), and is granted in consideration of Parent entering into the Agreement and Plan of Reorganization, dated as of the date hereof, among Parent, Sapphire Acquisition Corp., a California corporation and a wholly owned subsidiary of Parent, and the Company (the "Reorganization Agreement"). Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Reorganization Agreement. The proxy granted herein is executed in accordance with and intended to comply with the requirements of Section 705 of the California Corporations Code applicable to irrevocable proxies. The attorneys and proxies named above will be empowered, and may exercise this proxy, to vote the Shares at any meeting of the shareholders of the Company, however called, and in any action by written consent of the Shareholders of the Company: (i) in favor of the Merger and the adoption of the Agreement of Merger, Reorganization Agreement and the transactions contemplated thereby (including any amendments or modifications of the terms thereof approved by the Board of Directors of the Company) in connection with any meeting of, or solicitation of consents from, the shareholders of the Company at which or in connection with which the Merger, the Agreement of Merger or the Reorganization Agreement are submitted for the consideration and vote of the shareholders of the Company; (ii) against any action or agreement that would result in a breach of any representation, warranty, covenant or obligation of the Company in the Reorganization Agreement; (iii) against any action or agreement that would cause any provision contained in Section 6 of the Reorganization Agreement to not be satisfied; (iv) against approval or adoption of any extraordinary corporate transaction (other than the Merger, Agreement of Merger, the Reorganization Agreement or the transactions contemplated thereby) including, without limitation, any transaction involving (i) the sale or transfer of all or substantially all of the capital stock of the Company, whether by merger, consolidation or other business combination, (ii) a sale or transfer of all or substantially all of the assets of the Company or its subsidiaries, (iii) a reorganization, recapitalization or liquidation of the Company or its subsidiaries, or (iv) any amendment to the Company's governing instruments creating any new class of securities of the Company or otherwise affecting the rights of any class of security as currently in effect; and (v) against the following actions (other than the Merger, Agreement of Merger and the transactions contemplated by the Reorganization Agreement): (i) any Company Acquisition Proposal; (ii) any change in a majority of the members of the board of directors of the Company; or (iii) any other action which is intended to, or could reasonably be expected to, impede, interfere with, delay, postpone, discourage or adversely affect the consummation of the Merger, the Agreement of Merger or any of the other transactions contemplated by the Reorganization Agreement or this Voting Agreement. THE ATTORNEYS AND PROXIES NAMED ABOVE MAY NOT EXERCISE THIS IRREVOCABLE PROXY ON ANY OTHER MATTER EXCEPT AS PROVIDED ABOVE. THE UNDERSIGNED SHAREHOLDER MAY VOTE THE SHARES ON ALL OTHER MATTERS. This proxy shall be binding upon the heirs, estate, executors, personal representatives, successors and assigns of the undersigned (including any transferee of any of the Shares). If any provision of this proxy or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this proxy. Each provision of this proxy is separable from every other provision of this proxy, and each part of each provision of this proxy is separable from every other part of such provision. This proxy shall terminate upon the valid termination of the Voting Agreement. [next page is a signature page] 2 Dated: October __, 2002. ----------------------------------- [NAME] Number of shares of common stock of the Company owned of record or beneficially as of the date of this irrevocable proxy: ----------------------------------- EX-10.1 5 ex10_1.txt STIPULATION AGREEMENT UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA IN RE CYLINK SECURITIES LITIGATION, ) Master File No. ) C-98-04292 (VRW) ) ) STIPULATION AND AGREEMENT This Document Relates To: ALL ACTIONS ) OF SETTLEMENT ) ) ) ) ) - ----------------------------------------------- This stipulation and agreement of settlement (the "Stipulation") is submitted pursuant to Rule 23 of the Federal Rules of Civil Procedure. Subject to the approval of the Court, this Stipulation is entered into among Lead Plaintiff Jonny Alpern and the Class (as hereinafter defined) and Defendants Cylink Corporation ("Cylink"), and Fernand B. Sarrat, John H. Daws, and Thomas L. Butler (the "Individual Defendants") (Cylink and the Individual Defendants are collectively referred to hereinafter as the "Defendants"), by and through their respective counsel. WHEREAS: A. Beginning on or about November 6, 1998, seven actions - Wenderhold v. Cylink Corp. et al., Case No. 98-CV-04292 (VRW), Lerner v. Cylink Corp. et al., Case No. 98-CV-04296 (VRW), Poling v. Cylink Corp. et al., Case No. 98-CV-04360 (VRW), Silberman v. Cylink Corp. et al., Case No. 98-CV-04536 (VRW), Vassilakos v. Cylink Corp. et al., Case No. 98-CV-04603 (VRW), Von Schweinitz v. Cylink Corp. et al., Case No. 98-CV-04673 (VRW), Plisski v. Cylink Corp. et al., Case No. 98-CV-04757 (VRW)- were filed in this Court and were consolidated under the caption above by order of the Court entered April 6, 2000, and are collectively hereinafter referred to as the "Action"; B. The Amended Consolidated Complaint dated December 5, 2000 (the "Complaint") filed in the Action generally alleges, among other things, that Defendants issued press releases and filed quarterly reports with the Securities and Exchange Commission regarding Cylink's financial condition during the Class Period -- April 23, 1998 through and including November 5, 1998 -- that were materially false and misleading in a scheme to artificially inflate the value of Cylink securities in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder; C. The Complaint further alleges that Plaintiff and other Class Members purchased the common stock of Cylink during the Class Period at prices artificially inflated as a result of the Defendants' dissemination of these materially false and misleading statements; D. By Order dated August 29, 2001, the Court granted in part and denied in part the motions to dismiss the Complaint filed by Cylink and by the Individual Defendants; E. The Defendants deny any wrongdoing or legal liability whatsoever and this Stipulation shall in no event be construed or deemed to be evidence of or an admission or concession on the part of any Defendant with respect to any claim or of any fault or liability or wrongdoing or damage whatsoever, or any infirmity in the defenses that the Defendants have asserted. Defendants also deny that Lead Plaintiff or Class Members have suffered damage or that the price of Cylink's common stock was artificially inflated by reason of alleged misrepresentations, non-disclosures or otherwise, or that the Class was harmed by the conduct alleged in the Complaint. This Stipulation shall not be construed or deemed to be a concession by any Plaintiff of any infirmity in the claims asserted in the Action. The parties to this Stipulation recognize, however, that the litigation has been filed by Plaintiff and defended by Defendants in good faith and with adequate basis in fact under Federal Rule of Civil Procedure 11, that the litigation is being voluntarily settled after advice of counsel, and that the terms of the settlement are fair, adequate and reasonable; -2- F. Plaintiff's Counsel have conducted an investigation relating to the claims and the underlying events and transactions alleged in the Complaint. Plaintiff's Counsel have analyzed evidence adduced during pretrial discovery and have researched the applicable law with respect to the claims of Plaintiff and the Class against the Defendants and the potential defenses thereto; G. Plaintiff, by his counsel, has conducted discussions and arm's length negotiations with counsel for Defendants with respect to a compromise and settlement of the Action with a view to settling the issues in dispute and achieving the best relief possible consistent with the interests of the Class. Indeed, Plaintiff and Defendants, including representatives of Defendants' insurance carriers, conducted several mediation sessions with Magistrate Judge Edward A. Infante; H. Based upon their investigation and pretrial discovery as set forth above, Plaintiff's Counsel have concluded that the terms and conditions of this Stipulation are fair, reasonable and adequate to Plaintiff and the Class, and in their best interests, and have agreed to settle the claims raised in the Action pursuant to the terms and provisions of this Stipulation, after considering (a) the substantial benefits that Plaintiff and the members of the Class will receive from settlement of the Action, (b) the attendant risks of litigation, and (c) the desirability of permitting the Settlement to be consummated as provided by the terms of this Stipulation; and I. Defendants have concluded that it is desirable that this Action be fully and finally settled in the manner and upon the terms and conditions set forth herein in order to avoid the expense, inconvenience and distraction of further legal proceedings and to fully and finally settle the Settled Claims (as defined below). In determining to enter the Stipulation, the defendants also have considered a number of issues, including the uncertain outcome and the risk inherent in any litigation, especially in complex actions such as this Action, as well as the difficulties and delays inherent in such litigation. NOW THEREFORE, without any admission or concession on the part of Plaintiff of any lack of merit of the Action whatsoever, and without any admission or concession of any liability or wrongdoing or lack of merit in the defenses whatsoever by Defendants, it is hereby STIPULATED AND AGREED, by and among the parties to this Stipulation, through their -3- respective attorneys, subject to approval of the Court pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, in consideration of the benefits flowing to the parties hereto from the Settlement, that all Settled Claims (as defined below) as against the Released Parties (as defined below) shall be compromised, settled, released and dismissed with prejudice, upon and subject to the following terms and conditions: CERTAIN DEFINITIONS 1. As used in this Stipulation, the following terms shall have the following meanings: (a) "Authorized Claimant" means a Class Member who submits a timely and valid Proof of Claim form to the Claims Administrator. (b) "Claims Administrator" means the firm of Mulholland & Company which shall administer the Settlement. (c) "Class" and "Class Members" means all persons who purchased the common stock of Cylink during the period from April 23, 1998 through November 5, 1998, inclusive. Excluded from the Class are the Defendants, members of the immediate family (parents, spouses, siblings, and children) of each of the Individual Defendants, any subsidiary of Cylink, the directors and officers of Cylink or any subsidiary of Cylink, any entity in which any excluded person has a controlling interest, and the legal representatives, heirs, successors, and assigns of any excluded person. Also excluded from the Class are any putative Class Members who exclude themselves by filing a request for exclusion in accordance with the requirements set forth in the Notice. (d) "Class Period" means, for the purposes of this Stipulation only, the period of time from April 23, 1998 through November 5, 1998, inclusive. (e) "Defendants" means Cylink and the Individual Defendants. (f) "Defendants' Counsel" means the law firms of Wilson Sonsini Goodrich & Rosati, Bergeson & Eliopolous LLP, and Bryant Clohan & Baruh LLP. -4- (g) "Effective Date of Settlement" or "Effective Date" means the date upon which the Settlement contemplated by this Stipulation shall become effective, as set forth in paragraph 22 below. (h) "Notice" means the Notice of Pendency of Class Action, Hearing On Proposed Settlement and Attorneys' Fee Petition and Right to Share in Settlement Fund, which will be filed with the Court on or before November 1, 2002, and which, if approved by the Court, will be sent to members of the Class. (i) "Order and Final Judgment" means the proposed order to be entered approving the Settlement, which will be filed with the Court on or before November 1, 2002, and which, if signed by the Court, will dismiss this Action with prejudice. (j) "Plaintiff's Counsel" means the law firm of Innelli and Molder. (k) "Plaintiff" or "Lead Plaintiff" means Jonny Alpern. (l) "Preliminary Approval Order" means the proposed order preliminarily approving the Settlement and directing notice thereof to the Class, which will be filed with the Court on or before November 1, 2002. (m) "Publication Notice" means the summary notice of proposed Settlement and hearing for publication, which will be filed with the Court on or before November 1, 2002. (n) "Released Parties" means the Defendants, their past or present subsidiaries, parents, successors and predecessors, officers, directors, shareholders, agents, employees, attorneys, advisors, investment advisors, auditors, accountants, insurers and reinsurers, insurers' and reinsurers' counsel, and any person, firm, trust, corporation, officer, director or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants, and the legal representatives, heirs, successors in interest or assigns of the Defendants. (o) "Settled Claims" means any and all claims, rights or causes of action or liabilities whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including both known claims and Unknown Claims, that have been or could have been asserted in any forum by the Class Members or any of them against any of -5- the Released Parties which arise out of or relate in any way to the allegations, transactions, facts, matters or occurrences, representations or omissions involved, set forth, referred to or that could have been asserted in the Complaint relating to the purchase of shares of the common stock of Cylink during the Class Period. (p) "Settled Defendants' Claims" means any and all claims, rights or causes of action or liabilities whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including both known claims and Unknown Claims, that have been or could have been asserted in the Action or any forum by the Defendants or any of them or the successors and assigns of any of them against Plaintiff, Class Members or their attorneys, which arise out of or relate in any way to the institution, prosecution, or settlement of the Action. (q) "Settlement" means the settlement contemplated by this Stipulation. (r) "Unknown Claims" means any and all Settled Claims which any Plaintiff or Class Member does not know or suspect to exist in his, her or its favor at the time of the release of the Released Parties, and any Settled Defendants' Claims which any Defendant does not know or suspect to exist in his, her or its favor, which if known by him, her or it might have affected his, her or its decision(s) with respect to the Settlement. With respect to any and all Settled Claims and Settled Defendants' Claims, the parties stipulate and agree that upon the Effective Date, the Plaintiff and the Defendants shall expressly, and each Class Member shall be deemed to have, and by operation of the Judgment shall have, expressly waived any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law, which is similar, comparable, or equivalent to Cal. Civ. Code ss. 1542, which provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Plaintiff and Defendants acknowledge, and Class Members by operation of law shall be deemed to have acknowledged, that the inclusion of "Unknown Claims" in the definition of Settled -6- Claims and Settled Defendants' Claims was separately bargained for and was a key element of the Settlement. SCOPE AND EFFECT OF SETTLEMENT 2. The obligations incurred pursuant to this Stipulation shall be in full and final disposition of the Action and any and all Settled Claims as against all Released Parties and any and all Settled Defendants' Claims. 3. (a) Pursuant to the Order and Final Judgment, upon the Effective Date of this Settlement, Plaintiff and members of the Class on behalf of themselves, their heirs, executors, administrators, successors and assigns, and any persons they represent, shall, with respect to each and every Settled Claim, release and forever discharge, and shall forever be enjoined from prosecuting, any Settled Claims against any of the Released Parties. (b) Pursuant to the Order and Final Judgment, upon the Effective Date of this Settlement, each of the Defendants, on behalf of themselves and the Released Parties, shall release and forever discharge each and every of the Settled Defendants' Claims, and shall forever be enjoined from prosecuting the Settled Defendants' Claims. THE SETTLEMENT CONSIDERATION 4. Defendants will pay $6.2 million (the "Cash Settlement Amount") into an interest-bearing escrow account on behalf of Plaintiff and the Class within 30 days from the filing of this fully executed stipulation with the Court. The Cash Settlement Amount and any interest earned thereon shall be the Gross Settlement Fund. The Plaintiff and Defendants also acknowledge and agree that, notwithstanding anything else in this paragraph, if Cylink files for bankruptcy protection (or if an involuntary bankruptcy petition is filed against Cylink) prior to the occurrence of all events set forth in Paragraph 22, subsections (a) through (c), then the parties shall seek the bankruptcy court's approval of the settlement and, if it has not yet occurred, of payment of the Cash Settlement Amount into the escrow account, which payment will be contingent on such approval. All parties will cooperate as necessary in obtaining an appropriate order. -7- 5. (a) The Gross Settlement Fund, net of any Taxes (as defined below) on the income thereof, shall be used to pay (i) the notice and administration costs referred to in paragraph 7 hereof, (ii) the attorneys' fee and expense award referred to in paragraph 8 hereof, and (iii) the remaining administration expenses referred to in paragraph 9 hereof. The balance of the Gross Settlement Fund after the above payments shall be the Net Settlement Fund which shall be distributed to the Authorized Claimants as provided in paragraphs 10-12 hereof. Any sums required to be held in escrow hereunder shall be held by an independent Escrow Agent for the Settlement Fund. This Escrow Agent shall be PNC Bank, N.A. All funds held by the Escrow Agent shall be deemed to be in the custody of the Court and shall remain subject to the jurisdiction of the Court until such time as the funds shall be distributed or returned to the persons paying the same pursuant to this Stipulation and/or further order of the Court. Accordingly, the Escrow Agent shall only disburse funds by an order of the Court, upon signature of Plaintiff's Counsel, after notice to Defendants' Counsel. The Escrow Agent shall invest any funds in excess of $100,000 in short term United States Agency or Treasury Securities, and shall collect and reinvest all interest accrued thereon. Any funds held in escrow in an amount of less than $100,000 may be held in an interest bearing bank account insured by the FDIC. The parties hereto agree that the Settlement Fund is intended to be a Qualified Settlement Fund within the meaning of Treasury Regulation ss. 1.468B-1 and that the Escrow Agent, as administrator of the Settlement Fund within the meaning of Treasury Regulation ss. 1.468B-2(k)(3), shall be responsible for filing tax returns for the Settlement Fund and paying from the Settlement Fund any Taxes owed with respect to the Settlement Fund. Counsel for Defendants agree to provide promptly to the Escrow Agent the statement described in Treasury Regulation ss. 1.468B-3(e). (b) All (i) taxes on the income of the Gross Settlement Fund and (ii) expenses and costs incurred in connection with the taxation of the Gross Settlement Fund (including, without limitation, expenses of tax attorneys and accountants) (collectively "Taxes") shall be paid out of the Gross Settlement Fund, shall be considered to be a cost of administration of the settlement and shall be timely paid by the Escrow Agent without prior Order of the Court. -8- ADMINISTRATION 6. The Claims Administrator shall administer the Settlement under Plaintiff's Counsel's supervision and subject to the jurisdiction of the Court. Except as stated in paragraph 14 hereof, the Released Parties shall have no responsibility for the administration of the Settlement and shall have no liability to the Class in connection with such administration. Defendants' Counsel shall cooperate in the administration of the Settlement to the extent reasonably necessary to effectuate its terms, including providing all information from Cylink's transfer records concerning the identity of Class Members and their transactions. 7. Plaintiff's Counsel may expend from the Settlement Amount, without further approval from the Defendants or the Court, the reasonable costs and expenses associated with the administration of the Settlement, including without limitation, the costs of identifying members of the Class and effecting mail notice and Publication Notice. Such amounts shall include, without limitation, the actual costs of publication, printing and mailing the Notice, payment to Cylink's transfer agent for any charges associated with obtaining Cylink's transfer records, reimbursements to nominee owners for forwarding notice to their beneficial owners, and the administrative expenses incurred and fees charged by the Claims Administrator in connection with providing notice and processing the submitted claims. ATTORNEYS' FEES AND EXPENSES 8. (a) Plaintiff's Counsel will apply to the Court for an award from the Gross Settlement Fund of attorneys' fees and reimbursement of expenses, plus interest. Such attorneys' fees, expenses, and interest as are awarded by the Court shall be payable from the Gross Settlement Fund to Plaintiff's Counsel within three (3) days from the Court's entry of an Order and Final Judgment and the Court's award of attorneys fees and expenses, subject to Plaintiff's Counsel's obligation to make appropriate refunds or repayments to the Settlement Fund plus accrued interest at the same net rate as is earned by the Gross Settlement Fund, if and when, as a result of any appeal and/or further proceedings on remand, or successful collateral attack, the fee or cost award is reduced or reversed. -9- (b) The procedure for, and the allowance or disallowance by the Court of, any applications by Plaintiff's Counsel for attorneys' fees, costs and expenses to be paid out of the Gross Settlement Fund, are not part of the Settlement set forth in this Stipulation, and are to be considered by the Court separately from the Court's consideration of the fairness, reasonableness and adequacy of the Settlement set forth in this Stipulation. Any order or proceeding relating to such fee and expense application, or any appeal from any order relating thereto or reversal or modification thereof, shall not operate to terminate or cancel the Stipulation, or affect or delay the finality of the Judgment approving the Stipulation and the Settlement set forth herein. Defendants and the Released Parties shall have no responsibility for, and no liability whatsoever with respect to, the allocation among Plaintiff's Counsel, and any other person who may assert some claim thereto, of any fee and expense award that the Court may make in the litigation, and Defendants and the Released Parties take no position with respect to such matters. ADMINISTRATION EXPENSES 9. Plaintiff's Counsel will apply to the Court, on notice to Defendants' Counsel, for an order (the "Class Distribution Order") approving the Claims Administrator's administrative determinations concerning the acceptance and rejection of the claims submitted herein and approving any fees and expenses not previously applied for, including the fees and expenses of the Claims Administrator, and, if the Effective Date has occurred, directing payment of the Net Settlement Fund to Authorized Claimants. DISTRIBUTION TO AUTHORIZED CLAIMANTS 10. The Claims Administrator shall determine each Authorized Claimant's pro rata share of the "Net Settlement Fund" based upon each Authorized Claimant's Recognized Claim (as defined in the Plan of Allocation described in the Notice, or in such other Plan of Allocation as the Court approves). 11. The Plan of Allocation proposed in the Notice is not a necessary term of this Stipulation and it is not a condition of this Stipulation that that Plan of Allocation be approved. It is further understood and agreed by Plaintiff and Defendants that any proposed Plan of Allocation including, but not limited to, any adjustments to an Authorized Claimants's claim set -10- forth therein, is to be considered by the Court separately from the Court's consideration of the fairness, reasonableness and adequacy of the Settlement set forth in this Stipulation, and any order or proceedings relating to the Plan of Allocation shall not operate to terminate or cancel the Stipulation or affect the finality of the Court's Judgment approving the Stipulation and the Settlement set forth herein, or any orders entered pursuant to the Stipulation. 12. Each Authorized Claimant shall be allocated a pro rata share of the Net Settlement Fund based on his or her Recognized Claim compared to the total Recognized Claims of all accepted claimants. This is not a claims-made settlement. The Defendants shall not be entitled to get back any of the settlement monies once the Settlement becomes final. The Defendants shall have no involvement in reviewing or challenging claims. ADMINISTRATION OF THE SETTLEMENT 13. Any member of the Class who does not submit a valid Proof of Claim will not be entitled to receive any of the proceeds from the Net Settlement Amount but will otherwise be bound by all of the terms of this Stipulation and the Settlement, including the terms of the Judgment to be entered in the Action and the releases provided for herein, and will be barred from bringing any action against the Released Parties concerning the Settled Claims. 14. Plaintiff's Counsel shall be responsible for supervising the administration of the Settlement and disbursement of the Net Settlement Fund by the Claims Administrator. Except for their obligation to pay the Settlement Amount, and to cooperate in the production of information with respect to the identification of Class Members from Cylink's shareholder transfer records, as provided herein, the Released Parties shall have no liability, obligation or responsibility for the administration of the Settlement or disbursement of the Net Settlement Fund. Plaintiff's Counsel shall have the right, but not the obligation, to waive what they deem to be formal or technical defects in any Proofs of Claim submitted in the interests of achieving substantial justice. 15. For purposes of determining the extent, if any, to which a Class Member shall be entitled to be treated as an "Authorized Claimant", the following conditions shall apply: -11- (a) Each Class Member shall be required to submit a Proof of Claim, supported by such documents as are designated therein, including proof of the Claimant's loss, or such other documents or proof as Plaintiff's Counsel, in their discretion, may deem acceptable; (b) All Proofs of Claim must be submitted by the date specified in the Notice unless such period is extended by Order of the Court. Any Class Member who fails to submit a Proof of Claim by such date shall be forever barred from receiving any payment pursuant to this Stipulation (unless, by Order of the Court, a later submitted Proof of Claim by such Class Member is approved), but shall in all other respects be bound by all of the terms of this Stipulation and the Settlement including the terms of the Judgment to be entered in the Action and the releases provided for herein, and will be barred from bringing any action against the Released Parties concerning the Settled Claims. Provided that it is received before the motion for the Class Distribution Order is filed, a Proof of Claim shall be deemed to have been submitted when posted, if received with a postmark indicated on the envelope and if mailed by first-class mail and addressed in accordance with the instructions thereon. In all other cases, the Proof of Claim shall be deemed to have been submitted when actually received by the Claims Administrator; (c) Each Proof of Claim shall be submitted to and reviewed by the Claims Administrator, under the supervision of Plaintiff's Counsel, who shall determine in accordance with this Stipulation the extent, if any, to which each claim shall be allowed, subject to review by the Court pursuant to subparagraph (e) below; (d) Proofs of Claim that do not meet the submission requirements may be rejected. Prior to rejection of a Proof of Claim, the Claims Administrator shall communicate with the Claimant in order to remedy the curable deficiencies in the Proof of Claims submitted. The Claims Administrator, under supervision of Plaintiff's Counsel, shall notify, in a timely fashion and in writing, all Claimants whose Proofs of Claim they propose to reject in whole or in part, setting forth the reasons therefor, and shall indicate in such notice that the Claimant whose claim is to be rejected has the right to a review by the Court if the Claimant so desires and complies with the requirements of subparagraph (e) below; -12- (e) If any Claimant whose claim has been rejected in whole or in part desires to contest such rejection, the Claimant must, within twenty (20) days after the date of mailing of the notice required in subparagraph (d) above, serve upon the Claims Administrator a notice and statement of reasons indicating the Claimant's grounds for contesting the rejection along with any supporting documentation, and requesting a review thereof by the Court. If a dispute concerning a claim cannot be otherwise resolved, Plaintiff's Counsel shall thereafter present the request for review to the Court; and (f) The administrative determinations of the Claims Administrator accepting and rejecting claims shall be presented to the Court, on notice to Defendants' Counsel, for approval by the Court in the Class Distribution Order. 16. Each Claimant shall be deemed to have submitted to the jurisdiction of the Court with respect to the Claimant's claim, and the claim will be subject to investigation and discovery under the Federal Rules of Civil Procedure, provided that such investigation and discovery shall be limited to that Claimant's status as a Class Member and the validity and amount of the Claimant's claim. No discovery shall be allowed on the merits of the Action or Settlement in connection with processing of the Proofs of Claim. 17. Payment pursuant to this Stipulation shall be deemed final and conclusive against all Class Members. All Class Members whose claims are not approved by the Court shall be barred from participating in distributions from the Net Settlement Fund, but otherwise shall be bound by all of the terms of this Stipulation and the Settlement, including the terms of the Judgment to be entered in the Action and the releases provided for herein, and will be barred from bringing any action against the Released Parties concerning the Settled Claims. 18. All proceedings with respect to the administration, processing and determination of claims described by paragraph 15 of this Stipulation and the determination of all controversies relating thereto, including disputed questions of law and fact with respect to the validity of claims, shall be subject to the jurisdiction of the Court. 19. The Net Settlement Fund shall be distributed to Authorized Claimants by the Claims Administrator only after the Effective Date and after: (i) all Claims have been processed, -13- and all Claimants whose Claims have been rejected or disallowed, in whole or in part, have been notified and provided the opportunity to be heard concerning such rejection or disallowance; (ii) all objections with respect to all rejected or disallowed claims have been resolved by the Court, and all appeals therefrom have been resolved or the time therefor has expired; (iii) all matters with respect to attorneys' fees, costs, and disbursements have been resolved by the Court, all appeals therefrom have been resolved or the time therefor has expired; and (iv) all costs of administration have been paid. PRELIMINARY APPROVAL ORDER AND HEARING 20. On or before November 1, 2002, the parties shall apply to the Court for entry of a Preliminary Approval Order. The Preliminary Approval Hearing is scheduled for November 12, 2002 at 10 a.m. before the Honorable Vaughn R. Walker. ORDER AND FINAL JUDGMENT 21. If the Settlement contemplated by this Stipulation is approved by the Court, counsel for the parties shall request that the Court enter an Order and Final Judgment dismissing this Action with prejudice. EFFECTIVE DATE OF SETTLEMENT, WAIVER OR TERMINATION 22. The Effective Date of Settlement shall be the date when all the following events listed in subsections (a) through (c) shall have occurred: (a) entry of the Preliminary Approval Order in all material respects consistent with this Stipulation; (b) approval by the Court of the Settlement, following notice to the Class and a hearing, as prescribed by Rule 23 of the Federal Rules of Civil Procedure; and (c) entry by the Court of an Order and Final Judgment, consistent with this Stipulation in all material respects, and the expiration of any time for appeal or review of such Order and Final Judgment, or, if any appeal is filed and not dismissed, after such Order and Final Judgment is upheld on appeal in all material respects and is no longer subject to review upon appeal or review by writ of certiorari, or, in the event that the Court enters an order and final judgment in form other than that provided above ("Alternative Judgment") and none of the -14- parties hereto elect to terminate this Settlement, the date that such Alternative Judgment becomes final and no longer subject to appeal or review; Provided, however, that if a bankruptcy petition is filed by or against Cylink before occurrence of all events in Paragraph 22 subsections (a) through (c), then the Effective Date shall not be deemed to have occurred until the additional occurrence of the Bankruptcy Court's approval of the Settlement or determination that its approval is not necessary. 23. Defendants' Counsel or Plaintiff's Counsel shall have the right to terminate the Settlement and this Stipulation by providing written notice of their election to do so ("Termination Notice") to all other parties hereto within thirty (30) days of: (a) the Court's declining to enter the Preliminary Approval Order in any material respect; (b) the Court's refusal to approve this Stipulation or any material part of it; (c) the Court's declining to enter the Order and Final Judgment in any material respect; (d) in the event of a bankruptcy petition necessitating an application for approval from the Bankruptcy Court pursuant to Paragraph 4, the Bankruptcy Court's declining to approve the Settlement in any material respect, unless the Bankruptcy Court determines its approval to be unnecessary; (e) the date upon which the Order and Final Judgment is modified or reversed in any material respect by the Court of Appeals or the Supreme Court; or (f) the date upon which an Alternative Judgment is modified or reversed in any material respect by the Court of Appeals or the Supreme Court. 24. Except as otherwise provided herein, in the event the Settlement is terminated or fails to become effective for any reason, then the parties to this Stipulation shall be deemed to have reverted to their respective status in the Action as of October 15, 2002 and, except as otherwise expressly provided, the parties shall proceed in all respects as if this Stipulation and any related orders had not been entered, and any portion of the Settlement Amount previously paid by Defendants, together with any interest earned thereon, less any Taxes due with respect to such income, and less costs of administration and notice actually incurred and paid or payable from the Settlement Amount, shall be returned to the persons paying the same. -15- NO ADMISSION OF WRONGDOING 25. This Stipulation, whether or not consummated, and any proceedings taken pursuant to it: (a) shall not be offered or received against the Defendants as evidence of or construed as or deemed to be evidence of any presumption, concession, or admission by any of the Defendants with respect to the truth of any fact alleged by Plaintiff or the validity of any claim that had been or could have been asserted in the Action or in any litigation, or the deficiency of any defense that has been or could have been asserted in the Action or in any litigation, or of any liability, negligence, fault, or wrongdoing of the Defendants; (b) shall not be offered or received against the Defendants as evidence of a presumption, concession or admission of any fault, misrepresentation or omission with respect to any statement or written document approved or made by any Defendant, or against the Plaintiff and the Class as evidence of any infirmity in the claims of Plaintiff and the Class; (c) shall not be offered or received against the Defendants or against the Plaintiff or the Class as evidence of a presumption, concession or admission with respect to any liability, negligence, fault or wrongdoing, or in any way referred to for any other reason as against any of the parties to this Stipulation, in any other civil, criminal or administrative action or proceeding, other than such proceedings as may be necessary to effectuate the provisions of this Stipulation; provided, however, that if this Stipulation is approved by the Court, Defendants may refer to it to effectuate the liability protection granted them hereunder; (d) shall not be construed against the Defendants or the Plaintiff and the Class as an admission or concession that the consideration to be given hereunder represents the amount which could be or would have been recovered after trial; and (e) shall not be construed as or received in evidence as an admission, concession or presumption against Plaintiff or the Class or any of them that any of their claims are without merit or that damages recoverable under the Complaint would not have exceeded the Settlement Fund. -16- MISCELLANEOUS PROVISIONS 26. The parties to this Stipulation intend the Settlement to be a final and complete resolution of all disputes asserted or which could be asserted by the Class Members against the Released Parties with respect to the Settled Claims. Accordingly, Plaintiff and Defendants agree not to assert in any forum that the litigation was brought by Plaintiff or defended by Defendants in bad faith or without a reasonable basis. The parties hereto shall assert no claims of any violation of Rule 11 of the Federal Rules of Civil Procedure relating to the prosecution, defense, or settlement of the Action. The parties agree that the amount paid and the other terms of the Settlement were negotiated at arm's length in good faith by the parties, and reflect a settlement that was reached voluntarily after consultation with experienced legal counsel. 27. This Stipulation may not be modified or amended, nor may any of its provisions be waived except by a writing signed by all parties hereto or their successors-in-interest. 28. The headings herein are used for the purpose of convenience only and are not meant to have legal effect. 29. The administration and consummation of the Settlement as embodied in this Stipulation shall be under the authority of the Court and the Court shall retain jurisdiction for the purpose of entering orders providing for awards of attorneys' fees and expenses to Plaintiff's Counsel and enforcing the terms of this Stipulation. 30. The waiver by one party of any breach of this Stipulation by any other party shall not be deemed a waiver of any other prior or subsequent breach of this Stipulation. 31. This Stipulation constitutes the entire agreement among the parties hereto concerning the Settlement of the Action, and no representations, warranties, or inducements have been made by any party hereto concerning this Stipulation other than those contained herein. 32. This Stipulation may be executed in one or more counterparts. All executed counterparts and each of them shall be deemed to be one and the same instrument provided that counsel for the parties to this Stipulation shall exchange among themselves original signed counterparts. -17- 33. This Stipulation shall be binding upon, and inure to the benefit of, the successors and assigns of the parties hereto. 34. All parties acknowledge that this Stipulation constitutes a substantially contemporaneous exchange of consideration for new (and essentially equivalent) value given. 35. The construction, interpretation, operation, effect and validity of this Stipulation, and all documents necessary to effectuate it, shall be governed by the internal laws of the State of California without regard to conflicts of laws, except to the extent that federal law requires that federal law governs. 36. This Stipulation shall not be construed more strictly against one party than another merely by virtue of the fact that it, or any part of it, may have been prepared by counsel for one of the parties, it being recognized that it is the result of arm's-length negotiations between the parties and all parties have contributed substantially and materially to the preparation of this Stipulation. 37. All counsel and any other person executing this Stipulation, or any related settlement documents, warrant and represent that they have the full authority to do so and that they have the authority to take appropriate action required or permitted to be taken pursuant to the Stipulation to effectuate its terms. 38. Plaintiff's Counsel and Defendants' Counsel agree to cooperate fully with one another in seeking Court approval of the Preliminary Approval Order, the Stipulation and the Settlement, and to promptly agree upon and execute all such other documentation as may be reasonably required to obtain final approval by the Court of the Settlement. Dated: October ___, 2002 WILSON SONSINI GOODRICH & ROSATI Professional Corporation By: --------------------------------- Leo P. Cunningham Attorneys for Defendants CYLINK CORPORATION AND FERNAND SARRAT -18- Dated: October ___, 2002 INNELLI AND MOLDER Attorneys at Law By: --------------------------------- John F. Innelli Attorneys for Plaintiff Dated: October ___, 2002 BERGESON & ELIOPOLOUS LLP By: --------------------------------- Daniel J. Bergeson Attorneys for Defendant THOMAS L. BUTLER Dated: October ___, 2002 BRYANT CLOHAN & BARUH LLP By: --------------------------------- Robert Maines Attorneys for Defendant JOHN H. DAWS -19- EX-10.2 6 p16275_ex10-2.txt SECOND AMENDMENT TO LEASE SECOND AMENDMENT TO LEASE AND PARTIAL TERMINATION AGREEMENT This Second Amendment to Lease and Partial Termination Agreement (the "Agreement") is dated as of October 30, 2002, for reference purposes only, and is made between Orchard Jay Investors, LLC, a California limited liability company, ("Landlord") and Cylink Corporation, a California corporation ("Tenant"), with reference to the following facts and circumstances, which are conclusively agreed between the parties: A. Landlord and Tenant are parties to a lease dated for reference purposes as of May 10, 1999 as amended from time to time (collectively referred to herein as the "Lease"). All capitalized words having an assigned meaning in the Lease shall continue to have such meaning in this Agreement unless explicitly modified. Landlord is the successor in interest to an ownership group made up of Landlord and David J. Brown. B. Pursuant to the Lease, Tenant has leased from Landlord three buildings located in Santa Clara, California at 3101-3121 Jay Street ("3101 Building"), 3131 Jay Street, ("3131 Building"), and 3151 Jay Street ("3151 Building"). C. Landlord and Tenant have discussed terminating this Lease solely as to the 3101 and 3131 Buildings (collectively the "Terminated Premises") while continuing the Lease in effect in regard to the 3151 Building. D. Landlord and Tenant have agreed that the Lease will be terminated under the terms and conditions hereof solely as to Terminated Premises, and not as to the 3151 Building, which will continue to be subject to the Lease as amended hereby. Now, therefore, in consideration of all of the foregoing facts and circumstances, and for good and valuable consideration, the receipt of which is acknowledged by each party, Landlord and Tenant agree to and do amend the Lease as follows: 1. Termination Of Lease As To Each Of The Terminated Premises A. On November 1, 2002 (the "Building 3101 Termination Date - Second Floor"), the Lease shall terminate and end as to the second floor of Building 3101, and Tenant shall deliver possession of the second floor of Building 3101 to Landlord as set forth below. On January 31, 2003 (the "Building 3101 Termination Date - First Floor"), the Lease shall terminate and end as to the first floor of Building 3101, and Tenant shall deliver possession of the first floor of Building 3101 to Landlord as set forth below. Notwithstanding the foregoing, however, provisions herein whereby Tenant is relieved of responsibilities and liabilities for the 3101 Building shall take effect on November 1, 2002, and Tenant shall not incur or pay any financial liabilities on the first floor of Building 3101 during the period from November 1, 2002 to January 31, 2003. B. On March 1, 2003 (the "Building 3131 Termination Date"), the Lease shall terminate and end as to Building 3131, and Tenant shall deliver possession of Building 3131 to Landlord as set forth below. Tenant will use commercially reasonable efforts to deliver possession of Building 3131 to Landlord prior to March 1, 2003, but notwithstanding such delivery, shall be obligated to continue to pay Base Monthly Rent and all Additional Rent due under the Lease on Building 3131 until March 1, 2003. 2. Lease Restructuring Consideration Concurrently with the full execution of this Agreement, the parties agree to the following: (a) Tenant will remit to Landlord's lender the sum of $2,915,220.40 in cash in consideration of said lender's consent to this Agreement; (b) Tenant consents to the release of $285,018.60 currently held as cash security for the Lease to Landlord's lender, also in consideration for said lender's consent hereto; and (c) upon receipt of the aforementioned sums, Landlord will cause Landlord's lender, with the consent of Tenant, which is given hereby, to return to Tenant uncashed a Letter of Credit in the aggregate face amount of $600,000.00 issued by Imperial Bank (now Comerica Bank), which is currently being held by Landlord's lender as security for this Lease. The parties will deal with the other Letter of Credit on Imperial Bank in favor of Landlord's lender as set forth in Paragraph 10. Upon return of the $600,000.00 Letter of Credit, Landlord and its lender shall not have to account further to Tenant for this Letter of Credit or the released cash security, and such shall no longer be deemed to be security for this Lease. This Agreement shall be of no force or effect unless collected funds in the aforementioned amounts are remitted to Landlord's lender. 3. Delivery Of Possession A. On the Termination Date specified above for each Building (or, in the case of the 3101 Building, each floor of each Building), Tenant shall deliver possession of such Building to Landlord in accordance with all provisions of the Lease, including but not limited to the provisions of Paragraph 15.1 of the Lease. It is understood that on the Building 3101 Termination Date - Second Floor, Tenant is not actually delivering possession of the space, because Tenant never took possession of the space, its rights taking effect only after the current Tenant delivered possesion, which has not happened. B. Prior to delivery of the 3131 Building, Tenant shall, as its sole cost and expense (a) perform those portions of the work outlined in the letter agreement between Landlord and Tenant dated June 17, 1999 that are specified by Landlord; and (b) restore the elements designated by Landlord of the first floor of the said Building to their former condition. The total - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 2 of 11 scope of work to be performed by Tenant under subparagraphs (a) and (b) above is as shown on Exhibit "A" attached hereto. C. If Tenant does not complete its surrender and restoration obligations with respect to the 3131 Building before March 1, 2003, then Tenant's obligation to pay Base Monthly Rent and Additional Rent on the 3131 Building shall continue until such obligations are fulfilled. Failure to turn over possession on or before the date which is ninety (90) days after March 1, 2003 shall constitute a default under the Lease without requirement of any statutory or lease notice or cure period. D. If Landlord so requests in writing, Tenant will contract for and have performed work in addition to the work required under Paragraph 3B above on the 3131 Building per Landlord's written direction and with Landlord's selected contractor(s) at Tenant's expense, provided, however, that Tenant will be immediately reimbursed in cash for these costs in full by Landlord. Upon request, Tenant will assign to Landlord all of Tenant's rights under any contracts entered into in connection with the work to be performed by Tenant pursuant to this Paragraph. In regard to such work, Tenant assumes no liability for the work performed and Landlord hereby agrees to indemnify, defend and hold Tenant harmless from and against any claims, losses, liabilities, damages and costs, including, without limitation, claims by contractors, arising out of such additional work and such indemnity shall survive termination of this Lease as to the 3131 Building; provided, however, Landlord shall not be obligated to indemnify Tenant for any claims, losses, liabilities, damages and costs resulting from the gross negligence or willful misconduct of Tenant or any of Tenant's agents (other than the contractors). In the event that the performance of this work is the sole factor preventing or delaying delivery of the 3131 Building or any part thereof to Landlord, Tenant shall not incur any liability for such delay, including rent. E. As security for performance of its restoration and surrender obligations, Tenant shall post an additional cash security deposit, to be dealt with as a part of the Security Deposit under the Lease, in the sum of $75,000 on full execution hereof. Said deposit shall be in addition to and not in place of the remaining Lease Security Deposit referenced below. Upon Tenant's surrender of the 3131 Building and completion of its obligations of restoration, construction, and surrender, Landlord shall account to Tenant for any application of this sum to Tenant's obligations, and thereafter shall return the unapplied balance of said sum to Tenant less Landlord's actual and reasonable legal costs associated with this Lease restructuring and any other costs actually incurred with Landlord's lender in regard to this matter, including but not limited to any of the lender's legal and other fees which the lender requires to be paid in regard to this transaction. F. Notwithstanding anything set forth in this Paragraph, it is agreed that the Terminated Premises will, where applicable, be delivered subject to the Transferred Subleases (as defined below). - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 3 of 11 4. Furniture and Cubicles A. On the Building 3101 Termination Date - First Floor, Tenant will transfer to Landlord and leave in the space such furniture and cubicles located on said First Floor, as Landlord shall designate in writing, at no charge to Landlord. Tenant will receive reasonable notice of the items selected by Landlord prior to its moving date - thus, if such notice cannot be given before the Building 3101 Termination Date - First Floor, then Tenant will be able to postpone moving all items from such First Floor until it has had reasonable notice. As used herein, notice shall be deemed reasonable if it is at least three (3) business days, but the parties will attempt to accommodate each other in regard to shorter notices if possible. Tenant will deliver such items to Landlord free and clear of all liens and encumbrances, and will supply such documentation as Landlord may reasonably request showing that these items are free and clear. B. On the Building 3131 Termination Date, Tenant will transfer to Landlord and leave in the space such furniture and cubicles as (1) are not needed for Tenant's future operations and (2) which Landlord designates in writing on or before fifteen (15) days prior to the said Termination Date, at no charge to Landlord. Tenant will deliver such items to Landlord free and clear of all liens and encumbrances, and will supply such documentation as Landlord may reasonably request showing that these items are free and clear. In the event that Tenant proposes to move prior to the Building 3131 Termination Date, then Tenant will give Landlord written notice of the proposed moving date and allow Landlord at least seven (7) days opportunity to make a written designation under this Paragraph 4B prior to moving such items. 5. Abandoned Property Landlord and Tenant agree that all property belonging to Tenant which remains on the Terminated Premises after they are delivered to Landlord that is not covered by Paragraph 4 above, shall be deemed to have been abandoned by Tenant, which waives all of its rights in such property, that all such property, in the aggregate, shall be conclusively agreed between the parties to have a fair market value of less than $300.00, that all such property may be disposed of by Landlord as its own property without further notice to Tenant, and that Tenant waives any statutory requirements of notice, auction, sale, or accounting relating to such abandoned property, but Tenant shall still be obligated to reimburse Landlord for any costs actually incurred by Landlord in regard to the removal or disposal of such property. 6. Subleases; Subtenants; and Subrent (A) Tenant is the Sublandlord under certain Subleases identified as follows and referred to herein as the "Transferred Subleases": Sublease between ICG Communications, Inc., and Cylink Corporation dated May - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 4 of 11 21, 2001 as to 10,855 square feet of space comprising a portion of the first floor of 3101 Jay Street, commonly known as Suite 101 (including all rights of Tenant under the Consent of Landlord to such Sublease dated as of September 11, 2001, as subsequently approved by the Bankruptcy Court). Sublease between Cylink Corporation and Intel Corporation dated January 12, 2001 as to 10,855 square feet of space comprising a portion of the first floor of 3101 Jay Street, commonly known as Suite 110 (including all rights of Tenant under the Consent of Landlord to such Sublease dated as of February 16, 2001). As of November 1, 2002, Tenant shall take all action necessary pursuant to the Transferred Subleases, and in particular pursuant to the provisions of the two Consents, to instruct the Subtenants that all rent and other payments are to be made directly to Landlord and not to Tenant. Any sums received after November 1, 2002 from these Subtenants (except sums relating to periods ending on or before October 31, 2002) shall be remitted to Landlord immediately by transfer of the check, duly endorsed by Tenant, to Landlord without deposit in Tenant's accounts. Concurrently with full execution hereof, Tenant shall convey the Transferred Subleases to Landlord or Landlord's nominee by a transfer that will be effective on February 1, 2003. Such conveyance shall be by Assignment of Sublease and Consent of Landlord as attached hereto as Exhibit B, and Tenant agrees to sign such document. Such documents shall be executed prior to the execution of this Agreement, but shall take effect conditioned on the parties executing this Agreement and on the date specified therein. Landlord will indemnify, hold harmless, and defend Tenant against any and all claims, liabilities, damages, losses, or injuries arising from any failure on the part of Landlord or Landlord's nominee to perform all of the Tenant's obligations as Sublandlord under the Transferred Subleases arising from and after the effective date of such transfers or arising during the November 1, 2002 to January 31, 2003 period. On full execution hereof, Tenant shall transfer to Landlord any security deposits, including all rights under any letter of credit, that are in Tenant's possession or control under the Transferred Subleases. (B) With the exception of Subtenants and Subleases listed above, when delivered to Landlord, the Terminated Premises shall be unoccupied by Tenant or any subtenant or other person, and all subleases shall have been terminated and possession recovered from the subtenant(s) on or before the Termination Date. 7. Duties Of Tenant Tenant's duty to pay Base Monthly Rent and Additional Rent on the Terminated Premises shall continue until all of Tenant's obligations hereunder have been completed with respect to the applicable Terminated Premises. Tenant shall indemnify, defend, and hold harmless Landlord from and against any and all claims, liabilities, damages, losses, or injuries suffered by Landlord - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 5 of 11 due to Tenant's failure to timely perform the said obligations, including but not limited to Landlord's reasonable attorney's fees and costs, any claims made by any succeeding tenant, and any losses to Landlord due to lost opportunities to lease to succeeding tenants. 8. Payment Obligations Pending Termination Tenant is obligated to and shall promptly meet all payment obligations to Landlord arising during the period prior to and including the Termination Dates for each Building. Such obligations shall include, without limitation, the obligation to pay Base Monthly Rent and all Additional Rent arising during such period. As soon as reasonably practicable after the Termination Date for a Building or a floor of a Building, Landlord will reconcile Common Operating Expenses and other items of Additional Rent relating to periods of time up to and including the Termination Date with regard to such Building (or floor), and present Tenant with a written reconciliation of such matters (the "COE Reconciliation"). Tenant shall promptly pay to Landlord any sums due pursuant to such reconciliation, not later than ten (10) days after presentation of Landlord's statement, or if such reconciliation shows that Landlord is required to pay Tenant, then Landlord shall make such payment within ten (10) days after presentation of Landlord's reconciliation. 9. Termination Of Obligations; Continuing Obligations From and after each Termination Date, all duties, obligations, and liabilities of Tenant to Landlord with respect to that particular portion of the Terminated Premises for periods after the applicable Termination Date, including the obligation for Base Monthly Rent and Additional Rent, shall cease, except as expressly set forth herein. However, Tenant shall continue to be subject to all obligations and duties under the Lease and this Agreement as to the Remaining Premises, and shall continue to be subject to all obligations and duties relating to the Terminated Premises which would survive the expiration or earlier termination of the Lease, including but not limited to all obligations relating to Hazardous Materials. 10. Continuance of Lease on 3151 Building and On 3131 Building Through the Building 3131 Termination Date The 3151 Building shall remain subject to all terms and conditions of the Lease, notwithstanding any other provision hereof, and shall not be terminated, but shall continue with the same rent (per square foot) as currently paid for that space and subject to any Lease provisions relating to increased rent, for the remaining term of the Lease. The 3131 Building shall remain subject to all terms and conditions of the Lease notwithstanding any other provision hereof, including the duty to pay rent at the current rate per square foot, to and including the Building 3131 Termination Date. - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 6 of 11 Until the Building 3131 Termination Date, the Base Monthly Rent for 3131 Building and 3151 Building from November 1, 2002 (Month 39) through February 28, 2003 (Month 42) shall be $190,579.19 per month. Following the Building 3131 Termination Date (and provided the Base Monthly Rent for the 3131 Building does not continue because of a failure to deliver possession of the 3131 Building or any other circumstance under which this Agreement provides that the rent thereon shall continue), the Base Monthly Rent for the 3151 Building will be $92,922.97 per month starting in March, 2003 (Month 43) and thereafter as determined under the following table. In this table, the numbered months indicate the said numbered months running from the Commencement Date of the Lease. - -------------------------------------------------------------------------------- Mo. Thru Base Monthly Rent Base Monthly Rent - -------------------------------------------------------------------------------- 3151 and 3131 3151 Only - -------------------------------------------------------------------------------- 39 42 $190,579.18 - -------------------------------------------------------------------------------- 43 48 $92,922.97 - -------------------------------------------------------------------------------- 49 60 $95,710.66 - -------------------------------------------------------------------------------- 61 72 $98,581.98 - -------------------------------------------------------------------------------- 73 84 $101,539.44 - -------------------------------------------------------------------------------- 85 96 $104,585.62 - -------------------------------------------------------------------------------- 97 108 $107,723.19 - -------------------------------------------------------------------------------- 109 120 $110,954.88 - -------------------------------------------------------------------------------- Upon full execution hereof, and as a condition of effectiveness of this Agreement, Tenant will supply Landlord with a letter of credit in the sum of $667,623.60 which shall serve as security for the Lease going forward, including any and all obligations set forth herein. Said Letter of Credit shall be in favor of Landlord's lender, shall comply in all other regards with the Letter of Credit requirements of the Lease, and shall contain a provision approved by Landlord under which the Letter of Credit is automatically self-renewing on an annual basis. Notwithstanding anything to the contrary in the Lease, such deposit shall not be subject to any reduction during the Lease Term. Tenant may satisfy this requirement by leaving the existing Letter of Credit in the face amount of $800,000.00 originally drawn on Imperial Bank (now Comerica Bank) on file and effective as a deposit, following which Tenant will, as soon as available from its bank, deposit an Amendment by which the said Letter of Credit will be reduced in value to $667,623.60 and a self-renewing provision will be added such that the Letter of Credit will automatically renew unless the bank upon which it is drawn gives notice at least thirty days before expiration that it will not be renewed. Within fifteen (15) days of full execution hereof, Tenant will provide a clean new Letter of Credit, without separate amendments, in the same sum, upon which event Landlord's lender will return to Tenant the $800,000,00 Letter of Credit and Amendment. The parties will cooperate to effectuate an exchange of one Letter of Credit for the other. - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 7 of 11 11. Tenant's Allocated Share From and after the Building 3131 Termination Date, Tenant's Share of the 3151 Building shall be 100% and Tenant's Allocated Share of the Project shall be 32.78%. 12. Parking Spaces The term "Tenant's Allocated Parking Stalls" is amended to 362 stalls after the Building 3101 Termination Date and to mean 177 stalls from and after the Building 3131 Termination Date. 13. Effect On Options; Rights Of First Refusal; Rights of First Offer Effective on full execution hereof, Tenant waives and gives up any and all options to extend or renew the Lease Term, and any and all rights of first refusal or rights of first offer, as to the Terminated Premises only, while retaining any rights which have been granted as to the 3151 Building. 14. Release: Upon the Termination Date for each of the Terminated Premises, Tenant, for itself and for all other persons associated with Tenant, releases Landlord and any officers, directors, agents, servants, employees, shareholders, partners, joint venturers, lenders, and/or all other persons associated with Landlord, from any and all claims, liabilities, obligations, demands, actions, causes of action, and/or lawsuits relating to or arising from each Terminated Premise. This release and all covenants and agreements contained herein shall be for the benefit of, and be enforceable against Tenant by, the officers, directors, agents, servants, employees, shareholders, partners, joint venturers, and lenders of Landlord, and all other persons associated with Landlord. a. Claims Released: The claims released hereby shall be all claims of whatever nature, whether now known or unknown, whether suspected or unsuspected, whether latent or patent, whether such claims are or could be anticipated, and whether such claims have arisen now, or arise in the future. b. Acceptance of Responsibility for Unknown Claims: Tenant enters into this release with the knowledge that there may be unknown, unanticipated, or unsuspected claims which are released and waived by executing this release, and that there is a risk that Tenant will incur or suffer losses, damages, or injuries which are in some way caused by the transactions and occurrences referred to above, or which would, but for this release, be the legal responsibility of Landlord. Tenant agrees to accept the above-described risks with the understanding that - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 8 of 11 THIS RELEASE APPLIES TO ALL UNKNOWN OR UNANTICIPATED RESULTS OF THE TRANSACTIONS, OCCURRENCES, AND DISPUTES DESCRIBED ABOVE, AS WELL AS THOSE KNOWN AND ANTICIPATED, and Tenant agrees to accept and bear full responsibility for any losses, injuries, or damages which are suffered or incurred as a result of unknown, unanticipated, or unsuspected claims, losses, damages, or injuries. c. Waiver of Civil Code Section 1542: Tenant agrees that this is a full and final release applying to all unknown and unanticipated claims or damages suffered by the Tenant, as well as to those claims and/or damages now known or disclosed, and Tenant waives and gives up all rights or benefits which might otherwise accrue to Tenant, now or in the future, under the terms of California Civil Code Section 1542, which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of execution of the release, which if known by him must have materially affected his settlement with the debtor." Tenant further waives any rights and benefits which might otherwise accrue to Tenant under the provisions of any similar statute which later comes into effect in California or which now or later is in effect under the law of any other jurisdiction. d. Successors: This agreement shall be binding on the heirs, assigns, and successors of each party. e. Survival: Notwithstanding anything in this Paragraph 14, the terms, provisions, and conditions of this Second Amendment to Lease and Partial Termination Agreement shall survive and be unaffected by the release contained in this Paragraph. 15. Effect of Agreement: This Agreement modifies the Lease. In the event of any conflict or discrepancy between the Lease and/or any other previous documents between the parties and the provisions of this Agreement, then the provisions of this Agreement shall control. All capitalized words having an assigned meaning in the Lease shall continue to have such meaning in this Agreement unless explicitly modified hereby. Except as modified herein, the Lease shall remain in full force and effect. This Agreement has been negotiated between sophisticated parties, both represented by counsel, and each party waives any presumptions under which the Agreement is to be construed against the drafting party. The tender of this Agreement by Landlord does not constitute an offer to enter into the Agreement, and this Agreement shall be accepted by Landlord only by signing - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 9 of 11 and delivering a duplicate original hereof to Tenant 16. Brokerage Commissions Neither party has been represented by a real estate broker in regard to the transaction represented by this Agreement, and no brokerage commissions or finder's fees are due in regard to the transaction. Tenant will hold Landlord harmless and indemnify Landlord against any claim, loss, or damage, including reasonable attorney's fees, in regard to a brokerage commission or finder's fee claim by a broker or finder under contract with or working with Tenant. Landlord will hold Tenant harmless and indemnify Tenant against any claim, loss, or damage, including reasonable attorney's fees, in regard to a brokerage commission or finder's fee claim by a broker or finder under contract with or working with Landlord. 17. Bankrupty In the event of a bankruptcy filing, assignment for benefit of creditors, or any other form of insolvency liquidation with respect to the Tenant, if such takes place on a date which may require Landlord or its lender to return to the Tenant or Tenant's Representative ("Representative" means and includes a trustee or assignee for benefit of creditors) any sums remitted or released hereunder to Landlord or Landlord's lender, and if Tenant or Tenant's Representative reject the Lease as to the 3151 Building, Tenant agrees that the releases granted hereby shall (at Landlord's option exercised by notice in writing to Tenant and/or Tenant's Representative) be of no force or effect, and that if Landlord exercises such option, Landlord shall be entitled to full performance under the Lease and to make and have approved such claims as shall be based on full performance under the Lease, without regard to any releases and terminations granted hereby, provided only, that Tenant shall be entitled to credit sums paid hereunder (to the extent such sums are ultimately retained by Landlord in such proceeding) against any such claims. 18. Authority Each individual executing this Agreement represents and warrants that he or she is duly authorized to and does execute and deliver this Agreement pursuant to express authority from Tenant or Landlord, as applicable, pursuant to and in accordance with the By-Laws and the other organic documents of the signing party. 19. Cooperation and Information During the time while Tenant continues to occupy the 3131 Building, Tenant will cooperate with Landlord's reasonable efforts to market and show the Building through its management firm and/or brokers. From time to time on Landlord's reasonable request, and except as otherwise provided by law, Tenant will provide Landlord with updated, detailed - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 10 of 11 information relating to its efforts to achieve sustainability by cutting expenses, reorganizing, and increasing revenues, as well as by equity infusion, additional debt, or sale to or merge with a more profitable or better capitalized company. LANDLORD: TENANT: Orchard Jay Investors, LLC, a California Cylink Corporation, a California limited liability company corporation By: /s/ Michael J. Biggar By: /s/ Chris Chillingworth ------------------------------------- ----------------------------- Michael J. Biggar Chris Chillingworth Managing Member Chief Financial Officer Dated: October 30, 2002 Dated: October 30, 2002 - -------------------------------------------------------------------------------- Second Amendment and Partial Lease Termination Agreement Page 11 of 11 [ EXHIBIT A FLOOR PLAN ] EXHIBIT A ASSIGNMENT OF SUBLEASE; CONSENT OF LANDLORD There is a Lease Agreement (the "Lease") dated for reference purposes as of May 10, 1999, between Orchard Jay Investors, LLC, a California limited liability company ("Landlord") and Cylink Corporation, a California corporation ("Tenant/Assignor") relating to premises including those commonly known as 3101 Jay Street, Santa Clara, California, in the County of Santa Clara. Tenant/Assignor is the Sublandlord under the following Subleases (referred to herein as the "Transferred Subleases"): Sublease between ICG Communications, Inc., and Cylink Corporation dated May 21, 2001 as to 10,855 square feet of space comprising a portion of the first floor of 3101 Jay Street, commonly known as Suite 101 (including all rights of Tenant under the Consent of Landlord to such Sublease dated as of September 11, 2001, as subsequently approved by the Bankruptcy Court). Sublease between Cylink Corporation and Intel Corporation dated January 12, 2001 as to 10,855 square feet of space comprising a portion of the first floor of 3101 Jay Street, commonly known as Suite 110 (including all rights of Tenant under the Consent of Landlord to such Sublease dated as of February 16, 2001). The two premises identified above are referred to herein as the "Subleased Premises". Tenant/Assignor agrees to and does assign the Transferred Subleases on the terms and conditions set forth below to Orchard Jay Investors, LLC ("Assignee") and Assignee agrees to accept such assignment and assume Tenant/Assignor's duties as Sublandlord going forward, and Landlord consents to the proposed assignment on the following terms and conditions: 1. Assignment and Acceptance: Effective on February 1, 2003, Tenant/Assignor assigns all of its right, title, and interest in and to the Transferred Subleases to Assignee. Assignee hereby confirms its acceptance of the assignment of the Lease and the Tenant/Assignor's leasehold interest in the Subleased Premises and assumption of the obligations thereof. 2. No Waiver Of Assignment And Sublease Approval Rights: Landlord's consent hereto does not constitute consent to any subsequent subletting or assignment, nor a waiver of the restriction on assignment and subletting contained in the Lease. 3. No Effect On Lease: In no event shall Landlord's consent to this Assignment be, or be construed as, a modification of the terms of the Lease, and in the event of any inconsistency between the terms of the approved Assignment and the terms of the Lease, the terms of the Lease shall prevail. 4. Assignment of Security Deposit: Tenant confirms and agrees that Tenant has not received any Security Deposit from Intel Corporation on its Sublease, and Tenant has received as Security Deposit from ICG only that certain irrevocable letter of credit dated February 7, 2002 and drawn on Wells Fargo Bank in favor of Landlord. Landlord is hereby relieved of any obligations to Tenant relating to the said letter of credit, including but not limited to the obligations set forth in the Consent of Landlord, Paragraph 11, and Landlord is entitled to all - -------------------------------------------------------------------------------- EXHIBIT B PAGE ONE OF TWO Consent of Landlord Page 2 of 2 - -------------------------------------------------------------------------------- right, title, and interest in said letter of credit in its own name and for protection of its interests as the Assignee of the Sublease with ICG. 5. Brokerage Commissions: There are no commissions payable on this transaction, and neither party has been assisted by or contracted with a broker in regard hereto. 6. No Merger: Landlord and Tenant do not intend, by this Assignment or any concurrent transaction between them, to effect any merger of interests. Assignee's continuing rights as Sublandlord by assignment from Tenant shall not be interfered with or affected by any relief of Tenant of all or any part of its obligations under the Lease. Landlord consents to the foregoing Tenant and Assignee agree to the transaction: foregoing transaction Orchard Jay Investors, LLC, a California Cylink Corporation, a California limited liability company corporation By:____________________________ By:_____________________________ Michael J. Biggar Chris Chillingworth Managing Member Chief Financial Officer Dated: October 30, 2002 Dated: October 30, 2002 ASSIGNEE Orchard Jay Investors, LLC, a California limited liability company By:_____________________________ Michael J. Biggar Managing Member Dated: - -------------------------------------------------------------------------------- EXHIBIT B PAGE TWO OF TWO EX-10.3 7 ex10_3.txt ASSIGNMENT TO SUBLEASE ASSIGNMENT OF SUBLEASE; CONSENT OF LANDLORD There is a Lease Agreement (the "Lease") dated for reference purposes as of May 10, 1999, between Orchard Jay Investors, LLC, a California limited liability company ("Landlord") and Cylink Corporation, a California corporation ("Tenant/Assignor") relating to premises including those commonly known as 3101 Jay Street, Santa Clara, California, in the County of Santa Clara. Tenant/Assignor is the Sublandlord under the following Subleases (referred to herein as the "Transferred Subleases"): Sublease between ICG Communications, Inc., and Cylink Corporation dated May 21, 2001 as to 10,855 square feet of space comprising a portion of the first floor of 3101 Jay Street, commonly known as Suite 101 (including all rights of Tenant under the Consent of Landlord to such Sublease dated as of September 11, 2001, as subsequently approved by the Bankruptcy Court). Sublease between Cylink Corporation and Intel Corporation dated January 12, 2001 as to 10,855 square feet of space comprising a portion of the first floor of 3101 Jay Street, commonly known as Suite 110 (including all rights of Tenant under the Consent of Landlord to such Sublease dated as of February 16, 2001). The two premises identified above are referred to herein as the "Subleased Premises". Tenant/Assignor agrees to and does assign the Transferred Subleases on the terms and conditions set forth below to Orchard Jay Investors, LLC ("Assignee") and Assignee agrees to accept such assignment and assume Tenant/Assignor's duties as Sublandlord going forward, and Landlord consents to the proposed assignment on the following terms and conditions: 1. Assignment and Acceptance: Effective on February 1, 2003, Tenant/Assignor assigns all of its right, title, and interest in and to the Transferred Subleases to Assignee. Assignee hereby confirms its acceptance of the assignment of the Lease and the Tenant/Assignor's leasehold interest in the Subleased Premises and assumption of the obligations thereof. 2. No Waiver Of Assignment And Sublease Approval Rights: Landlord's consent hereto does not constitute consent to any subsequent subletting or assignment, nor a waiver of the restriction on assignment and subletting contained in the Lease. 3. No Effect On Lease: In no event shall Landlord's consent to this Assignment be, or be construed as, a modification of the terms of the Lease, and in the event of any inconsistency between the terms of the approved Assignment and the terms of the Lease, the terms of the Lease shall prevail. 4. Assignment of Security Deposit: Tenant confirms and agrees that Tenant has not received any Security Deposit from Intel Corporation on its Sublease, and Tenant has received as Security Deposit from ICG only that certain irrevocable letter of credit dated February 7, 2002 and drawn on Wells Fargo Bank in favor of Landlord. Landlord is hereby relieved of any obligations to Tenant relating to the said letter of credit, including but not limited to the obligations set forth in the Consent of Landlord, Paragraph 11, and Landlord is entitled to all - -------------------------------------------------------------------------------- Consent of Landlord Page 2 of 2 - -------------------------------------------------------------------------------- right, title, and interest in said letter of credit in its own name and for protection of its interests as the Assignee of the Sublease with ICG. 5. Brokerage Commissions: There are no commissions payable on this transaction, and neither party has been assisted by or contracted with a broker in regard hereto. 6. No Merger: Landlord and Tenant do not intend, by this Assignment or any concurrent transaction between them, to effect any merger of interests. Assignee's continuing rights as Sublandlord by assignment from Tenant shall not be interfered with or affected by any relief of Tenant of all or any part of its obligations under the Lease. Landlord consents to the foregoing Tenant and Assignee agree to the transaction: foregoing transaction Orchard Jay Investors, LLC, a Cylink Corporation, a California California limited liability company corporation By: /s/ Michael J. Biggar By: /s/ Chris Chillingworth ----------------------------- ---------------------------- Michael J. Biggar Chris Chillingworth Managing Member Chief Financial Officer Dated: October 30, 2002 Dated: October 30, 2002 ASSIGNEE Orchard Jay Investors, LLC, a California limited liability company By: /s/ Michael J. Biggar ----------------------------- Michael J. Biggar Managing Member Dated: 10/30/02 ----------------------------- - -------------------------------------------------------------------------------- EX-10.4 8 ex10_4.txt WARRANT TO PURCHASE COMMON STOCK THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. WARRANT TO PURCHASE COMMON STOCK OF CYLINK CORPORATION Void after October 30, 2012 Warrant No.: W-1 Number of Shares: 500,000 CUSIP No.: 232565101 This certifies that Orchard Gateway Investors, LLC or assigns (collectively, the "Holder"), for value received, is entitled to purchase, subject to the terms and conditions of this warrant (this "Warrant"), from Cylink Corporation, a California corporation (the "Company"), up to five hundred thousand (500,000) shares of the Company's Common Stock, par value $0.01 per share (the "Warrant Shares") at a price per share of $0.3838; provided, however, that if prior to a Reorganization Event (as defined below) the Company closes a Qualified Financing (as defined below) within twelve months of the Initial Exercise Date (as defined below), the purchase price per share of the Warrant Shares shall equal the lower of (i) $0.3838; and (ii) the price per share of the Company's capital stock sold in such Qualified Financing (the "Exercise Price Adjustment Right"). For purpose of this Warrant, the term "Stock Purchase Price" shall mean $0.3838 or, if there is a Qualified Financing and the price per share of the Company's capital stock sold in such Qualified Financing is less than $0.3838, then such lower price. For the purposes of this Warrant, the term "Qualified Financing" shall mean the sale by the Company of shares of its capital stock sold to qualified investors in one or more series of related transactions for aggregate cash proceeds to the Company of not less than One Million dollars ($1,000,000). For avoidance of doubt, the Exercise Price Adjustment Right shall expire on the earlier of (x) a Reorganization Event or (y) twelve months from the Initial Exercise Date. This Warrant shall be exercisable, in whole or in part' at any time or from time to time from and after the date of execution of that certain Amendment To Lease at 3101-3151 Jay Street, Santa Clara, between Orchard Gateway Investors, LLC and the Company (such date being referred to herein as the "Initial Exercise Date") up to and including 5:00 p.m. (Pacific Time) on the ten (10) year anniversary of the date hereof (such date being referred to herein as the "Expiration Date"), upon surrender to the Company at its principal office (or at such other location as the Company may advise the Holder in writing) of this Warrant properly endorsed with (i) the Form of Subscription attached hereto duly completed and executed and (ii) payment pursuant to Section 2 of the aggregate Stock Purchase Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Stock Purchase Price and the number of shares purchasable hereunder are subject to further adjustment as provided in Section 4 of this Warrant. 1. Exercise; Issuance of Certificates; Acknowledgement. This Warrant is exercisable at the option of the holder of record hereof, at any time or from time to time from or after the Initial Exercise Date up to the Expiration Date for all or any part of the Warrant Shares (but not for a fraction of a share) which may be purchased hereunder. The Company agrees that the shares of Common Stock purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered, properly endorsed, the completed, executed Exercise Form delivered and payment made for such shares. Certificates for the shares of the Common Stock so purchased, together with any other securities or property to which the Holder hereof is entitled upon such exercise, shall be delivered to the Holder hereof by the Company at the Company's expense within a reasonable time after the rights represented by this Warrant have been so exercised. Each certificate so delivered shall be in such denominations of the Warrant Shares as may be requested by the Holder hereof and shall be registered in the name of such Holder. In case of a purchase of less than all the Warrant Shares, the Company shall execute and deliver to Holder within a reasonable time an Acknowledgement in the form attached hereto indicating the number of Warrant Shares which remain subject to this Warrant, if any. 2. Payment for Shares. The aggregate purchase price for Warrant Shares being purchased hereunder may be paid either (i) by cash or wire transfer of immediately available funds, or (ii) by surrender of a number of Warrant Shares which have a fair market value equal to the aggregate purchase price of the Warrant Shares being purchased ("Net Issuance") as determined herein. If the Holder elects the Net Issuance method of payment, the Company shall issue to Holder upon exercise a number of shares of Warrant Shares determined in accordance with the following formula: Y (A-B) X = ------ A where: X = the number of Warrant Shares to be issued to the Holder; the number of Warrant Shares with respect to which the Holder is exercising its purchase rights under this Warrant; the fair market value of one (1) share of the Warrant Shares on the date of exercise; and B = the Stock Purchase Price. No fractional shares arising out of the above formula for determining the number of shares to be issued to the Holder shall be issued upon exercise of this Warrant. In lieu thereof, the Company shall make payment to the Holder of cash in the amount of such fraction multiplied by the fair market value of one (1) share of the Warrant Shares on the date of exercise. For 2 purposes of the above calculation, the fair market value of one (1) share of the Warrant Shares shall mean the average of the closing sale prices of such Common Stock on the NASDAQ National Market or The NASDAQ SmallCap Market (or, if the Common Stock is not listed on the NASDAQ National Market or NASDAQ SmallCap Market but regularly quoted on an automated quotation system, including the OTC Bulleting Board, or by a recognized securities dealer, the mean between the high bid and low asked prices for the Common Stock) over the fifteen (15) calendar day period (or portion thereof) ending three (3) days prior to the date of exercise. 3. Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any shareholder and free and clear of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued shares of Common Stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant in full. 4. Adjustment of Stock Purchase Price and Number of Shares. The Stock Purchase Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 4. Upon each adjustment of the Stock Purchase Price, the Holder of this Warrant shall thereafter be entitled to purchase, at the Stock Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Stock Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Stock Purchase Price resulting from such adjustment. 4.1 Split, Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Stock Purchase Price in effect immediately prior to such split or subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of the Common Stock of the Company shall be combined into a smaller number of shares, the Stock Purchase Price in effect immediately prior to such combination shall be proportionately increased. 4.2 Reclassification. If any reclassification of the capital stock of the Company shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or other assets or property, then, as a condition of such reclassification, lawful and adequate provisions shall be made whereby the Holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of the Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby) such shares of stock, securities or other assets or property as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore purchasable and receivable upon the 3 exercise of the rights represented hereby. In any reclassification described above, appropriate provision shall be made with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Stock Purchase Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. 4.3 Reorganization, Mergers, Consolidations or Sale of Assets. If at any time there shall be a capital reorganization of the Company's outstanding equity securities (other than a combination, reclassification, exchange, or subdivision of shares provided for elsewhere in this Warrant) or a merger or consolidation of the Company with or into another corporation, or the sale of the Company's properties and assets as, or substantially as, an entity to any other person (a "Reorganization Event"), then, as a part of such Reorganization Event, lawful provision shall be made so that the Holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified in this Warrant and upon payment of the Stock Purchase Price then in effect, the number of shares of stock or other securities or property of the Company, or of the successor corporation resulting from such Reorganization Event, to which a holder of the shares issuable upon exercise of this Warrant would have been entitled in such Reorganization Event if this Warrant had been exercised immediately prior thereto. In any such case, appropriate adjustment (as determined by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder of this Warrant after the Reorganization Event if this Warrant (including adjustment of the Stock Purchase Price then in effect and the number of shares purchasable upon exercise of this Warrant) shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. The provisions of this paragraph shall similarly apply to successive capital reorganizations, mergers, consolidations or sales. 4.4 Notice of Certain Events. If at any time after the date hereof and before the expiration of the Exercise Period: (i) the Company declares any dividend or distribution on its Common Stock payable in shares of its capital stock; (ii) there shall be a Reorganization Event; (iii) there shall be any voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (iv) there shall be any other event that would result in an adjustment pursuant to this Section 4 in the Stock Purchase Price or the number of Warrant Shares that may be purchased upon the exercise hereof the Company will cause to be mailed to the Holder, at least twenty days before the applicable record or effective date hereinafter specified, a notice stating (A) the date as of which the holders of Common Stock of record entitled to receive any such dividends or distributions is to be 4 determined, or (B) the date on which any Reorganization Event, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record will be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such Reorganization Event, dissolution, liquidation or winding up. 4.5 Notice of Adjustment. Upon any adjustment of the Stock Purchase Price or any increase or decrease in the number of shares purchasable upon the exercise of this Warrant, the Company shall give written notice thereof, by first class mail postage prepaid, addressed to the registered Holder of this Warrant at the address of such Holder as shown on the books of the Company. The notice shall be signed by the Company's chief financial officer and shall state the Stock Purchase Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 5. Rights of Holder. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote, to consent, or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company, except as expressly provided in this Warrant. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. 6. Warrants Transferable. Subject to compliance with applicable federal and applicable state securities laws, this Warrant and all rights hereunder may be transferred, in whole or in part, without charge to the holder hereof (except for transfer taxes) to one or more of Holder's affiliates, not to exceed ten transferees, upon surrender of this Warrant properly endorsed and compliance with the provisions of the Agreement. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Warrant shall have been so endorsed, may be treated by the Company, at the Company's option, and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company and notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered owner hereof as the owner for all purposes. 7. Lost Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 8. Incidental Registration Rights. If the Company proposes to register any of its stock or other securities under the Securities Act of 1933, as amended (the "Act"), in connection with the public offering of such securities (other than a registration relating solely to the sale of 5 securities to participants in a Company stock plan, a registration relating to a corporate reorganization or other transaction under Rule 145 of the Act, a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the securities underlying the Warrant or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered), the Company shall, at such time, promptly give the Holder written notice of such registration. Upon the written request of the Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 12, the Company shall use its commercially reasonable efforts to cause to be registered under the Act all of the Warrant Shares that such Holder has requested to be registered. This right shall terminate as to any Holder on the earlier of (i) such earlier time at which all securities held by such Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three (3) month period with registration in compliance with Rule 144 of the Act, and (ii) in connection with a Reorganization Event, the filing of a registration statement on Form S-4 of the shares of common stock that may be issued by the registering corporation (the "Acquiring Company") pursuant to a Reorganization Event, provided that such registration statement include shares of the Acquiring Company's common stock that may be issued pursuant to a Reorganization Event for Warrant Shares outstanding prior to the date of the Reorganization Event; and no other registration statement shall be required to be filed by the Company or the Acquiring Company with respect to any Warrant Shares that are not purchased prior to such Reorganization Event. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under this Section 8 to include any Holder's Warrant Shares in such underwriting unless such Holder accepts the terms of the underwriting as agreed upon between the Company and the underwriters selected by it and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. 9. Representations and Warranties of the Company. The Company hereby represents and warrants to the initial Holder as of the date of execution of this Warrant as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has all requisite corporate power and authority to execute and deliver this Warrant and to perform its obligations hereunder. (b) This Warrant has been duly authorized, executed and delivered by the Company, and constitutes its valid and legally binding obligation, enforceable in accordance with its terms except (i) as limited by any applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. 10. Representations and Warranties of Holder. The Holder hereby represents and warrants to the Company as of the date of execution of this Warrant as follows: (a) Purchase for Own Account. The Holder represents that it is acquiring this Warrant and the Warrant Shares (collectively, the "Securities") solely for investment for such 6 Holder's own account not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. The acquisition by such Holder of any of the Securities shall constitute confirmation of the representation by such Holder that such Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. (b) Access to Information. The Holder represents that it has been furnished or afforded access to information describing the Company, the terms of an investment in the Company, the Company's past, present and future activities and other matters the Holder has deemed relevant to its investment decision. The Holder further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and the business, properties, prospects and financial condition of the Company. (c) Accredited Investor. The Holder represents that it is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. (d) Restrictions on Transfer. The Holder acknowledges that the Warrant Shares must be held indefinitely unless subsequently registered under the Act or the Company receives an opinion of counsel satisfactory to the Company that such registration is not required. The Holder is aware that the Securities may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all conditions of Rule 144 are satisfied. The Holder further acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time the Holder wishes to sell the Warrant Shares; and, if so, the Holder would be precluded from selling such Warrant Shares under Rule 144 even if the one year minimum holding period has been satisfied. 11. Modification and Waiver. Any term of this Warrant and all Warrants issued pursuant to the Agreement may be amended and the observance of any term of this Warrant and all Warrants issued pursuant to the Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of Warrants representing at least a majority of the aggregate number of Warrant Shares issuable upon exercise of all outstanding Warrants issued pursuant to the Agreement. Any amendment or waiver effected in accordance with this paragraph shall be binding upon the Company, the Holder and the holders of all Warrants issued pursuant to the Agreement. 12. Notices. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Warrant shall be in writing and shall be conclusively deemed to have been duly given (a) when hand delivered to the other party; (b) when sent by facsimile to the number set forth below if sent between 8:00 a.m. and 5:00 p.m. recipient's local time on a business day, or on the next business day if sent by facsimile to the number set forth below if sent other than between 8:00 a.m. and 5:00 p.m. recipient's local time on a business day; (c) three business days after deposit in the U.S. mail with first class or 7 certified mail receipt requested postage prepaid and addressed to the other party at the address set forth below; or (d) the next business day after deposit with a national overnight delivery service, postage prepaid, addressed to the parties as set forth below with next business day delivery guaranteed, provided that the sending party receives a confirmation of delivery from the delivery service provider. Each person making a communication hereunder by facsimile shall promptly confirm by telephone to the person to whom such communication was addressed each communication made by it by facsimile pursuant hereto but the absence of such confirmation shall not affect the validity of any such communication. A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this Section 9 by giving the other party written notice of the new address in the manner set forth above. The addresses for the parties are as follows: For the Company: Cylink Corporation 3131 Jay Street Santa Clara, CA 95054 Fax: (408) 855-6106 For the Holder: Orchard Gateway Investors, LLC 2262 North First Street San Jose, CA 95131 Fax: (408) 922-0157 13. Successors and Assigns. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the Holder hereof and their respective successors and assigns. 14. Titles and Subtitles; Governing Law; Venue. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Agreement. This Warrant is to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the Company and the Holder. All disputes and controversies arising out of or in connection with this Warrant shall be resolved exclusively by the state and federal courts located in Santa Clara County in the State of California, and each of the Company and the Holder hereto agrees to submit to the jurisdiction of said courts and agrees that venue shall lie exclusively with such courts. 8 IN WITNESS WHEREOF, the Company and the initial Holder have caused this Warrant to be duly executed by their officers, thereunto duly authorized as of this 30th day of October, 2002. CYLINK CORPORATION By: ___________________________________ R. Christopher Chillingworth, CFO HOLDER Orchard Gateway Investors, LLC By: /s/ Michael Biggar ----------------------------------- Michael Biggar Its: Managing Member 9 EXERCISE FORM (To be signed only upon exercise of Warrant) To: _____________________ The undersigned, the holder of a right to purchase shares of Common Stock of CYLINK CORPORATION (the "Company") pursuant to that certain Warrant to Purchase Shares of Cylink Corporation (the "Warrant"), dated as of____________, 2002, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _______________________ (shares) of Common Stock of the Company and herewith makes payment of ____________ Dollars ($___________) therefor by the following method: (Check one of the following) (check if applicable) The undersigned hereby elects to make payment of ______________ Dollars ($___________) therefor in cash. (check if applicable) The undersigned hereby elects to make payment for the aggregate exercise price of this exercise using the Net Issuance method pursuant to Section 2 of the Warrant. The undersigned represents that it is acquiring such securities for its own account for investment and not with a view to or for sale in connection with any distribution thereof and in order to induce the issuance of such securities makes to the Company, as of the date hereof, the representations and warranties set forth in Section 10 of the Warrant. DATED: [name of Holder] By: _______________________ Name: _____________________ Its:_______________________ 10 WARRANT ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned, ____________________________ ("Assignor"), hereby sells, assigns and transfers unto Name: ___________________________________________ ("Assignee") (Please type or print in block letters) Address: ___________________________________________ ___________________________________________ ___________________________________________ This Warrant and all rights evidenced thereby and does hereby irrevocably constitute and appoint the Company and any of its officers, secretary, or assistant secretaries, as attorneys-in-fact to transfer the same on the books of the Company, with full power of substitution in the premises. Date: ______________________ ______________________________________ Name of Holder: Title: In the presence of: ______________________________ Note: The signature of this Warrant Assignment must correspond to the name as it appears on the face of this Warrant. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing. 11 ACKNOWLEDGMENT To: [name of Holder] The undersigned hereby acknowledges that as of the date hereof, ___________________________________________ (_________________) shares of Common Stock remain subject to the right of purchase in favor of [name of Holder] pursuant to that certain Warrant to Purchase Common Stock of Cylink Corporation, dated as of _________________, 2002. DATED: __________________________ CYLINK CORPORATION By: ______________________________ Name: ____________________________ Its: _____________________________ 12 EX-99.1 9 ex99_1.txt CERTIFICATION OF CEO CYLINK CORPORATION CERTIFICATION In connection with the periodic report of Cylink Corporation (the "Company") on Form 10-Q for the period ended September 29, 2002 as filed with the Securities and Exchange Commission (the "Report"), I, William P. Crowell, President and Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. Date: November 13, 2002 By: /s/ William P. Crowell ---------------------- William P. Crowell Chief Executive Officer Cylink Corporation EX-99.2 10 ex99_2.txt CERTIFICATION OF CFO CYLINK CORPORATION CERTIFICATION In connection with the periodic report of Cylink Corporation (the "Company") on Form 10-Q for the period ended September 28, 2002 as filed with the Securities and Exchange Commission (the "Report"), I, R. Christopher Chillingworth, Vice President of Finance and Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. Date: November 13, 2002 By: /s/ R. Christopher Chillingworth -------------------------------- R. Christopher Chillingworth Vice President of Finance and Chief Financial Officer Cylink Corporation -----END PRIVACY-ENHANCED MESSAGE-----