-----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, SHhwcqnYHFRBhnCvP7uRNnC7in5He47HWxTiNIuZxGN8gKVy5avTFrk8/PDq445n Kl1Wpm7BgeiZB9x7fp8Lbw== 0001072993-99-000090.txt : 19990414 0001072993-99-000090.hdr.sgml : 19990414 ACCESSION NUMBER: 0001072993-99-000090 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19990413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MICRO CIRCUITS CORP CENTRAL INDEX KEY: 0000711065 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942586591 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-76185 FILM NUMBER: 99592837 BUSINESS ADDRESS: STREET 1: 6290 SEQUENCE DR CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194509333 MAIL ADDRESS: STREET 1: 6290 SEQUENCE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 S-3 1 FORM S-3 FOR APPLIED MICRO CIRCUITS CORP. As filed with the Securities and Exchange Commission on April 13, 1999 Registration No. 333-xxxxx ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------------------- APPLIED MICRO CIRCUITS CORPORATION (Exact Name of Registrant as Specified in Its Charter) -------------------------------------- Delaware 94-2586591 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 6290 Sequence Drive San Diego, CA 92121 (619) 450-9333 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) -------------------------------------- COPIES TO: Mark A. Medearis Carl L. Spataro, Jr. VENTURE LAW GROUP A Professional Corporation 2800 Sand Hill Road Menlo Park, CA 94025 ------------------------------ Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. ------------------------------ If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective registration statement for the same offering. [_] --------------- If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective registration statement for the same offering. [_] ---------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
Title Of Each Class Of Amount Proposed Maximum Proposed Maximum Amount Of Securities To To Be Offering Aggregate Registration Be Registered Registered Price Per unit(1) Offering Price(1) Fee - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $0.001 2,908,587 $43.00 $125,069,241 $34,770 ==================================================================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee based on the average of the high and low closing price of the Common Stock as reported on the Nasdaq National Market on April 9, 1999 pursuant to Rule 457(c). The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Subject To Completion, Dated April 13, 1999 Prospectus APPLIED MICRO CIRCUITS CORPORATION 2,908,587 shares of Common Stock The common stock offered by this prospectus involve a high degree of risk. You should carefully consider the "Risk Factors" beginning on page 3 in determining whether to purchase the common stock. ---------------------------------------- The selling stockholders identified on page 20 of this prospectus are offering these shares of common stock. For additional information on the methods of sale, you should refer to the section entitled "Plan of Distribution" on page 18. We will not receive any portion of the proceeds from the sale of these shares. Applied Micro Circuits Corporation's common stock is quoted on the Nasdaq National Market under the symbol "AMCC". On April 9, 1999, the last sale price of the common stock on the Nasdaq National Market was $43.625 per share.
====================================================================================================== Underwriting Price to Discounts and Proceeds to Public Commissions Selling Stockholders - ------------------------------------------------------------------------------------------------------ Per Share............................ See Text Above See Text Above See Text Above Total................................ - ------------------------------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities or passed on the adequacy of accuracy of the disclosures in this prospectus. Any representation to the contrary is a criminal offense. The information in the prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The date of this prospectus is April 13, 1999 TABLE OF CONTENTS THE COMPANY............................................................. 3 RISK FACTORS............................................................ 3 USE OF PROCEEDS......................................................... 18 ISSUANCE OF COMMON STOCK TO SELLING STOCKHOLDERS........................ 18 PLAN OF DISTRIBUTION.................................................... 18 SELLING STOCKHOLDERS.................................................... 20 LEGAL MATTERS........................................................... 22 EXPERTS................................................................. 22 WHERE YOU CAN FIND MORE INFORMATION..................................... 22
-2- We have not authorized any dealer, salesperson or other person to give any information or represent anything not contained in this prospectus. You should not rely on any unauthorized information. This prospectus does not offer to sell or seek offers to buy any shares in any jurisdiction in which it is unlawful. The information in this prospectus is current as of the date on the cover. THE COMPANY Applied Micro Circuits Corporation designs, develops, manufactures and markets high-performance, high-bandwidth silicon solutions for the world's communications infrastructure. We utilize a combination of high-frequency mixed-signal design expertise, system-level knowledge and multiple silicon process technologies to offer IC products for the telecommunications markets that address the SONET/SDH and ATM transmission standards and for the data communications markets that address the Gigabit Ethernet, ATM and Fibre Channel transmission standards. We also leverage our technology to provide solutions for the ATE, high-speed computing and military markets. Our customers include 3Com, Alcatel, Cisco Systems, Compaq, Hughes Electronics, Nortel, Sun Microsystems and Teradyne. We have developed multiple generations of many of our products. In the telecommunications market, we provide ATM and SONET/SDH physical layer transceivers, overhead processors, physical media devices and clock recovery and synthesis units for the OC-3, OC-12 and OC-48 standards, and are currently developing OC-192 chips. In the data communications market, we provide physical layer transceivers for serial backplane, Gigabit Ethernet and Fibre Channel applications. In the high-speed computing market, we provide PCI controllers and high-frequency clock drivers and clock generators. In addition, we also provide high-performance, low-power application-specific integrated circuit products for the ATE and military markets. Applied Micro Circuits Corporation was originally incorporated in California on April 9, 1979 and reincorporated in Delaware in April 1987. The company commenced operating in April 1979. Our principal executive offices are located at 6290 Sequence Drive, San Diego, CA 92121, and our telephone number is (619) 450-9333. As used in this prospectus, "we," "us," "our" and "AMCC" refer to Applied Micro Circuits Corporation, a Delaware corporation and its wholly owned subsidiaries.. RISK FACTORS An investment in the common stock offered by this prospectus involves a high degree of risk. Prospective purchasers of the common stock offered by this prospectus should carefully consider the following risk factors in addition to the other information appearing in or incorporated by reference into this prospectus. This prospectus includes forward-looking statements based upon current expectations that involve risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. We use words such as "anticipate," "believe," "expect," "future" and "intend" and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Our operating results may fluctuate because of many factors, many of which are beyond our control. If our operating results are below the expectations of public market analysts or investors, then the market price of our common stock could be materially and adversely affected. Some of the factors that affect our quarterly and annual results, but which are difficult to control or predict are: . the rescheduling or cancellation of orders by customers; . fluctuations in the timing and amount of customer requests for product shipments; . fluctuations in manufacturing output, yields and inventory levels; -3- . changes in the mix of products that our customers buy; . our ability to introduce new products and technologies on a timely basis; . the announcement or introduction of products and technologies by our competitors; . the availability of external foundry capacity, purchased parts and raw materials; . competitive pressures on selling prices; . the amounts and timing of costs associated with warranties and product returns; . the amounts and timing of investments in research and development; . market acceptance of our products and of our customers' products; . the timing of depreciation and other expenses that we expect to incur in connection with our proposed new wafer fabrication facility; . costs associated with compliance with applicable environmental regulations or remediation; . costs associated with future litigation, if any, including without limitation, litigation or settlements relating to the use or ownership of intellectual property; . general semiconductor industry conditions; and . general economic conditions, including, but not limited to, economic conditions in Asia. Our expense levels are relatively fixed and are based, in part, on our expectations of future revenues. We are continuing to increase our operating expenses for personnel and new product development. However, we have a limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our business, financial condition and operating results would be adversely affected if we do not achieve increased revenues. We can have revenue shortfalls for a variety of reasons, including: . significant pricing pressures that occur because of declines in average selling prices over the life of a product; . sudden shortages of raw materials or production capacity constraints that lead producers to allocate available supplies or capacity to customers with resources greater than us and, in turn, interrupt our ability to meet our production obligations; . fabrication or test capacity constraints for internally manufactured devices which interrupt our ability to meet our production obligations; and . the rescheduling or cancellation of customer orders. In addition, our business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Due to the absence of substantial noncancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. In addition, from time to time, in response to anticipated long lead times to obtain inventory and materials from our outside foundries, we may order materials in advance of anticipated customer demand, which might result in excess inventory levels or unanticipated inventory write- downs if expected orders fail to materialize, or other factors render the customer's products less marketable. Furthermore, we currently anticipate that an increasing portion of our revenues in future periods will be derived from sales of application-specific standard products ("ASSPs"), as compared to application-specific integrated circuits ("ASICs"). Customer orders for ASSPs typically have shorter lead times than orders for ASICs, which may make it increasingly difficult for us to predict revenues and inventory levels and adjust production appropriately in future periods. If we are unable to plan inventory and production levels effectively, our financial condition and operating results could be materially adversely affected. One example of the volatility of our results is that we experienced revenue fluctuations and incurred net losses in fiscal 1995 and 1996. These revenue fluctuations and net losses were caused by the termination of a relationship with a strategic foundry partner, decreased orders from two major customers, charges associated with a reduction in the company's workforce and charges for excess inventory. Accordingly, we believe that period-to-period comparisons of operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. -4- Our operating results depend substantially on our manufacturing yields, which may not meet expectations. AMCC Fabrication We manufacture most of our semiconductors at our San Diego facility. Our yields can decline whenever a substantial percentage of wafers must be rejected or a significant number of die on each wafer are nonfunctional. Such declines can be caused by many factors over which we have little or no control, including minute levels of contaminants in the manufacturing environment, design issues, defects in masks used to print circuits on a wafer and difficulties in the fabrication process. Unfortunately, the ongoing expansion of the manufacturing capacity of our existing wafer fabrication facility could increase the risk of contaminants in the facility. In addition, many of these problems are difficult to diagnose, time consuming and expensive to remedy and can result in shipment delays. Because the majority of our costs of manufacturing are relatively fixed, maintenance of the number of shippable die per wafer is critical to our results of operations. Yield decreases can result in substantially higher unit costs and may result in reduced gross profit and net income. In the past we experienced yield problems in connection with the manufacture of our products. For example, in the second quarter of fiscal 1997 we experienced a decrease in internal yields primarily due to increasing volume production of a single product at less than normal production yields in support of a customer's delivery requirements. This decrease in internal yields adversely impacted our gross margin for the quarter by approximately $600,000. We estimate yields per wafer in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be revalued. We have in the past and may in the future from time to time take inventory write-downs as a result of decreases in manufacturing yields. We may suffer periodic yield problems in connection with new or existing products or in connection with the commencement of production in our proposed new manufacturing facility or the transfer of our operations to this facility. Fabrication by Third Parties Semiconductor manufacturing yields are a function both of product design and process technology. When our products are manufactured by an outside foundry, the process technology is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems may require cooperation between ourselves and our manufacturer. In some cases this risk could be compounded by the offshore location of certain of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. If we develop relationships with additional outside foundries, yields could be adversely affected due to difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of the new foundries. Because of our limited access to wafer fabrication capacity from outside foundries for certain products, any decrease in manufacturing yields of such products could result in an increase in our per unit costs for such products and force us to allocate available product supply among customers, which could potentially adversely impacting customer relationships as well as revenues and gross margin. Our outside foundries may not achieve or maintain acceptable manufacturing yields in the future. Furthermore, we also face the risk of product recalls resulting from design or manufacturing defects which are not discovered during the manufacturing and testing process. Our business strategy is based on increasing dependence on telecommunications and data communications markets. An important part of our strategy is to continue our focus on the telecommunications market and to leverage our technology and expertise to penetrate further the data communications market for high-speed ICs. If we are unable to penetrate these markets further, our short and long term business will suffer. In the short term, we may experience reduced revenues. In the long term, our revenues could stop growing and may decline. We anticipate that sales to our other traditional markets will grow more slowly or not at all and, in some instances, as in the case of military markets, may decrease over time. The telecommunications and data communications markets are characterized by: . extreme price competition; . rapid technological change; . industry standards that are continually evolving; and . in many cases, short product life cycles. These markets frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. If our products are unable to support the new features or performance levels required by OEMs in these markets, we would be likely to lose business from an existing or potential customer and, moreover, would not have the opportunity to compete for new design wins until the next product transition occurs. If we fail to develop products with required features or performance standards for the telecommunications or data communications markets, or if we experience a delay as short as a few months in bringing a new product to market, or if our telecommunications or data communications customers fail to achieve market acceptance of their products, our revenues could be significantly reduced for a substantial period. A significant portion of our revenues in recent periods has been, and is expected to continue to be, derived from sales of products based on the Synchronous Optical Network, or SONET, and Synchronous Digital Hierarchy, or SDH, transmission standards and the Asynchronous Transfer Mode, or ATM, transmission standard. If the communications market evolves to new standards, we may not be able to successfully design and manufacture new products that address the needs of our customers or gain substantial market acceptance. Although we have developed products for the Gigabit Ethernet and Fibre Channel communications standards, volume sales of these products are modest, and we may not be successful in addressing the market opportunities for products based on these standards. Our business could be adversely affected if we do not adequately address the risks associated with our recent acquisition of Cimaron Communications Corporation. On March 17, 1999, we completed the acquisition of Cimaron Communications Corporation. This transaction is accompanied by a number of risks, including: . the difficulty of assimilating the operations and personnel of Cimaron; . the potential disruption of AMCC's and Cimaron's ongoing business and distraction of management; . possible unanticipated expenses related to technology integration; . the potential impairment of relationships with employees and customers as a result of any integration of new management personnel; and . potential unknown liabilities associated with acquired businesses. We may not be successful in addressing these risks or any other problems encountered in connection with the Cimaron acquisition. In addition, the market price of our common stock could decline as a result of the merger if: . the integration of AMCC and Cimaron is unsuccessful; . the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial analysts; . the effect of the merger on the combined company financial results is not consistent with the expectations of financial analysts; or -6- . the management of Cimaron employees who are geographically distant from our headquarters, but engaged in developing technology and products that are vital for our future revenues. We intend to account for the merger under the pooling of interests accounting and financial reporting rules. To qualify the merger as a pooling of interests for accounting purposes, AMCC and Cimaron and their respective affiliates must meet the criteria for pooling of interests accounting established in opinions published by the Accounting Principles Board and interpreted by the Financial Accounting Standards Board and the Commission. These opinions are complex, and the interpretation of them is subject to change. Consummation of the merger was conditioned, among other things, upon the receipt by us of a letter from our independent accountants that, subject to customary qualifications, they concur with management's conclusion that no conditions exist that would preclude AMCC and Cimaron from being parties to a business combination that would be accounted for as a pooling of interests. However, the availability of pooling of interests accounting treatment for the merger depends in part, upon circumstances and events occurring after the effective time. For example, there must be no significant changes in the business of the combined company, including significant dispositions of assets, for a period of two years following the effective time. Further, our affiliates and Cimaron's affiliates must not sell, or otherwise reduce their risk with respect to, any shares of either AMCC and Cimaron capital stock, except for a deminimus number as defined by certain Commission rules and regulations, during the period beginning 30 days before the effective time and continuing until the day that we publicly announce financial results covering at least 30 days of combined operations of AMCC and Cimaron after the merger. We expect that such combined financial results will be published in late April 1999. If our affiliates or Cimaron's affiliates sell their shares of AMCC common stock prior to that time despite a contractual obligation not to do so, the merger may not qualify for accounting as a pooling of interests for financial reporting purposes. The failure of the merger to qualify for pooling of interests accounting treatment for financial reporting purposes for any reason would materially and adversely affect our reported earnings and likely, the price of our common stock. Our business strategy is also based on increasing dependence on application- specific standard products. We have under development a number of ASSPs for the telecommunications and data communications markets, from which we expect to derive an increasing portion our future revenues. However, we have a limited operating history in selling ASSPs, particularly to customers in the telecommunications and data communications markets. In addition, our relationships with certain customers in these markets have only been established recently. Our future success in selling ASSPs, and in particular, selling ASSPs to customers in the telecommunications and data communications markets, will depend in large part on whether our ASSPs are developed on a timely basis and whether such products achieve market acceptance among new and existing customers, and on the timing of the commencement of volume production of products in corporating our ASSPs, if at all. We have in the past encountered difficulties in introducing new products in accordance with customers' delivery schedules and initial expectations. We may encounter similar difficulties in the future, and we may not be able to develop and introduce ASSPs in a timely manner so as to meet customer demands. We currently depend on the automated test equipment market, and that market has recently experienced declines in demand. We have historically derived significant revenues from product sales to customers in the Automated Test Equipment, or ATE, market and currently anticipate that we will continue to derive significant revenues from sales to customers in this market in the near term. During the past year, customers in the ATE market have experienced decreased demand due primarily to slower growth in the semiconductor industry and economic turmoil in Asia. Accordingly, our net revenues in the ATE market has declined for three consecutive quarters as of December 31, 1998, and we believe that our revenue from the ATE market may decline further. -7- We depend on the high-speed computing market, but we believe that the average selling prices of our IC products for the high-speed computing market will decline in future periods and that our gross margin on sales of such products may also decline in future periods. The market for high-speed computing IC products is subject to extreme price competition, and we may not be able to reduce the costs of manufacturing high- speed computing IC products in response to declining average selling prices. Even if we successfully utilize new processes or technologies to reduce the manufacturing costs of our high-speed computing products in a timely manner, our customers in the high-speed computing market may not purchase these products. Furthermore, we expect that certain competitors may seek to develop and introduce products that integrate the functions performed by our high-speed computing IC products on a single chip. In addition, one or more of our customers may choose to utilize discrete components to perform the functions served by our high-speed computing IC products or may use their own design and fabrication facilities to create a similar product. In either case, the need for high-speed computing customers to purchase our IC products could be eliminated. Our markets are subject to rapid technological change, so our success depends heavily on our ability to develop and introduce new products The markets for our products are characterized by: . rapidly changing technologies; . evolving and competing industry standards; . short product life cycles; . changing customer needs; . emerging competition; . frequent new product introductions and enhancements; . increased integration with other functions; and . rapid product obsolescence. To develop new products for these markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to develop technical and design expertise. In addition, we must have our products designed into our customers' future products and maintain close working relationships with key customers in order to develop new products, particularly ASSPs, that meet customers' changing needs. We also must respond to changing industry standards, trends towards increased integration and other technological changes on a timely and cost-effective basis. Furthermore, if we fail to achieve design wins with key customers our business will be significantly hurt because once a customer has designed a supplier's product into its system, the customer typically is extremely reluctant to change its supply source due to significant costs associated with qualifying a new supplier. Products for telecommunications and data communications applications, as well as for high-speed computing applications, are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. -8- The markets in which we compete are highly competitive and subject to rapid technological change, price erosion and heightened international competition. The telecommunications, data communications, ATE and high-speed computing industries are intensely competitive. We believe that the principal factors of competition in our markets are price, product performance, product quality and time-to-market. Our ability to compete successfully in our markets depends on a number of factors, including: . success in designing and subcontracting the manufacture of new products that implement new technologies; . product quality; . reliability; . price; . the efficiency of production; . design wins for our IC products; . expansion of production of our products for particular systems manufacturers; . end-user acceptance of the systems manufacturers' products; . market acceptance of competitors' products; and . general economic conditions. In addition, our competitors may offer enhancements to existing products or offer new products based on new technologies, industry standards or customer requirements that are available to customers on a more timely basis than comparable products from us or that have the potential to replace or provide lower-cost alternatives to our products. The introduction of enhancements or new products by our competitors could render our existing and future products obsolete or unmarketable. In addition, we expect that certain of our competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by our IC products on a single chip, thus eliminating the need for our products. In the communications markets, we compete primarily against Giga, Hewlett- Packard, Lucent, Maxim, Philips, Sony, Texas Instruments, Rockwell International, TriQuint and Vitesse. Some of these companies use gallium arsenide ("GaAs") process technologies for certain products. In certain circumstances, most notably with respect to ASICs supplied to Nortel, our customers or potential customers have internal IC manufacturing capabilities. In the ATE market, our products compete primarily against GaAs based products offered by Vitesse and silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Analog Devices, Lucent Technologies and Maxim. In the high-speed computing market, we compete primarily against Chrontel, Cypress, ICS, PLX and Tundra. Many of these companies and potential new competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. If we are not successful in expanding the capacity of our existing fabrication facility and in constructing our new facility on time and within budget, we may face serious capacity constraints. We currently manufacture a majority of our IC products at our four-inch wafer fabrication facility located in San Diego, California. We believe that we will be able to satisfy our production needs from this fabrication facility through 2001, although this date may vary depending on, among other things, our rate of growth. However, if we cannot expand the capacity of this facility on a timely basis, we could experience significant capacity constraints that could render us unable to meet customer demand or force us to spend more to make wafers to meet demand. We will be required to hire, train and manage additional production personnel in order to increase production capacity as scheduled. Based on our current forecasts of future need for manufacturing capacity, we have tentative plans for the construction of a new six-inch wafer fabrication facility, initially to complement, and potentially to replace, our existing facility in San Diego. We are also exploring other alternatives for the expansion of our manufacturing -9- capacity, including purchasing a wafer fabrication facility or entering into strategic relationships to obtain additional capacity. In July 1998 we acquired the right to purchase, in the form of a ground lease, a parcel of land as a site for our new wafer fabrication facility. This parcel of land is located approximately one quarter mile from our headquarters in San Diego, California. The Company has made payments of $1.0 million related to this ground lease through December 31, 1998. In December 1998, the Company exercised this right to acquire the land and will be required to make additional payments of approximately $3.7 million. We currently plan to acquire the site to which we have rights by mid-1999, to initiate construction of the new facility during 2000 and to complete the physical plant during 2001. Following the completion of the physical plant, we must install equipment and perform necessary testing prior to commencing commercial production at the facility, a process which we anticipate will take at least nine months. Accordingly, we believe the new facility will not commence commercial production prior to late 2001. We estimate that the cost of the new wafer fabrication facility will be at least $80.0 million, of which at least $35.0 million relates to the purchase of land and construction of the building and at least $45.0 million relates to capital equipment purchases necessary to establish the initial manufacturing capacity of the facility. We intend to fund approximately $24.0 million of the total cost of the new facility with a portion of the proceeds from our initial and secondary public offering, which are now invested in short-term investments. The balance of the cost of this facility is expected to be funded through a combination of available cash, cash equivalents and short-term investments, cash from operations and additional debt, lease or equity financing. We may not be able to obtain the additional financing necessary to fund the construction and completion of the new manufacturing facility. In addition, the rights to acquire the site for our proposed new manufacturing facility are subject to certain conditions, and, as a result, we may experience delays in acquiring the site or, if the site becomes unavailable, in finding a new site for the potential wafer fabrication facility. Our existing wafer fabrication facility is, and its proposed new wafer fabrication facility is expected to be, located in California and these facilities may be subject to natural disasters such as earthquakes or floods. In addition, the depreciation and other expenses that we will incur in connection with the expansion of our existing manufacturing facility and in connection with our proposed new wafer fabrication facility may adversely affect our gross margin in any future fiscal period. The construction of the new wafer fabrication facility entails significant risks, including: . shortages of materials and skilled labor; . unforeseen environmental or engineering problems; . work stoppages; . weather interferences; and . unanticipated cost increases. Any one of these risks could have a material adverse effect on the building, equipping and production start-up of the new facility. In addition, unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site approvals and building permits could involve significant additional costs and delay the scheduled opening of the facility and could reduce our anticipated revenues. Also, the timing of commencement of operation of the new facility will depend upon the availability, timely delivery and successful installation and testing of the necessary process equipment. As a result of the foregoing and other factors, the new facility may not be completed and in volume production within its current budget or within the period currently scheduled. Furthermore, we may be unable to achieve adequate manufacturing yields in the proposed new fabrication facility in a timely manner, and our revenues may not increase commensurate with the anticipated increase in manufacturing capacity associated with the new facility. In addition, in the future, we may be required for competitive reasons to make capital investments in the existing wafer fabrication facility or to accelerate the timing of the construction of our new wafer fabrication facility in order to expedite the manufacture of products based on more advanced manufacturing processes. The successful operation of our proposed new wafer fabrication facility, if completed, as well as our overall production operations, will also be subject to numerous risks. We have no prior experience with the operation of the equipment or the processes involved in producing finished six-inch wafers, which differ significantly from those involved in the production of four-inch wafers. We will be required to hire, train and manage production personnel in order to effectively operate the new facility. We do not have sufficient excess -10- production capacity at our existing San Diego facility to fully offset any failure of the proposed new wafer fabrication facility to meet planned production goals. We may transfer current San Diego manufacturing operations into the proposed new wafer fabrication facility subsequent to its completion. Should this transfer occur, we may experience delays in completing product testing and documentation required by customers to qualify or requalify our products from this facility. We will also have to effectively coordinate and manage two manufacturing facilities to successfully meet overall production goals. We have no experience in coordinating and managing production facilities that are located at different sites or in the transfer of manufacturing operations from one facility to another. As a result of these and other factors, our failure to successfully operate the proposed new wafer fabrication facility, to successfully coordinate and manage the two sites or to transfer our manufacturing operations could adversely affect our overall production. The markets for our products are characterized by rapid changes in manufacturing process technologies; therefore, to provide competitive products to our target markets, we must develop or otherwise gain access to improved process technologies. Our future success will depend, in large part, upon our ability to continue to improve existing process technologies, to develop new process technologies including silicon germanium, or SiGe, processes, and to adapt our process technologies to emerging industry standards. In the future, we may be required to transition one or more of our products to process technologies with smaller geometries, other materials or higher speeds in order to reduce costs and/or improve product performance. We may not be able to improve our process technologies and develop or otherwise gain access to new process technologies, including, but not limited to SiGe process technologies, in a timely or affordable manner. In addition, products based on these technologies may not achieve market acceptance. Our dependence on third-party manufacturing and supply relationships increases the risk that we will not have an adequate supply of products to meet demand or that our cost of goods will be higher than expected. We rely on outside foundries for the manufacture of certain products, including all of our products designed on CMOS processes and all products that we anticipate will be designed on silicon germanium processes. We generally do not have long-term wafer supply agreements with our outside foundries that guarantee wafer or product quantities, prices or delivery lead times. Instead, our products that are manufactured by outside foundries are manufactured on a purchase order basis. We expect that, for the foreseeable future, certain products will be manufactured by a single outside foundry. Because establishing relationships with new outside foundries takes several months, there is no readily available alternative source of supply for these products. A manufacturing disruption experienced by one or more of our outside foundries would impact the production of certain of our products for a substantial period of time. Furthermore, the transition to the next generation of manufacturing technologies at one or more of our outside foundries could be unsuccessful or delayed. There are additional risks associated with our dependence upon third-party manufacturers for certain products. These include, but are not limited to: . reduced control over delivery schedules and quality; . risks of inadequate manufacturing yields and excessive costs; . the potential lack of adequate capacity during periods of excess demand; . limited warranties on wafers or products supplied to us; . potential increases in prices; and . potential misappropriation of our intellectual property. With respect to certain of our products, we depend upon external foundries to produce wafers and, in some cases, finished products of acceptable quality, to deliver those wafers and products to us on a timely basis and to allocate to us a portion of their manufacturing capacity sufficient to meet our needs. On occasion, we have experienced difficulties with our suppliers failing to produce goods of sufficient quality or quantity or failing to meet delivery deadlines. Our wafer and product requirements typically represent a very small portion of the total production of these external foundries. As a result, we are subject to the risk that a producer will cease production -11- on an older or lower-volume process that is used to produce our parts. Additionally, we cannot be certain our external foundries will continue to devote resources to the production of our products or continue to advance the process design technologies on which the manufacturing of our products are based. Certain of our products are assembled and packaged by third-party subcontractors. We do not have long-term agreements with any of these subcontractors. Assembly and packaging is conducted on a purchase order basis. As a result, we cannot directly control product delivery schedules. This could lead to product shortages or quality assurance problems that could increase the costs of manufacturing, assembly or packaging of our products. In addition, we may, from time to time, be required to accept price increases for assembly or packaging services. Due to the amount of time normally required to qualify assembly and packaging subcontractors, product shipments could be delayed significantly if we are required to find alternative subcontractors. In the future, we may contract with third parties for the testing of our products. Any problems associated with the delivery, quality or cost of the assembly, testing or packaging of our products could have a material adverse effect on our business. Due to an industry transition to six-inch and eight-inch wafer fabrication facilities, there is a limited number of suppliers of the four-inch wafers that we use to build products in our existing manufacturing facility, and we rely on a single supplier for these wafers. Although we believe that we will have sufficient access to four-inch wafers to support production in our existing fabrication facility for the foreseeable future, we cannot be certain that our current supplier will continue to supply us with four-inch wafers on a long-term basis. Additionally, the availability of manufacturing equipment needed for a four-inch process is limited, and certain new equipment required for more advanced processes may not be available for a four-inch process. Our customers are concentrated, so the loss of one or more key customers could significantly reduce our revenues and profits. Historically, a relatively small number of customers has accounted for a significant portion of our revenues in any particular period. For example, our five largest customers accounted for approximately 44%, 46%, 56% and 62% of our revenues in fiscal 1997, fiscal 1998, the first nine months of fiscal 1999 and the quarter ended December 31, 1998, respectively, and sales to Nortel accounted for approximately 20%, 21%, 18% and 20% of our revenues in each of these periods. However, we have no long-term volume purchase commitments from any of our major customers. We anticipate that sales of products to relatively few customers will continue to account for a significant portion of our revenues. A reduction, delay or cancellation of orders from one or more significant customers or the loss of one or more key customers could significantly reduce our revenues and profits. We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers. Our strategy is based on growth, and periods of rapid growth and expansion have placed, and could continue to place, a significant strain on our limited personnel and other resources. To manage expanded operations effectively, we will be required to continue to improve our operational, financial and management systems and to successfully hire, train, motivate and manage our employees. In addition, the integration of past and future potential acquisitions, the construction and operation of our planned wafer fabrication facility, the initial integration of the proposed new wafer fabrication facility with our current facility and the subsequent potential transfer of our manufacturing operations to the proposed new wafer fabrication facility will require significant management, technical and administrative resources. We cannot be certain that we will be able to manage our growth or effectively integrate our planned wafer fabrication facility into our current operations. Our future success depends in part on the continued service of our key design engineering, sales, marketing and executive personnel and our ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, in particular design engineers, and we may not be able to continue to attract and train engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our employ in the future. Our anticipated growth is expected to place increased demands on our resources and will likely -12- require the addition of new management personnel and the development of additional expertise by existing management personnel. Although we have entered into an "at-will" employment agreement with David M. Rickey, the President and Chief Executive Officer, we have not entered into fixed term employment agreements with any of our executive officers except for one-year employment agreements with Ram Sudireddy, Vice President, Cimaron, and Gary Martin, Vice President and Chief Technical Officer, Cimaron. In addition, we have not obtained key-person life insurance on any of our executive officers or key employees. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to our product and process development programs. We anticipate that we will need to raise additional capital in the future, and we cannot be certain that additional debt, lease or equity financing will be available on commercially reasonable terms or at all. We require substantial working capital to fund our business, particularly to finance inventories and accounts receivable and for capital expenditures. We believe that our available cash, cash equivalents and short-term investments and cash generated from operations, will be sufficient to meet our capital requirements through the next 12 months, although we could be required, or could elect, to seek to raise additional financing during this period. Our future capital requirements will depend on many factors, including: . the costs associated with the expansion of manufacturing operations; . the rate of revenue growth; . the timing and extent of spending to support research and development programs and expansion of sales and marketing; . the timing of introductions of new products and enhancements to existing products; and . market acceptance of our products. Additionally, we may elect to acquire other businesses, which would entail the issuance of stock and the payment of cash. We may elect to raise additional cash to finance such transactions. We expect that we will need to raise additional debt or equity financing in the future, primarily for purposes of financing the acquisition of property for our proposed new wafer fabrication facility, the construction of the proposed new wafer fabrication facility and the purchase of equipment for the proposed new wafer fabrication facility. We may not be able to protect our intellectual property adequately. We rely in part on patents to protect our intellectual property. There can be no assurance that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties, or that if challenged, will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us. To protect our intellectual property, we also rely on the combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements. Despite these efforts, we cannot be certain that others will not independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. Our business, operating results and financial condition could be materially adversely affected by litigation involving patents and proprietary rights. As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. We have, in the past and may, in the future be notified that we may be infringing the intellectual property rights of third parties. We have certain indemnification obligations to customers -13- with respect to the infringement of third-party intellectual property rights by our products. We cannot be certain that infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect our business. On July 31, 1998, the Lemelson Medical, Education & Research Foundation Limited Partnership filed a lawsuit in the U.S. District Court for the District of Arizona against 26 companies, including us, engaged in the manufacture and/or sale of IC products. The complaint alleges infringement by the defendants of certain U.S. patents held by the Lemelson Partnership relating to certain semiconductor manufacturing processes. On November 25, 1998, we were served a summons pursuant to this lawsuit. The complaint seeks, among other things, injunctive relief and unspecified treble damages. Previously, the Lemelson Partnership has offered us a license under the Lemelson patents. We are monitoring this matter and, although the ultimate outcome of this matter is not currently determinable, we believe, based in part on the licensing terms previously offered by the Lemelson Partnership, that the resolution of this matter will not have a material adverse effect on our financial position or liquidity; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on our results of operations for any quarter. Furthermore, there can be no assurance that we would prevail in any such litigation. Any litigation relating to the intellectual property rights of third parties, including the Lemelson Patents, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms or at all. Our operating results are subject to fluctuations because we rely substantially on foreign customers. International sales (including sales to Canada) accounted for 40%, 42% and 40% of revenues in fiscal 1997, fiscal 1998 and the first nine months of fiscal 1999, respectively. International sales may increase in future periods and may account for an increasing portion of our revenues. As a result, an increasing portion of our revenues may be subject to certain risks, including: . changes in regulatory requirements; . tariffs and other barriers; . timing and availability of export licenses; . political and economic instability; . difficulties in accounts receivable collections; . natural disasters; . difficulties in staffing and managing foreign subsidiary and branch operations; . difficulties in managing distributors; . difficulties in obtaining governmental approvals for communications and other products; . foreign currency exchange fluctuations; . the burden of complying with a wide variety of complex foreign laws and treaties; and . potentially adverse tax consequences. Although less than eight percent of our revenues were attributable to sales in Asia during the nine months ended December 31, 1998, the recent economic instability in certain Asian countries could adversely affect our business, financial condition and operating results, particularly to the extent that this instability impacts the sales of products manufactured by our customers. We are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries. Because sales of our products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, -14- leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations. Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, we may be limited in our ability to enforce our rights under such agreements and to collect damages, if awarded. We could incur substantial fines or litigation costs associated with our storage, use and disposal of hazardous materials. We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines, the suspension of production or a cessation of operations. In addition, these regulations could restrict our ability to expand our facilities at the present location or construct or operate our planned wafer fabrication facility or could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. Since 1993 we have been named as a potentially responsible party, or PRP, along with a large number of other companies that used Omega Chemical Corporation in Whittier, California to handle and dispose of certain hazardous waste material. We are a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site, which efforts are ongoing. To date, our payment obligations with respect to these funding efforts have not been material, and we believe that our future obligations to fund these efforts will not have a material adverse effect on our business, financial condition or operating results. Although we believe that we are currently in material compliance with applicable environmental laws and regulations, we cannot assure you that we are or will be in material compliance with these laws or regulations or that our future obligations to fund any remediation efforts, including those at the Omega site, will not have a material adverse effect on our business. Our ability to manufacture sufficient wafers to meet demand could be severely hampered by a shortage of water. We use significant amounts of water throughout our manufacturing process. Previous droughts in California have resulted in restrictions being placed on water use by manufacturers and residents in California. In the event of future drought, reductions in water use may be mandated generally, and it is unclear how such reductions will be allocated among California's different users. We cannot be certain that near term reductions in water allocations to manufacturers will not occur. Our stock price is volatile. The market price of our common stock has fluctuated significantly to date. In addition, the market price of the common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in: . our anticipated or actual operating results; . announcements or introductions of new products; . technological innovations or setbacks by us or our competitors; . conditions in the semiconductor, telecommunications, data communications, ATE, high-speed computing or military markets; . the commencement of litigation; . changes in estimates of the Company's performance by securities analysts; . announcements of merger or acquisition transactions; and . other events or factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies, and -15- that have often been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may affect adversely the market price of our common stock. If we are not adequately prepared for the transition to Year 2000, our business, operating results and financial condition could suffer. As a semiconductor manufacturer with our own wafer fabrication facility, we are dependent on computer systems and manufacturing equipment with embedded hardware or software to conduct our business. We have developed and are currently executing a plan designed to make our computer systems, applications, computer and manufacturing equipment and facilities Year 2000 ready. The plan covers five stages including: (i) inventory; (ii) assessment; (iii) remediation; (iv) testing; and (v) contingency planning. The inventory and assessment stages were completed in March 1999. We will primarily utilize internal resources to reprogram, or replace where necessary, and test the software for Year 2000 modifications. The remediation, testing and contingency planning stages are targeted to be completed in November 1999. We have initiated communications with our critical external suppliers to determine the extent to which we may be vulnerable to their failure to resolve their own Year 2000 issues. Where practicable, we will assess and attempt to mitigate our risks with respect to the failure of these entities to be Year 2000 ready. The effect, if any, on our results of operations from the failure of such parties to be Year 2000 ready, is not reasonably estimable. As of December 31, 1998, we have incurred and expensed approximately $200,000 related to the Year 2000 project and expect to incur an additional $700,000 on completing the Year 2000 project. Approximately one-half the costs associated with the Year 2000 project will be internal resources that have been reallocated from other projects, with the balance of costs reflecting incremental spending for equipment and software upgrades. The costs of the Year 2000 Project will be funded through operating cash flows, with the cost of internal resources expensed as incurred and the cost of equipment and software upgrades capitalized or expensed in accordance with our policy on property and equipment. The costs of the project and the date on which we plan to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. Among the factors that might cause such material differences are: . the availability and cost of personnel trained in this area; . the ability to locate and correct all relevant computer codes; and . the ability to identify and correct equipment with embedded hardware or software and similar uncertainties. The anti-takeover provisions of our certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control. Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control of AMCC, as the terms of the preferred -16- stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on stockholders of AMCC. Section 203 of the Delaware General Corporation Law, to which we are subject, restricts certain business combinations with any "interested stockholder" as defined by this statute. The statute may also delay, alter or prevent a change of control. -17- USE OF PROCEEDS The proceeds from the sale of the common stock offered by this prospectus are solely for the account of the selling shareholders. We will not receive any proceeds from the sale of these shares. ISSUANCE OF COMMON STOCK TO SELLING STOCKHOLDERS On March 17, 1999, we issued 2,908,587 shares of our common stock to the shareholders of Cimaron Communications Corporation pursuant to a merger agreement. Under the terms of the merger agreement, Cimaron Communications Corporation became our wholly-owned subsidiary. PLAN OF DISTRIBUTION Shares of common stock offered by this prospectus may be offered and sold from time to time by the selling stockholders. The selling stockholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. Such sales may be made on the Nasdaq National Market or otherwise, at prices and under terms then prevailing or at prices related to the then current market price or in negotiated transactions, including pursuant to one or more of the following methods: . purchases by a broker-dealer as principal and resale by such broker- dealer for its own account pursuant to this prospectus; . ordinary brokerage transactions and transactions in which the broker solicits purchasers; . block trades in which the broker-dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; and . in privately negotiated transactions. In connection with distributions of the shares or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions. In connection with such transactions, broker-dealers or other financial institutions may engage in short sales of the common stock in the course of hedging the positions they assume with selling stockholders. The selling stockholders may also sell the common stock short and redeliver the shares to close out such short positions. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker- dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The selling stockholders may also pledge shares to a broker-dealer or other financial institution, and, upon a default, such broker-dealer or other financial institution, may effect sales of the pledged shares pursuant to this prospectus (as supplemented or amended to reflect such transaction). The selling stockholders and any underwriters, dealers or agents who participate in the distribution of the shares may be deemed to be "underwriters" under the Securities Act of 1933. Any discount, commission or concession received by such persons might be deemed to be an underwriting discount or commission under the Securities Act. We have agreed to indemnify the selling stockholders against certain liabilities arising under the Securities Act. Certain of the selling stockholders may distribute their shares from time to time to their limited and/or general partners, who may sell shares pursuant to this prospectus. In addition, each selling stockholder may also transfer shares owned by him or her by gift and, upon the transfer, the donee would have the same rights of sale as the selling stockholder under this prospectus. The selling stockholders may pay selling commissions or brokerage fees with respect to the sale of the common stock offered by this prospectus. Each selling stockholder will also pay all applicable transfer taxes incurred in connection with the sale of shares. We have advised the selling stockholders that the anti-manipulation rules under the Securities Exchange Act of 1934 may apply to sales of the shares offered by this prospectus in the market, and to their own activities -18- and those of their affiliates. The selling stockholders have advised us that during the time they are engaged in attempting to sell the shares offered by this prospectus, they will: . not engage in any stabilization activity in connection with any of our securities; . provide copies of this prospectus to each person to whom shares may be offered, and to each broker-dealer, if any, through whom shares are offered; . not bid for or purchase any of our securities or any rights to acquire our securities, or attempt to induce any person to purchase any of our securities or rights to acquire our securities other than as permitted under the Exchange Act; . not effect any sale or distribution of the shares offered hereby until after the prospectus has been appropriately amended or supplemented, if required; and . effect all sales, distributions or gifts of shares in accordance with this plan of distribution. We have agreed to maintain the effectiveness of this registration statement until March 17, 2000. No sales may be made pursuant to this prospectus after the expiration date unless we amend or supplement this prospectus to indicate that we have agreed to extend the period of effectiveness. The selling stockholders may sell all, some or none of the shares offered by this prospectus. -19- SELLING STOCKHOLDERS The following table sets forth certain information as of March 31, 1999 with respect to the selling stockholders. The following table assumes that the selling stockholders sell all of the shares offered by this prospectus. We are unable to determine the exact number of shares that actually will be sold. The number and percentage of shares beneficially owned is based on a total of 26,612,069 shares outstanding at March 31, 1999 determined in accordance with Rule 13d-3 of the Exchange Act. The information is not necessarily indicative of beneficial ownership for any other purpose. Under Rule 13d-3, beneficial ownership includes any shares as to which an individual has sole or shared voting power or investment power, and also includes shares which an individual has the right to acquire within 60 days of March 31, 1999 through the exercise of any stock option or other right. Unless otherwise indicated in the footnotes, each person has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares shown as beneficially owned.
Shares Beneficially Owned Shares Beneficially Prior Shares Offered by Owned After Selling Stockholder to the Offering this Prospectus(1) the Offering - ------------------ --------------------------------- ----------------- ------------------------- Number Percent Number Percent ------ ------- ---------- --------- Matrix Partners(2) 795,200 2.99% 795,200 0 * Greylock IX, Limited Partnership 789,236 2.97 789,236 0 * Ramakrishna Sudireddy 321,936 1.21 321,936 0 * Gary Martin 278,817 1.05 278,817 0 * Gururaj Deshpande 115,934 * 115,934 0 * Charles Waite 73,845 * 73,845 0 * Shahrukh Merchant 68,788 * 68,788 0 * Christos Skalkos 65,604 * 65,604 0 * Steve Boulanger 62,097 * 62,097 0 * John LoMedico 62,097 * 62,097 0 * John Langevin 32,802 * 32,802 0 * Other former Cimaron stockholders as a 243,224 * 242,230 994 * group(3)
______________________________ (1) Of the total shares of common stock listed as owned by the selling stockholders, a total of 290,858 shares are held in an escrow account to secure indemnification obligations of the selling stockholders to us. It is expected that these shares (less any shares that may be distributed from the escrow account to us in satisfaction of indemnification claims) will be released from escrow and distributed to the selling stockholders no later than June 30, 1999. The number of shares indicated as owned by each selling stockholder includes those shares (representing 10% of the number of shares listed as beneficially owned by each selling stockholder) which such selling stockholder is entitled to receive upon distribution of these shares from the escrow account. (2) Includes 715,680 shares owned by Matrix Partners V, LP and 79,520 shares owned by Matrix V Entrepreneurs Fund, LP. (3) Includes 994 shares issuable upon exercise of options that will have vested as of May 29, 1999. -20- Except as described below, none of the selling stockholders in the above table has had any material relationship, other than as an employee or consultant, with us or any of our predecessors or affiliates within the last three years: . Prior to the merger of Cimaron Communications Corporation with AMCC, pursuant to which Cimaron became our wholly owned subsdiary, the following selling stockholders had the following material relationships with Cimaron: . Ramakrishna Sudireddy, President and Chief Executive Officer, Director; . Gary Martin, Vice President and Chief Technical Officer, Director; . Charles Waite, Vice President of Operations; . Steve Boulanger, Vice President and Chief Financial Officer; . John LoMedico, Vice President of Sales and Marketing; . Gururaj Deshpande, Director; . Greylock IX Limited Partnership owned more than 10% of the outstanding stock of Cimaron and David Aronoff, a general partner of Greylock was a director of Cimaron; and . Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P., owned more than 10% of the outstanding stock of Cimaron and Timothy Barrows, a general partner of both Matrix partnerships, was a director of Cimaron. . Following the merger, Mr. Sudireddy became the Vice President, Cimaron and Mr. Martin became the Vice President and Chief Technical Officer, Cimaron. -21- LEGAL MATTERS The validity of the issuance of the common stock offered by this prospectus will be passed upon by Venture Law Group, A Professional Corporation, Menlo Park, California, counsel to Applied Micro Circuits Corporation. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule included in our Annual Report on Form 10-K for the year ended March 31, 1998, as set forth in their report, which is incorporated by reference in this prospectus and elsewhere in the registration statement. Our financial statement and schedule are incorporated by reference in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION This prospectus is part of a registration statement on Form S-3 that we filed with the Securities and Exchange Commission. Certain information in the registration statement has been omitted from this prospectus in accordance with the rules of the SEC. We file proxy statements and annual, quarterly and special reports and other information with the SEC. You can inspect and copy the registration statement as well as the reports, proxy statements and other information we have filed with the SEC at the public reference room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C., and at the SEC Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. You can call the SEC at 1-800-732-0330 for further information about the public reference rooms. We are also required to file electronic versions of these documents with the SEC, which may be accessed from the SEC's World Wide Web site at http://www.sec.gov. Reports, proxy and information statements and other information concerning Applied Micro Circuits Corporation may be inspected at The Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006. The SEC requires us to "incorporate by reference" certain of our publicly- filed documents into this prospectus, which means that information included in those documents is considered part of this prospectus. Information that we file with the SEC after the effective date of this prospectus will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, until the selling stockholders have sold all the shares, or until we terminate the effectiveness of this registration statement. The following documents filed with the SEC are incorporated by reference in this prospectus: 1. Our Annual Report on Form 10-K for the year ended March 31, 1998, (File No 0-23193), as amended by Form 10-K/A. 2. Our definitive Proxy Statement dated June 15, 1998, filed in connection with our 1998 Annual Meeting of Stockholders. 3. Our Quarterly Reports on Form 10-Q, as amended, for the quarters ended December 31, 1998, September 30, 1998, and June 30, 1998, (File No. 0-23193). 4. Our Current Reports on Form 8-K, filed with the SEC on April 18, 1999 (File No. 0-23193). 5. The description of our common stock in our Registration Statement on Form 8-A filed with the SEC on October 10, 1997, (File No. 0-23193), including any amendments or reports filed for the purpose of updating such description. -22- 6. All of the filings pursuant to the Exchange Act after the date of filing the original Registration Statement and prior to the effectiveness of the Registration Statement. We will furnish without charge to you, on written or oral request, a copy of any or all of the documents incorporated by reference, other than exhibits to those documents. You should direct any requests for documents to Joel Holliday, 6290 Sequence Drive, San Diego, CA 92121, telephone: (619) 450-9333. -23- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses payable by the Registrant in connection with the sale and distribution of the common stock being registered. Selling commissions and brokerage fees and any applicable transfer taxes and fees and disbursements of counsel for the selling stockholders are payable individually by the selling stockholders. All amounts shown are estimates except the SEC registration fee and the Nasdaq listing fee.
Amount To be Paid ---------- SEC registration fee.............................................................. $ 34,770.00 Legal fees and expenses........................................................... $ 25,000.00* Accounting fees and expenses...................................................... $ 20,000.00* Nasdaq listing fee................................................................ $ 17,500.00 Miscellaneous expenses............................................................ $ 2,750.00* ----------- Total.......................................................................... $100,020.00 ===========
*Estimate Item 15. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933. Article Seventh of the Registrant's Amended and Restated Certificate of Incorporation and Article VI of the Registrant's Bylaws provide for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by law. In addition, the Registrant has entered into Indemnification Agreements with its officers and directors and maintains director and officer liability insurance. In connection with this offering, the selling stockholders have agreed to indemnify the Registrant, its directors and officers and each such person who controls the Registrant, against any and all liability arising from inaccurate information provided to the Registrant by the selling stockholders and contained herein up to a maximum of the net proceeds received by the selling stockholders from the sale of their shares hereunder. Item 16. Exhibits Exhibit Number Description of Exhibit ------- ---------------------- 2.1 Agreement and Plan of Merger dated as of March 3, 1999 among Applied Micro Circuits Corporation, Wiley Acquisition Corporation and Cimaron Communications Corporation 4.1 Specimen Certificate for shares of Common Stock of the Company* 5.1 Opinion of Venture Law Group, A Professional Corporation 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page II-5) 23.2 Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-4) * Incorporated by reference to Exhibit 4.1 filed with the Company's Registration Statement on Form S-1 (File No. 333-37609). II-1 Item 17. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; provided, however, that paragraphs (1) (i) and (1) (ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Company pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are incorporated by reference in this Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referred to in Item 15 above or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 12 day of April 1999. APPLIED MICRO CIRCUITS By: /s/ DAVID M. RICKEY ----------------------------------------- David M. Rickey President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, David M. Rickey and Joel O. Holliday, and each of them, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and any and all Registration Statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the Offering contemplated by this Registration Statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date - ---------------------------------- ------------------------------------------- ----------------- /s/ DAVID M. RICKEY - ----------------------------- (David M. Rickey) President, Chief Executive Officer and April 12, 1999 Director (Principal Executive Officer) /s/ JOEL O. HOLLIDAY - ----------------------------- Vice President and Chief Financial (Joel O. Holliday) Officer (Principal Financial and April 12, 1999 Accounting Officer) /s/ ROGER A. SMULLEN, SR. - ----------------------------- (Roger A. Smullen, Sr.) Director and Chairman of the Board of April 12, 1999 Directors /s/ WILLIAM K. BOWES, JR. - ----------------------------- (William K. Bowes, Jr.) Director April 12, 1999 - ----------------------------- (R. Clive Ghest) Director /s/ FRANKLIN P. JOHNSON, JR. - ----------------------------- (Franklin P. Johnson, Jr.) Director April 12, 1999 /s/ ARTHUR B. STABENOW - ----------------------------- (Arthur B. Stabenow) Director April 12, 1999
II-3 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Applied Micro Circuits Corporation We consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form S-3 and related Prospectus of Applied Micro Circuits Corporation for the registration of 2,908,587 shares of its common stock and to the incorporation by reference therein of our report dated April 21, 1998, with respect to the consolidated financial statements and schedule of Applied Micro Circuits Corporation, included in its Annual Report on Form 10-K for the fiscal year ended March 31, 1998, filed with the Securities and Exchange Commission on June 15, 1998, as amended on October 15, 1998. Ernst & Young LLP San Diego, California April 12, 1999 II-4 APPLIED MICRO CIRCUITS CORPORATION INDEX TO EXHIBITS Exhibit Number - ------ 2.1 Agreement and Plan of Merger dated as of March 3, 1999 among Applied Micro Circuits Corporation, Wiley Acquisition Corporation and Cimaron Communications Corporation 4.1 Specimen Certificate for shares of Common Stock of the Company* 5.1 Opinion of Venture Law Group, A Professional Corporation 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page II-5) 23.2 Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-4) * Incorporated by reference to Exhibit 4.1 filed with the Company's Registration Statement on Form S-1 (File No. 333-37609) EX-2.1 2 AGREEMENT AND PLAN OF MERGER DATED MARCH 3, 1999 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER dated as of March 3, 1999 among APPLIED MICRO CIRCUITS CORPORATION, WILEY ACQUISITION CORPORATION and CIMARON COMMUNICATIONS CORPORATION TABLE OF CONTENTS
Page ---- ARTICLE I - THE MERGER....................................................... 2 Section 1.1 Effective Time of the Merger................................ 2 Section 1.2 Closing..................................................... 2 Section 1.3 Effects of the Merger....................................... 2 Section 1.4 Directors and Officers...................................... 2 ARTICLE II - CONVERSION OF SECURITIES........................................ 3 Section 2.1 Conversion of Capital Stock................................. 3 Section 2.2 Escrow Agreement............................................ 4 Section 2.3 Dissenting Shares........................................... 5 Section 2.4 Exchange of Certificates.................................... 5 Section 2.5 Distributions with Respect to Unexchanged Shares............ 6 Section 2.6 No Fractional Shares........................................ 7 Section 2.7 Tax and Accounting Consequences............................. 7 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF TARGET....................... 7 Section 3.1 Organization of Target...................................... 7 Section 3.2 Target Capital Structure.................................... 8 Section 3.3 Authority; No Conflict; Required Filings and Consents....... 9 Section 3.4 Financial Statements; Absence of Undisclosed Liabilities.... 11 Section 3.5 Tax Matters................................................. 11 Section 3.6 Absence of Certain Changes or Events........................ 13 Section 3.7 Title and Related Matters................................... 14 Section 3.8 Proprietary Rights.......................................... 15 Section 3.9 Employee Benefit Plans...................................... 17 Section 3.10 Bank Accounts.............................................. 19 Section 3.11 Contracts.................................................. 19 Section 3.12 Orders, Commitments and Returns............................ 21 Section 3.13 Compliance With Law........................................ 21 Section 3.14 Labor Difficulties; No Discrimination...................... 21 Section 3.15 Trade Regulation........................................... 22 Section 3.16 Insider Transactions....................................... 22 Section 3.17 Employees, Independent Contractors and Consultants......... 22 Section 3.18 Insurance.................................................. 22 Section 3.19 Litigation................................................. 23 Section 3.20 Governmental Authorizations and Regulations................ 23 Section 3.21 Subsidiaries............................................... 23 Section 3.22 Compliance with Environmental Requirements................. 23 Section 3.23 Corporate Documents........................................ 24 Section 3.24 No Brokers................................................. 24 Section 3.25 Pooling of Interests....................................... 24
-i- TABLE OF CONTENTS (continued)
Page ---- Section 3.26 Customers and Suppliers.................................... 24 Section 3.27 Target Action.............................................. 24 Section 3.28 Offers..................................................... 25 Section 3.29 Information Statement...................................... 25 Section 3.30 Accounts Receivable........................................ 25 Section 3.31 Year 2000 Compliance....................................... 25 Section 3.32 Disclosure................................................. 25 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB.............. 26 Section 4.1 Organization of Acquiror and Sub............................ 26 Section 4.2 Acquiror Capital Structure.................................. 26 Section 4.3 Authority; No Conflict; Required Filings and Consents....... 27 Section 4.4 Commission Filings; Financial Statements.................... 28 Section 4.5 Absence of Certain Changes or Events........................ 28 Section 4.6 Compliance with Laws........................................ 28 Section 4.7 Pooling of Interests........................................ 29 Section 4.8 Interim Operations of Sub................................... 29 Section 4.9 Disclosure.................................................. 29 Section 4.10 Stockholders Consent....................................... 29 Section 4.11 Litigation................................................. 29 ARTICLE V - PRECLOSING COVENANTS OF TARGET................................... 29 Section 5.1 Notice to Target Shareholders............................... 29 Section 5.2 Advice of Changes........................................... 30 Section 5.3 Operation of Business....................................... 30 Section 5.4 Access to Information....................................... 32 Section 5.5 Satisfaction of Conditions Precedent........................ 33 Section 5.6 Other Negotiations.......................................... 33 ARTICLE VI - PRECLOSING AND OTHER COVENANTS OF ACQUIROR AND SUB.............. 33 Section 6.1 Advice of Changes........................................... 33 Section 6.2 Reservation of Acquiror Common Stock........................ 33 Section 6.3 Satisfaction of Conditions Precedent........................ 33 Section 6.4 Nasdaq National Market Listing.............................. 34 Section 6.5 Stock Options............................................... 34 Section 6.6 Registration of Shares Issued in the Merger................. 35 Section 6.7 Procedures for Sale of Shares Under Registration Statement.. 39 Section 6.8 Certain Employee Benefit Matters............................ 39 Section 6.9 Indemnity of Target Affiliates.............................. 39 ARTICLE VII - OTHER AGREEMENTS............................................... 40 Section 7.1 Confidentiality............................................. 40
-ii- TABLE OF CONTENTS (continued)
Page ---- Section 7.2 No Public Announcement...................................... 40 Section 7.3 Regulatory Filings; Consents; Reasonable Efforts............ 40 Section 7.4 Pooling Accounting.......................................... 40 Section 7.5 Further Assurances.......................................... 40 Section 7.6 Escrow Agreement............................................ 41 Section 7.7 FIRPTA...................................................... 41 Section 7.8 Blue Sky Laws............................................... 41 Section 7.9 Other Filings............................................... 41 Section 7.10 Tax Free Reorganization.................................... 41 ARTICLE VIII - CONDITIONS TO MERGER.......................................... 42 Section 8.1 Conditions to Each Party's Obligation to Effect the Merger.. 42 Section 8.2 Additional Conditions to Obligations of Acquiror and Sub.... 42 Section 8.3 Additional Conditions to Obligations of Target.............. 43 ARTICLE IX - TERMINATION AND AMENDMENT....................................... 44 Section 9.1 Termination................................................. 44 Section 9.2 Effect of Termination....................................... 44 Section 9.3 Fees and Expenses........................................... 44 ARTICLE X - ESCROW AND INDEMNIFICATION....................................... 45 Section 10.1 Indemnification............................................ 45 Section 10.2 Escrow Fund................................................ 45 Section 10.3 Damage Threshold........................................... 46 Section 10.4 Escrow Periods............................................. 46 Section 10.5 Claims Upon Escrow Fund.................................... 46 Section 10.6 Valuation.................................................. 47 Section 10.7 Objections to Claims....................................... 47 Section 10.8 Resolution of Conflicts.................................... 47 Section 10.9 Stockholders' Agents....................................... 48 Section 10.10 Actions of the Stockholders' Agents....................... 49 Section 10.11 Third-Party Claims........................................ 49 ARTICLE XI - MISCELLANEOUS................................................... 51 Section 11.1 Survival of Representations and Covenants.................. 51 Section 11.2 Notices.................................................... 51 Section 11.3 Interpretation............................................. 52 Section 11.4 Counterparts............................................... 52 Section 11.5 Entire Agreement; No Third Party Beneficiaries............. 52 Section 11.6 Governing Law.............................................. 53 Section 11.7 Assignment................................................. 53 Section 11.8 Amendment.................................................. 53
-iii- TABLE OF CONTENTS (continued)
Page ---- Section 11.9 Extension; Waiver.......................................... 53 Section 11.10 Specific Performance...................................... 53
EXHIBITS - -------- EXHIBIT A - EMPLOYMENT AGREEMENT EXHIBIT B - NONCOMPETITION AGREEMENT EXHIBIT C - AFFILIATE AGREEMENT EXHIBIT D - ESCROW AGREEMENT EXHIBIT E - INVESTMENT REPRESENTATION LETTER EXHIBIT F - SUBJECT MATTER OF OPINION OF COUNSEL TO TARGET EXHIBIT G - SUBJECT MATTER OF OPINION OF COUNSEL TO ACQUIROR -iv- AGREEMENT AND PLAN OF MERGER ---------------------------- THIS AGREEMENT AND PLAN OF MERGER dated as of March 3, 1999 (this "Agreement"), is entered into by and among Applied Micro Circuits Corporation, a Delaware corporation ("Acquiror"), Wiley Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Acquiror ("Sub"), and Cimaron Communications Corporation, a Delaware corporation ("Target"). RECITALS: -------- A. The Boards of Directors of Acquiror, Sub and Target deem it advisable and in the best interests of each corporation and the respective stockholders that Acquiror and Target combine in order to advance the long-term business interests of Acquiror and Target; B. The combination of Acquiror and Target shall be effected by the terms of this Agreement through a transaction in which Sub will merge with and into Target, Target will become a wholly-owned subsidiary of Acquiror and the stockholders of Target will become stockholders of Acquiror (the "Merger"); C. For Federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); D. For accounting purposes, it is intended that the Merger shall be accounted for as a pooling of interests transaction; E. As a further condition and inducement to Acquiror's willingness to enter into this Agreement, certain employees of Target who are also stockholders of Target, including Ram Sudireddy, Gary Martin, Charles Waite, Shahrukh Merchant, Christos Skalkos and Kathy Bechtel have, concurrently with the execution of this Agreement executed and delivered Employment Agreements in the form attached hereto as Exhibit A and Noncompetition Agreements in the form --------- attached hereto as Exhibit B (the "Noncompetition Agreements"), which agreements --------- shall only become effective at the Effective Time (as defined in Section 1.1 below). F. As a further condition and inducement to Acquiror's willingness to enter into this Agreement, certain stockholders of Target have executed and delivered to Acquiror Affiliates Agreements in the form attached hereto as Exhibit C (the "Affiliates Agreements"). - --------- NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties agree as follows: ARTICLE I THE MERGER ---------- Section 1.1 Effective Time of the Merger. Subject to the provisions of ---------------------------- this Agreement, a certificate of merger (the "Certificate of Merger") in such mutually acceptable form as is required by the relevant provisions of the Delaware Corporations Code ("Delaware Law") shall be duly executed and delivered by the parties hereto and thereafter delivered to the Secretary of State of the State of Delaware for filing on the Closing Date (as defined in Section 1.2). The Merger shall become effective upon the due and valid filing of the Certificate of Merger with the Secretary of State of the State of Delaware (the "Effective Time"). Section 1.2 Closing. The closing of the Merger (the "Closing") will take ------- place at 10:00 a.m., California time, on March 17, 1999, or such later as is agreed by Acquiror and Target, which shall be no later than the second business day after satisfaction or waiver of the latest to occur of the conditions set forth in Article VIII (the "Closing Date"), at the offices of Venture Law Group, A Professional Corporation, 2775 Sand Hill Road, Menlo Park, California unless another date, time or place is agreed to in writing by Acquiror and Target. Section 1.3 Effects of the Merger. --------------------- (a) At the Effective Time (i) the separate existence of Sub shall cease and Sub shall be merged with and into Target (Sub and Target are sometimes referred to herein as the "Constituent Corporations" and Target following consummation of the Merger is sometimes referred to herein as the "Surviving Corporation"), (ii) subject to Section 6.9 of this Agreement, the Certificate of Incorporation of Sub shall be the Certificate of Incorporation of the Surviving Corporation and (iii) subject to Section 6.9 of this Agreement, the Bylaws of Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation. (b) At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, at and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, powers and franchises of a public as well as of a private nature, and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations. Section 1.4 Directors and Officers. The directors of Sub immediately ---------------------- prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation, and the officers of Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed. -2- ARTICLE II CONVERSION OF SECURITIES ------------------------ Section 2.1 Conversion of Capital Stock. At the Effective Time, by virtue --------------------------- of the Merger and without any action on the part of the holder of any shares of Common Stock, $0.001 par value, or Series A Preferred Stock, $0.001 par value, of Target ("Target Common Stock") or capital stock of Sub: (a) Capital Stock of Sub. Each issued and outstanding share of the -------------------- capital stock of Sub shall be converted into and become one fully paid and nonassessable share of Common Stock, $0.001 par value, of the Surviving Corporation. (b) Cancellation of Acquiror-Owned and Target-Owned Stock. Any shares ----------------------------------------------------- of Target Common Stock or Preferred Stock that are owned by Acquiror, Sub, Target or any other direct or indirect wholly-owned Subsidiary (as defined below) of Acquiror or Target shall be canceled and retired and shall cease to exist and no stock of Acquiror or other consideration shall be delivered in exchange. As used in this Agreement, the word "Subsidiary" means, with respect to any other party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which held by such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization or a majority of the profit interests in such other organization is directly or indirectly owned or controlled by such party or by any one or more of its subsidiaries, or by such party and one or more of its subsidiaries. (c) Exchange Ratio. -------------- (i) Subject to Sections 2.2 and 2.4, each issued and outstanding share of Target Common Stock and each issued and outstanding share of Target Series A Preferred Stock (other than shares to be canceled in accordance with Section 2.1(b) and any Dissenting Shares as defined in and to the extent provided in Section 2.3) shall be converted into the right to receive a fraction of a fully paid and nonassessable share of Acquiror Common Stock (as defined in Section 4.2) equal to the "Exchange Ratio" as defined in and determined in accordance with the provisions of this Section 2.1(c). All such shares of Target Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the shares of Acquiror Common Stock and any cash in lieu of fractional shares of Acquiror Common Stock to be issued or paid in consideration therefor upon the surrender of such certificate in accordance with Section 2.4, without interest. (ii) The "Exchange Ratio" for the conversion of the Target Common Stock and Series A Preferred Stock shall be calculated by dividing (x) 3,000,000 by (y) the sum -3- of (A) the total number of shares of Target Common Stock issued and outstanding and issuable upon conversion of Target Preferred Stock issued and outstanding at the Effective Time, plus (B) the total number of shares of Target Common Stock ---- issuable on a "net exercise basis," assuming exercise of all Target Options (as defined in Section 2.1(d)) outstanding at the Effective Time, whether vested or unvested, plus (C) the total number of shares of committed but unissued or ---- unpriced Target capital stock or options or other rights to purchase or acquire Target capital stock, if any. (iii) If, between the date of this Agreement and the Effective Time, the outstanding shares of Acquiror Common Stock shall have been changed into a different number of shares or a different class by reason of any reclassification, split-up, stock dividend or stock combination, then the Exchange Ratio shall be correspondingly adjusted. The Exchange Ratio shall not change as a result of fluctuations in the market price of Acquiror Common Stock between the date of this Agreement and the Effective Time. (d) Target Stock Options. At the Effective Time, all then outstanding -------------------- options, whether vested or unvested, ("Target Options") to purchase Target Common Stock issued under Target's 1998 Stock Incentive Plan (the "Target Stock Plan") that by their terms survive the Closing will be assumed by Acquiror in accordance with Section 6.5. All of the Target Options issued and outstanding as of the date of this Agreement are listed on Schedule 2.1(d) attached hereto. An updated Schedule 2.1(d) of Target Options shall be delivered by Target to Acquiror on the Closing Date. (e) Restricted Shares. Shares of Target Common Stock or Target ----------------- Preferred Stock which are subject to repurchase by Target in the event the holder thereof ceases to be employed by Target ("Target Restricted Shares") shall be converted into Acquiror Common Stock on the same basis as provided in subsection (c) above and shall be registered in such holder's name, but shall be held by Target or Acquiror pursuant to the existing agreements in effect on the date of this Agreement. Holders of the Target Restricted Shares are identified on Schedule 2.2(e) together with the vesting schedules associated with such shares. Section 2.2 Escrow Agreement. At the Effective Time or such later time as ---------------- determined in accordance with Section 2.3(b), Acquiror will deposit in escrow certificates representing ten percent of the shares of Acquiror Common Stock issued or issuable in the merger in exchange for the stock of Target. Such shares shall be held in escrow on behalf of the persons who are the holders of Target Common Stock in the Merger immediately prior to the Effective Time (the "Former Target Stockholders"), on a pro rata basis, in accordance with each such Former Target Stockholders' percentage ownership ("Pro Rata Portion") of Target Common Stock immediately prior to the Merger (assuming conversion of all Target Preferred Stock to Target Common Stock). Such shares (the "Escrow Shares") shall be held as security for the Former Target Stockholders' indemnification obligations under Article X and pursuant to the provisions of an escrow agreement (the "Escrow Agreement") to be executed pursuant to Section 7.6. -4- Section 2.3 Dissenting Shares. ----------------- (a) Notwithstanding any provision of this Agreement to the contrary, any shares of Target Common Stock or Target Preferred Stock held by a holder who has exercised, or who still has the right to exercise, such holder's dissenter's rights in accordance with Section 262 of Delaware Law ("Dissenting Shares"), shall not be converted into or represent a right to receive Acquiror Common Stock pursuant to Section 2.1, but the holder of the Dissenting Shares shall only be entitled to such rights as are granted by Section 262 of Delaware Law. (b) Notwithstanding the provisions of Section 2.3(a), if any holder of shares of Target Common Stock or Target Preferred Stock who does not vote in favor of the Merger Agreement or who demands his dissenter's rights with respect to such shares under Section 2.1 shall effectively withdraw or lose (through failure to perfect or otherwise) his rights to receive payment for the fair market value of such shares under Delaware Law, then, as of the later of the Effective Time or the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive Acquiror Common Stock and payment for fractional shares as provided in Section 2.1(c) and 2.6, without interest, upon surrender of the certificate or certificates representing such shares; provided that if such holder effectively withdraws or -------- loses his right to receive payment for the fair market value of such shares after the Effective Time, then, at such time Acquiror will deposit in escrow certificates representing 10% of the shares of Acquiror Common Stock which such holder would otherwise be entitled to receive. (c) Target shall give Acquiror (i) prompt notice of any written demands for payment with respect to any shares of capital stock of Target pursuant to Section 262 of Delaware Law, withdrawals of such demands, and any other instruments served pursuant to Delaware Law and received by the Target and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for dissenter's rights under Delaware Law. Target shall not, except with the prior written consent of Acquiror, voluntarily make any payment with respect to any demands for dissenter's rights with respect to Target Common Stock or Target Preferred Stock or offer to settle or settle any such demands. Section 2.4 Exchange of Certificates. ------------------------ (a) From and after the Effective Time, each holder of an outstanding certificate or certificates ("Certificates") which represented shares of Target Common Stock or Target Preferred Stock immediately prior to the Effective Time shall have the right to surrender each Certificate to Acquiror (or at Acquiror's option, an exchange agent to be appointed by Acquiror), and receive in exchange for all Certificates held by such holder a certificate representing the number of whole shares of Acquiror Common Stock (other than the Escrow Shares) into which the Target Common Stock or Target Preferred Stock evidenced by the Certificates so surrendered shall have been converted pursuant to the provisions of Article II of this Agreement. The surrender of Certificates shall be accompanied by duly completed and executed Letters of Transmittal, which (along with appropriate instructions) shall be sent by Acquiror's Transfer Agent to the Former Target Stockholders promptly following the Closing -5- Date. Until surrendered, each outstanding Certificate which prior to the Effective Time represented shares of Target Common Stock or Target Preferred Stock shall be deemed for all corporate purposes to evidence ownership of the number of whole shares of Acquiror Common Stock into which the shares of Target Common Stock or Target Preferred Stock have been converted but shall, subject to applicable dissenter's rights under applicable law and Section 2.3, have no other rights. Subject to dissenter's rights under applicable law and Section 2.3, from and after the Effective Time, the holders of shares of Target Common Stock or Target Preferred Stock shall cease to have any rights in respect of such shares and their rights shall be solely in respect of the Acquiror Common Stock into which such shares of Target Common Stock or Target Preferred Stock have been converted. From and after the Effective Time, there shall be no further registration of transfers on the records of Target of shares of Target Common Stock or Target Preferred Stock outstanding immediately prior to the Effective Time. (b) If any shares of Acquiror Common Stock are to be issued in the name of a person other than the person in whose name the Certificate(s) surrendered in exchange therefor is registered, it shall be a condition to the issuance of such shares that (i) the Certificate(s) so surrendered shall be transferable, and shall be properly assigned, endorsed or accompanied by appropriate stock powers, (ii) such transfer shall otherwise be proper and (iii) the person requesting such transfer shall pay Acquiror, or its exchange agent, any transfer or other taxes payable by reason of the foregoing or establish to the satisfaction of Acquiror that such taxes have been paid or are not required to be paid. Notwithstanding the foregoing, neither Acquiror nor Target shall be liable to a holder of shares of Target Common Stock or Target Preferred Stock for shares of Acquiror Common Stock issuable to such holder pursuant to the provisions of Article II of the Agreement that are delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (c) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed, Acquiror shall issue in exchange for such lost, stolen or destroyed Certificate the shares of Acquiror Common Stock issuable in exchange therefor pursuant to the provisions of Article II of the Agreement. The Board of Directors of Acquiror may in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificate to provide to Acquiror an indemnity agreement against any claim that may be made against Acquiror with respect to the Certificate alleged to have been lost, stolen or destroyed. Section 2.5 Distributions with Respect to Unexchanged Shares. No ------------------------------------------------ dividends or other distributions declared or made after the Effective Time with respect to Acquiror Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Acquiror Common Stock represented thereby and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.6 below until the holder of record of such Certificate shall surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Acquiror Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of Acquiror Common Stock to which such holder is entitled -6- pursuant to Section 2.6 below and the amount of dividends or other distributions with a record date after the Effective Time previously paid with respect to such whole shares of Acquiror Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Acquiror Common Stock. Section 2.6 No Fractional Shares. No certificate or scrip representing -------------------- fractional shares of Acquiror Common Stock shall be issued upon the surrender for exchange of Certificates, and such fractional share interests will not entitle the owner thereof to vote or to any rights of a shareholder of Acquiror. Notwithstanding any other provision of this Agreement, each holder of shares of Target Common Stock or Target Preferred Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of Acquiror Common Stock (after taking into account all Certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of Acquiror Common Stock multiplied by the closing price of Acquiror Common Stock on the date of the Effective Time (the "Closing Stock Price"). Section2.7 Tax and Accounting Consequences. ------------------------------- (a) It is intended by the parties hereto that the Merger shall constitute a "reorganization" within the meaning of Section 368 of the Code. The parties hereto 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 Income Tax Regulations. (b) It is intended by the parties hereto that the Merger shall qualify for accounting treatment as a pooling of interests. ARTICLE III REPRESENTATIONS AND WARRANTIES OF TARGET ---------------------------------------- Target represents and warrants to Acquiror and Sub that the statements contained in this Article III are true and correct, except as set forth in the disclosure schedule delivered by Target to Acquiror on or before the date of this Agreement (the "Target Disclosure Schedule"). The Target Disclosure Schedule shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III. Section 3.1 Organization of Target. Target is a corporation duly ---------------------- organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite corporate power to own, lease and operate its property and to carry on its business as now being conducted, and is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of its business or ownership or leasing of properties makes such qualification or licensing necessary and where the failure to be so qualified or licensed is reasonably likely to result in a material adverse effect on the business, as presently conducted, assets (including intangible assets), liabilities, condition (financial or otherwise), prospects, property or results of operations (a "Material Adverse Effect") of Target. The Target -7- Disclosure Schedule contains a true and complete listing of the locations of all sales offices, manufacturing facilities, and any other offices or facilities of Target and a true and complete list of all states in which Target maintains any employees. The Target Disclosure Schedule contains a true and complete list of all states in which Target is duly qualified or licensed to transact business as a foreign corporation. Section 3.2 Target Capital Structure. ------------------------ (a) The authorized capital stock of Target consists of 10,000,000 shares of Target Common Stock and 5,000,000 shares of Target Preferred Stock, of which 4,467,200 shares are designated as Series A Preferred Stock. As of the date of this Agreement, there are: (i) 2,863,176 shares of Target Common Stock issued and outstanding, all of which are validly issued, fully paid and nonassessable and 2,130,878 of which are subject to repurchase rights under the Target Stock Plan or related agreements as described in the Target Disclosure Schedule; (ii) 4,452,200 shares of Series A Preferred Stock issued and outstanding (collectively, the "Target Preferred Stock"), all of which are validly issued, fully paid and nonassessable, and all of which are convertible into Target Common Stock on a one share for one share basis; (iii) 4,452,200 shares of Target Common Stock reserved for future issuance upon conversion of the Target Preferred Stock; (iv) 233,398 shares of Target Common Stock reserved for future issuance pursuant to Target Options granted and outstanding under the Target Stock Plan; and (v) 945,012 shares of Target Common Stock available and reserved for issuance upon exercise of options or pursuant to awards to be granted in the future under the Target Stock Plan. The issued and outstanding shares of Target Common Stock and Target Preferred Stock are held of record by the stockholders of Target as set forth and identified in the stockholder list attached as Schedule 3.2(a) to the Target Disclosure Schedule. The issued and outstanding Target Options are held of record by the option holders as set forth and identified in the option holder list provided to Acquiror or its representatives. All shares of Target Common Stock and Target Preferred Stock subject to issuance as specified above, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be duly authorized, validly issued, fully paid and nonassessable. All shares of Target Common Stock issuable upon the exercise of Target Options, upon issuance on the terms and conditions specified in the instrument pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. Except as otherwise set forth in Schedule 3.2(a), none of the issued and outstanding shares of Target Common Stock are subject to contractual rights to repurchase upon the termination of the employment or consulting services of the holder thereof with Target or its affiliates. All outstanding shares of Target Common Stock and Target Preferred Stock and outstanding Target Options (collectively "Target Securities") were issued in compliance with applicable federal and state securities laws. Except for the redemption rights of the Target Preferred Stock provided for in the Certificate of Incorporation, there are no obligations, contingent or otherwise, of Target to repurchase, redeem or otherwise acquire any shares of Target Common Stock or Target Preferred Stock or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity. An updated Schedule 3.2(a) reflecting changes, if any, permitted by this Agreement in the capitalization of Target between the date hereof and the Effective Time shall be delivered by Target to Acquiror on the Closing Date. -8- (b) Except as set forth in this Section 3.2, there are no equity securities of any class or series of Target, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Except as set forth in this Section 3.2, there are no options, warrants, equity securities, calls, rights, commitments or agreements of any character to which Target is a party or by which it is bound obligating Target to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of Target or (except as set forth in the stock restriction agreements, stock option agreements and the Investor Rights Agreements listed in Schedule 3.2) obligating Target to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, call, right, commitment or agreement. Target is not in discussion, formal or informal, with any person or entity regarding the issuance of any form of additional Target equity that has not been issued or committed to prior to the date of this Agreement. Except as provided in this Agreement and the other Transaction Documents (as defined in Section 3.3(a))or any transaction contemplated hereby or thereby, there are no voting trusts, proxies or other agreements or understandings with respect to the voting of the shares of capital stock of Target. (c) All Target Options have been issued in accordance with the terms of the Target Stock Plan and pursuant to the standard forms of option agreement previously provided to Acquiror or its representatives. Except as set forth in Schedule 3.2, neither the consummation of transactions contemplated by this Agreement or the other Transaction Documents nor any action taken by Target in connection with such transactions will result in (i) any acceleration of vesting in favor of any optionee under any Target Option; (ii) any acceleration of vesting in favor of any stockholder under the Target Stock Plan whose shares are subject to a right of repurchase on behalf of the Company; (iii) any additional benefits for any optionee under any Target Option; or (iv) the inability of Acquiror or Target after the Effective Time to exercise any right or benefit held by Target prior to the Effective Time with respect to any Target Option assumed by Acquiror or any stock awards under the Target Stock Plan, including, without limitation, the right to repurchase an optionee's or stockholder's unvested shares on termination of such optionee's or stockholder's employment. The assumption by Acquiror of Target Options in accordance with Section 6.5 hereunder will not (i) give the optionees additional benefits which they did not have under their options prior to such assumption (after taking into account the existing provisions of the options, such as their respective exercise prices and vesting schedules) and (ii) constitute a breach of the Target Stock Plan or any agreement entered into pursuant to such plan. Section 3.3 Authority; No Conflict; Required Filings and Consents. ----------------------------------------------------- (a) Target has all requisite corporate power and authority to enter into this Agreement and all Transaction Documents to which it is or will become a party and to consummate the transactions contemplated by this Agreement and such Transaction Documents. The execution and delivery by Target of this Agreement and such Transaction Documents and the consummation by Target of the transactions contemplated by this Agreement and such Transaction Documents have been duly authorized by all necessary corporate action on the part of Target, including the approval of the Merger by Target's stockholders under the provisions of Delaware Law and Target's Certificate of Incorporation. This Agreement has been and such -9- Transaction Documents have been or, to the extent not executed as of the date hereof, will be duly executed and delivered by Target. This Agreement and each of the Transaction Documents to which Target is a party constitutes, and each of the Transaction Documents to which Target will become a party when executed and delivered by Target will constitute, assuming the due authorization, execution and delivery by the other parties hereto and thereto, the valid and binding obligation of Target, enforceable against Target in accordance with their respective terms, except to the extent that enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding at law or in equity. For purposes of this Agreement, "Transaction Documents" means all documents or agreements required to be delivered by any party under this Agreement including the Certificate of Merger, the Escrow Agreement, the Investment Representation Letter (as defined in Section 8.2(c)), the Affiliates Agreements, the Employment Agreements and the Noncompetition Agreements. (b) The execution and delivery by Target of this Agreement and the Transaction Documents to which it is or will become a party does not and the consummation by Target of the transactions contemplated by this Agreement and the Transaction Documents to which it is or will become a party will not, (i) conflict with, or result in any violation or breach of any provision of the Certificate of Incorporation or Bylaws of Target, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which Target is a party or by which it or any of its properties or assets may be bound, or (iii) conflict or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Target or any of its properties or assets, except in the case of (ii) and (iii) for any such conflicts, violations, defaults, terminations, cancellations or accelerations which would not have a Material Adverse Effect on Target. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to Target in connection with the execution and delivery of this Agreement or of any other Transaction Document to which it is or will become a party or the consummation of the transactions contemplated by this Agreement or such Transaction Document or the continuation of the business activities of Target following consummation of the Merger without a Material Adverse Change (as defined in Section 3.6(a)), except for (i) the filing of the Certificate of Merger with the Delaware Secretary of State, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and (iii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not reasonably be expected to have a Material Adverse Effect on Target. -10- Section 3.4 Financial Statements; Absence of Undisclosed Liabilities. -------------------------------------------------------- (a) Target has delivered to Acquiror copies of Target's draft audited balance sheet as of December 31, 1998 (the "Most Recent Balance Sheet") and draft audited statements of operations, stockholders' equity and cash flow for the period since inception then-ended (collectively, with the Most Recent Balance Sheet, the "Target Financial Statements"). (b) The Target Financial Statements are complete and in accordance with the books and records of Target and present fairly in all material respects the financial position, results of operations and cash flows of Target as of their historical dates and for the periods indicated. The Target Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other. The reserves, if any, reflected on the Target Financial Statements are believed by management to be adequate in light of the contingencies with respect to which they were made. (c) Target has no debt, liability, or obligation of any nature, whether accrued, absolute, contingent, or otherwise, and whether due or to become due, that is not reflected or reserved against in the Most Recent Balance Sheet, except for those that may have been incurred after the date of the Most Recent Balance Sheet or that would not reasonably be required, in accordance with generally accepted accounting principles applied on a basis consistent with prior periods, to be included in a balance sheet or the notes thereto. All debts, liabilities, and obligations incurred after the date of the Most Recent Balance Sheet were incurred in the ordinary course of business (except for liabilities or obligations incurred in connection with the transaction contemplated by this Agreement), and are usual and normal in amount and do not exceed $50,000 individually or $250,000 in aggregate. Section 3.5 Tax Matters. ----------- (a) For purposes of this Section 3.5 and other provisions of this Agreement relating to Taxes, the following definitions shall apply: (i) The term "Taxes" shall mean all taxes, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, (A) imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes (including but not limited to, federal income taxes and state income taxes), payroll and employee withholding taxes, unemployment insurance, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, ozone depleting chemicals taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty Corporation premiums and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which are required to be paid, withheld or collected, (B) any liability for the payment of amounts referred to in (A) as a result of being a member of any affiliated, consolidated, -11- combined or unitary group, or (C) any liability for amounts referred to in (A) or (B) as a result of any obligations to indemnify another person. (ii) The term "Returns" shall mean all reports, estimates, declarations of estimated tax, information statements and returns relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties. (b) All Returns required to be filed by or on behalf of Target have been duly filed on a timely basis and such Returns are true, complete and correct in all material respects. All Taxes shown to be payable on such Returns or on subsequent assessments with respect thereto, and all payments of estimated Taxes required to be made by or on behalf of Target under Section 6655 of the Code or comparable provisions of state, local or foreign law, have been paid in full on a timely basis or have been accrued on the Most Recent Balance Sheet, and no other Taxes are payable by Target with respect to items or periods covered by such Returns (whether or not shown on or reportable on such Returns). Target has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto, in connection with amounts paid or owing to any employee, creditor, independent contractor, or other third party. There are no liens on any of the assets of Target with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that Target is contesting in good faith through appropriate proceedings and for which appropriate reserves have been established on the Most Recent Balance Sheet. Target has not at any time been (i) a member of an affiliated group of corporations filing consolidated, combined or unitary income or franchise tax returns, or (ii) a member of any partnership or joint venture for a period for which the statue of limitations for any Tax potentially applicable as a result of such membership has not expired. (c) The amount of Target's liability for unpaid Taxes (whether actual or contingent) for all periods through the date of the Most Recent Balance Sheet does not, in the aggregate, exceed the amount of the liability accruals for Taxes reflected on the Most Recent Balance Sheet, and the Most Recent Balance Sheet reflects proper accrual in accordance with generally accepted accounting principles applied on a basis consistent with prior periods of all liabilities for Taxes payable after the date of the Most Recent Balance Sheet attributable to transactions and events occurring prior to such date. No liability for Taxes has been incurred (or prior to Closing will be incurred) since such date other than in the ordinary course of business. (d) Acquiror has been furnished by Target with true and complete copies of (i) relevant portions of income tax audit reports, statements of deficiencies, closing or other agreements received by or on behalf of Target relating to Taxes, and (ii) all federal and state income or franchise tax Returns and state sales and use tax Returns for or including Target for all periods since the inception of Target. Target does not do business in or derive income from any state other than states for which Returns have been duly filed and furnished to Acquiror. (e) The Returns of or including Target have never been audited by a government or taxing authority, nor is any such audit in process, pending or, to Target's -12- knowledge, threatened (either in writing or verbally, formally or informally). No deficiencies exist or have been asserted (either in writing or verbally, formally or informally), and Target has not received notice (either in writing or verbally, formally or informally) that it has not filed a Return or paid Taxes required to be filed or paid. Target is neither a party to any action or proceeding for assessment or collection of Taxes, nor has such event been asserted or threatened (either in writing or verbally, formally or informally) against Target or any of its assets. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of Target. Target has disclosed on its federal and state income and franchise tax Returns all positions taken therein that could give rise to a substantial understatement penalty within the meaning of Code Section 6662 or comparable provisions of applicable state tax laws. (f) Target is not, nor has it ever been, a party to any tax sharing agreement. (g) Target is not, nor has it been, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code, and Acquiror is not required to withhold tax by reason of Section 1445 of the Code. Target is not a "consenting corporation" under Section 341(f) of the Code. Target has not entered into any compensatory agreements with respect to the performance of services which payment thereunder would result in a nondeductible expense to Target pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. Target has not agreed to, nor is it required to make any adjustment under Code Section 481(a) by reason of, a change in accounting method. Target is not, nor has it been, a "reporting corporation" subject to the information reporting and record maintenance requirements of Section 6038A and the regulations thereunder. Target is in compliance with the terms and conditions of any applicable tax exemptions, agreements or orders of any foreign government to which it may be subject or which it may have claimed, and the transactions contemplated by this Agreement will not have any adverse effect on such compliance. Section 3.6 Absence of Certain Changes or Events. Since December 31, ------------------------------------ 1998, Target has not: (a) suffered any material adverse change in its business, as presently conducted, assets (including intangible assets), liabilities, condition (financial or otherwise), prospects, property or results of operations ("Material Adverse Change"). (b) suffered any damage, destruction or loss, whether covered by insurance or not, that has resulted, or could be reasonably expected to result, in a Material Adverse Effect on Target; (c) granted or agreed to make any increase in the compensation payable or to become payable by Target to its officers or employees; (d) declared, set aside or paid any dividend or made any other distribution on or in respect of the shares of the capital stock of Target or declared any direct or indirect redemption, retirement, purchase or other acquisition by Target of such shares; -13- (e) made any change in the accounting methods or practices it follows, whether for general financial or tax purposes, or any change in depreciation or amortization policies or rates adopted therein; (f) sold, leased, abandoned or otherwise disposed of any real property or any material machinery, equipment or other operating property; (g) sold, assigned, transferred, licensed or otherwise disposed of any patent, trademark, trade name, brand name, copyright (or pending application for any patent, trademark or copyright) invention, work of authorship, process, know-how, formula or trade secret or interest thereunder or other intangible asset, except as set forth in Schedule 3.6 or 3.11; (h) permitted or allowed any of its property or assets to be subjected to any mortgage, deed o trust, pledge, lien, security interest or other encumbrance of any kind (except those permitted under Section 3.7); (i) made any capital expenditure or commitment individually in excess of $20,000 or in the aggregate in excess of $50,000; (j) paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets to, or entered into any agreement or arrangement with, any of its Affiliates (as defined in Section 3.16), officers, directors or stockholders or any affiliate or associate of any of the foregoing (except in the case of salaries in the ordinary course of business); (k) made any amendment to or terminated any agreement which, if not so amended or terminated, would be required to be disclosed on the Target Disclosure Schedule; or (l) agreed to take any action described in this Section 3.6 or outside of its ordinary course of business or which would constitute a material breach of any of the representations contained in this Agreement. Section 3.7 Title and Related Matters. Target has good and marketable ------------------------- title to all the properties, interests in properties and assets, real and personal, used in or necessary for the operation of the business of Target, free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except the lien of current taxes not yet due and payable. The equipment of Target used in the operation of its business is, taken as a whole, (i) adequate for the business conducted by Target and (ii) in good operating condition and repair, ordinary wear and tear excepted. All real or personal property leases to which Target is a party are valid, binding, enforceable and effective in accordance with their respective terms. To the knowledge of Target, there is not under any of such leases any existing default or event of default or event which, with notice or lapse of time or both, would constitute a default. The Target Disclosure Schedule contains a description of all personal property leased or owned with an individual net book value in excess of $20,000 and real property leased or owned by Target, describing its interest in said property. True and correct copies of Target's real property and personal property leases have been provided to Acquiror or its representatives. -14- Section 3.8 Proprietary Rights. ------------------ (a) Target owns all right, title and interest in and to, or otherwise possesses legally enforceable rights, or is licensed to use, all patents and patent rights and applications therefor, copyrights, technology, maskworks, software, software tools, know-how, processes, inventions, ideas, algorithms, trade secrets, trademarks, service marks and trade names and all applications and registrations therefor, Internet domain names and applications therefor, net lists, schematics, inventory, ideas, algorithms and other proprietary rights used in or necessary for the conduct of Target's business as conducted to the date of this Agreement, including, without limitation, the technology, information, databases, data lists, data compilations, and all proprietary rights developed or discovered or used in connection with or contained in all versions and implementations of any product or technology which has been or is being marketed, distributed, licensed, used or sold by Target or currently is under development by Target (collectively, the "Target Products"), free and clear of all liens, claims and encumbrances (including without limitation licensing and distribution rights) (all of which are referred to as "Target Proprietary Rights"). In addition, Target is not aware of any legal restrictions or impediments that would prevent Target from conducting its business as proposed to be conducted. The Target Disclosure Schedule contains an accurate and complete (i) description of all patents and patent applications, trademarks and service marks (with separate listings of registered copyrights and unregistered trademarks and service marks), trade names, Internet domain names and registered and maskwork in or related to the Target Products or otherwise included in the Target Proprietary Rights and all applications and registrations therefor, including the jurisdictions in which each such Target Proprietary Right has been issued or registered or in which any such application of such issuance and registration has been filed, (ii) list of all licenses and other agreements with third parties (the "Third Party Licenses") relating to any patents, patent rights, copyrights, trade secrets, software, inventions, ideas, designs, information, data, algorithms, technology, know-how, processes or other proprietary rights that Target is licensed or otherwise authorized by such third parties to license, use, market, distribute or incorporate in Target Products , excluding commercially available "off-the-shelf" software (such patents, patent rights, copyrights, trade secrets, software, inventions, ideas, designs, information, data, algorithms, technology, know-how, processes or other proprietary rights are collectively referred to as the "Third Party Technology"). All of Target's patents, patent rights, copyrights, maskworks, trademark, trade name or Internet domain name registrations covering the Target Products are valid and in full force and effect; and consummation of the transactions contemplated by this Agreement will not alter or impair any such rights. No claims have been asserted or threatened against Target (and Target is not aware of a valid basis for any claims which could be asserted or threatened against Target or which have been asserted or threatened against others relating to Target Proprietary Rights or Target Products) by any person challenging Target's use, possession, manufacture, license, sale or distribution of Target Products or challenging the Target Proprietary Rights (including, without limitation, the Third Party Technology) or challenging or questioning the validity thereof, or of any material license or agreement relating thereto (including, without limitation, the Third Party Licenses) or alleging a violation of any person's or entity's privacy, personal or confidentiality rights. There is no valid basis for any claim of the type specified in the immediately preceding sentence which could in any material way relate to or interfere with the continued enhancement, exploitation, licensing -15- and use by Target of any of the Target Products. None of the Target Products nor the license and use or exploitation of any Target Proprietary Rights in Target's current business infringes on the rights of or constitutes misappropriation of any proprietary information or intangible property right of any third person or entity, including without limitation any patent, patent right, trade secret, copyright, maskwork, trademark or trade name. Target has not been sued or named in any suit, action or proceeding which involves a claim of such infringement, misappropriation or unfair competition. (b) Except as set forth in the Target Disclosure Schedule, Target has not granted any third party any right to manufacture, reproduce, license, use, distribute, market or exploit any of the Target Products or Target Proprietary Rights or any adaptations, translations, or derivative works based on the Target Products or Target Proprietary Rights or any portion thereof. Except with respect to the rights of third parties to the Third Party Technology, no third party has any express right to manufacture, reproduce, distribute, market or exploit any works or materials of which any of the Target Products are a "derivative work" as that term is defined in the United States Copyright Act, Title 17, U.S.C. Section 101. (c) All material designs, drawings, specifications, net lists, schematics, designs, maskworks, source code, object code, scripts, documentation, flow charts, diagrams, data lists, databases, compilations and information which form part of any of the Target Products at any stage of their development (the "Target Components") were written, developed and created solely and exclusively by employees of Target without the assistance of any third party or entity or were created by third parties who assigned ownership of their rights to Target by means of valid and enforceable consultant confidentiality and invention assignment agreements, copies of which have been delivered to Acquiror. Target has at all times used commercially reasonable efforts customary in its industry to treat the Target Proprietary Rights related to Target Products and Target Components as containing trade secrets and has not disclosed or otherwise dealt with such items in such a manner as intended or reasonably likely to cause the loss of such trade secrets by release into the public domain. (d) To Target's knowledge, no employee, contractor or consultant of Target is in violation in any material respect of any term of any written employment contract, patent disclosure agreement or any other written contract or agreement relating to the relationship of any such employee, consultant or contractor with Target or, to Target's knowledge, any other party because of the nature of the business conducted by Target or proposed to be conducted by Target. The Target Disclosure Schedule lists all employees, contractors and consultants who have participated in any way in the development of the Target Products or the Target Proprietary Rights. (e) Each person presently or previously employed by Target (including independent contractors, if any) with access authorized by Target to confidential information has executed a confidentiality and non-disclosure agreement pursuant to the form of agreement previously provided to Acquiror or its representatives. Such confidentiality and non-disclosure agreements constitute valid and binding obligations of Target and such person, enforceable in accordance with their respective terms. -16- (f) No product liability or warranty claims have been communicated in writing to or threatened against Target. (g) To Target's knowledge, there is no material unauthorized use, disclosure, infringement or misappropriation of any Target Proprietary Rights, or any Third Party Technology to the extent licensed by or through Target, by any third party, including any employee or former employee of Target. Except pursuant to the agreements listed in Schedule 3.8, Target has not entered into any agreement to indemnify any other person against any charge of infringement of any third party intellectual property rights. (h) Target has used all commercially reasonable efforts customary in the industry to protect and preserve the confidentiality and proprietary nature of all source code, net lists, schematics, masks, trade secrets and other confidential information ("Confidential Information"). All use, disclosure or appropriation of Confidential Information owned by Target by or to a third party has been pursuant to the terms of a written agreement between Target and such third party. All use, disclosure or appropriation of Confidential Information not owned by Target has been pursuant to the terms of a written agreement between Target and the owner of such Confidential Information, or is otherwise lawful. Section 3.9 Employee Benefit Plans. ---------------------- (a) The Target Disclosure Schedule lists, with respect to Target and any trade or business (whether or not incorporated) which is treated as a single employer with Target (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all material employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) each loan to a non-officer employee, loans to officers and directors and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, medical, dental, vision care, disability, employee relocation, cafeteria benefit (Code Section 125) or dependent care (Code Section 129), life insurance or accident insurance plans, programs or arrangements, (iii) all bonus, pension, profit sharing, savings, deferred compensation or incentive plans, programs or arrangements, (iv) other fringe or employee benefit plans, programs or arrangements that apply to senior management of Target and that do not generally apply to all employees, and (v) any current or former employment or executive compensation or severance agreements, written or otherwise, for the benefit of, or relating to, any present or former employee, consultant or director of Target as to which (with respect to any of items (i) through (v) above) any potential liability is borne by Target (together, the "Target Employee Plans"). (b) Target has delivered to or made available to Acquiror or its representatives a copy of each of the Target Employee Plans and related plan documents (including trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and, to the extent still in its possession, any material employee communications relating thereto) and has, with respect to each Target Employee Plan which is subject to ERISA reporting requirements, provided copies of any Form 5500 reports filed for the last three plan years. Any Target Employee Plan intended to be qualified under Section 401(a) -17- of the Code has either obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has applied to the Internal Revenue Service for such a determination letter prior to the expiration of the requisite period under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for such determination letter and to make any amendments necessary to obtain a favorable determination. Target has also furnished Acquiror with the most recent Internal Revenue Service determination letter issued with respect to each such Target Employee Plan, and nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Target Employee Plan subject to Code Section 401(a). (c) (i) None of the Target Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Target Employee Plan, which could reasonably be expected to have, in the aggregate, a Material Adverse Affect on Target, (iii) each Target Employee Plan has been administered in accordance with its terms and in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code), except as would not have, in the aggregate, a Material Adverse Effect on Target, and Target and each subsidiary or ERISA Affiliate have performed all material obligations required to be performed by them under, are not in any material respect in default, under or violation of, and have no knowledge of any material default or violation by any other party to, any of the Target Employee Plans; (iv) neither Target nor any subsidiary or ERISA Affiliate is subject to any material liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any of the Target Employee Plans; (v) all material contributions required to be made by Target or any subsidiary or ERISA Affiliate to any Target Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Target Employee Plan for the current plan years; (vi) with respect to each Target Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) no Target Employee Plan is covered by, and neither Target nor any subsidiary or ERISA Affiliate has incurred or expects to incur any material liability under Title IV of ERISA or Section 412 of the Code. With respect to each Target Employee Plan subject to ERISA as either an employee pension plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, Target has prepared in good faith and timely filed all requisite governmental reports (which were true and correct as of the date filed) and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Target Employee Plan except as would not give rise, in the aggregate, to a Material Adverse Effect on Target. No suit, administrative proceeding, action or other litigation has been brought, or to the best knowledge of Target is threatened, against or with respect to any such Target Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor. Neither Target nor any ERISA Affiliate is a party to, or has made any contribution to or otherwise incurred any obligation under, any "multi-employer plan" as defined in Section 3(37) of ERISA. -18- (d) With respect to each Target Employee Plan, Target has complied with (i) the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the proposed regulations thereunder and (ii) the applicable requirements of the Family Leave Act of 1993 and the regulations thereunder, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect on Target. (e) Except as set forth in the Target Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or other service provider of Target or any other ERISA Affiliate to severance benefits or any other payment (including, without limitation, unemployment compensation, golden parachute or bonus), except as expressly provided in this Agreement, or (ii) accelerate the time of payment or vesting of any such benefits, or (iii) increase or accelerate any benefits or the amount of compensation due any such employee or service provider. (f) There has been no amendment to, written interpretation or announcement (whether or not written) by Target or other ERISA Affiliate relating to, or change in participation or coverage under, any Target Employee Plan which would materially increase the expense of maintaining such Plan above the level of expense incurred with respect to that Plan for the most recent fiscal year included in the Target Financial Statements. Section 3.10 Bank Accounts. The Target Disclosure Schedule sets forth the ------------- names and locations of all banks, trusts, companies, savings and loan associations, and other financial institutions at which Target maintains accounts of any nature and the names of all persons authorized to draw thereon or make withdrawals therefrom. Section 3.11 Contracts. --------- (a) Except as set forth on the Target Disclosure Schedule: (i) Target has no agreements, contracts or commitments that provide for the sale, licensing, transfer, assignment, distribution, marketing, promotion or resale by Target of any Target Products or Target Proprietary Rights, nor has Target granted any license of any Target trademarks or servicemarks. (ii) Target has no Third Party Licenses. (iii) Target has no agreements, contracts or commitments that call for fixed and/or contingent payments or expenditures by or to Target (including, without limitation, any advertising or revenue sharing arrangement) individually in excess of $20,000. (iv) Target has no outstanding sales or advertising contract, commitment or proposal that Target currently expects to result in any loss to Target upon completion or performance thereof. -19- (v) Target has no outstanding agreements, contracts or commitments to employ, engage or utilize officers, employees, agents, consultants, advisors, salesmen, sales representatives, distributors or dealers that are not cancelable by Target "at will" and without liability, penalty or premium. (vi) Target has no employment, independent contractor or similar agreement, contract or commitment that is not terminable on no more than thirty (30) days' notice without penalty, liability or premium of any type, including, without limitation, severance or termination pay. (vii) Target has no currently effective collective bargaining or union agreements, contracts or commitments. (viii) Target is not restricted by agreement from competing with any person or from carrying on its business anywhere in the world. (ix) Target has not guaranteed any obligations of other persons or made any agreements to acquire or guarantee any obligations of other persons. (x) Target has no outstanding loan or advance to any person; nor is it party to any line of credit, standby financing, revolving credit or other similar financing arrangement of any sort which would permit the borrowing by Target of any sum. (xi) Target has no agreements pursuant to which Target has agreed to manufacture for, supply to or distribute to any third party any Target Products or Target Components. (xii) There are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates or any affiliate thereof. True and correct copies of each document or instrument listed on the Target Disclosure Schedule pursuant to this Section 3.11(a) (the "Material Contracts") have been provided to Acquiror or its representatives. (b) All of the Material Contracts listed on the Target Disclosure Schedule are valid, binding, in full force and effect, and enforceable by Target in accordance with their respective terms. No party to any such Material Contract has notified Target that it intends to cancel, withdraw, modify or amend such contract, agreement or arrangement. (c) Target is not in material default under or in material breach or violation of, nor, to Target's knowledge, is there any valid basis for any claim of material default by Target under, or material breach or violation by Target of, any Material Contract. To Target's knowledge, no other party is in material default under or in material breach or violation of, nor is there any valid basis for any claim of material default by any other party under or any material breach or violation by any other party of, any Material Contract. -20- (d) Except as specifically indicated on the Target Disclosure Schedule, none of the Material Contracts provides for indemnification by Target of any third party. No claims have been made or threatened that would require indemnification by Target, and Target has not paid any amounts to indemnify any third party as a result of indemnification requirements of any kind. Section 3.12 Orders, Commitments and Returns. All accepted advertising ------------------------------- arrangements entered into by Target for, and all material agreements, contracts, or commitments for the purchase of supplies by Target, were made in the ordinary course of business. To the knowledge of Target, no outstanding purchase or outstanding lease commitment of Target is in excess of the normal, ordinary and usual requirements of its business or was made at any price (on both a per unit and aggregate basis) materially in excess of the current market price at the time made, or contains terms and conditions materially more onerous to Target than those usual and customary in the industry. There are no oral contracts or arrangements for the sale of advertising or any other product or service by Target. Section 3.13 Compliance With Law. Target and the operation of its ------------------- business are in compliance in all material respects with all applicable laws and regulations. Neither Target nor, to Target's knowledge, any of its employees has directly or indirectly paid or delivered any fee, commission or other sum of money or item of property, however characterized, to any finder, agent, government official or other party in the United States or any other country, that was or is in violation of any federal, state, or local statute or law or of any statute or law of any other country having jurisdiction. Target has not participated directly or indirectly in any boycotts or other similar practices affecting any of its customers. Target has complied in all material respects at all times with any and all applicable federal, state and foreign laws, rules, regulations, proclamations and orders relating to the importation or exportation of its products. Section 3.14 Labor Difficulties; No Discrimination. ------------------------------------- (a) Target is not engaged in any unfair labor practice and is not in material violation of any applicable laws respecting employment and employment practices, terms and conditions of employment, and wages and hours. There is no unfair labor practice complaint against Target actually pending or, to the knowledge of Target, threatened before the National Labor Relations Board. There is no strike, labor dispute, slowdown, or stoppage actually pending or, to the knowledge of Target, threatened against Target. To the knowledge of Target, no union organizing activities are taking place with respect to the business of Target. No grievance, nor any arbitration proceeding arising out of or under any collective bargaining agreement is pending and, to the knowledge of Target, no claims therefor exist. No collective bargaining agreement that is binding on Target restricts it from relocating or closing any of its operations. Target has not experienced any material work stoppage or other material labor difficulty. (b) There is and has not been any claim against Target, or to Target's knowledge, threatened against Target, based on actual or alleged race, age, sex, disability or other harassment or discrimination, or similar tortuous conduct, nor to the knowledge of Target, is there any basis for any such claim. -21- (c) There are no pending claims against Target or any of its subsidiaries under any workers compensation plan or policy or for long term disability. Neither Target nor any of its subsidiaries has any monetary material obligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder. There are no proceedings pending or, to the knowledge of Target, threatened, between Target and any of their respective employees, which proceedings have or could reasonably be expected to have a Material Adverse Effect on Target. Section 3.15 Trade Regulation. All of the prices charged by Target in ---------------- connection with the marketing or sale of any products or services have been in compliance with all applicable laws and regulations. No claims have been communicated or threatened in writing against Target with respect to wrongful termination of any dealer, distributor or any other marketing entity, discriminatory pricing, price fixing, unfair competition, false advertising, or any other violation of any laws or regulations relating to anti-competitive practices or unfair trade practices of any kind, and to Target's knowledge, no specific situation, set of facts, or occurrence provides any basis for any such claim. Section 3.16 Insider Transactions. To the knowledge of Target, no -------------------- affiliate ("Affiliate") as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") of Target has any interest in any equipment or other property, real or personal, tangible or intangible, including, without limitation, any Target Proprietary Rights or any creditor, supplier, customer, manufacturer, agent, representative, or distributor of Target Products; provided, however, that no such Affiliate or other person shall -------- ------- be deemed to have such an interest solely by virtue of the ownership of less than 1% of the outstanding stock or debt securities of any publicly-held company, the stock or debt securities of which are traded on a recognized stock exchange or quoted on the National Association of Securities Dealers Automated Quotation System. Section 3.17 Employees, Independent Contractors and Consultants. The -------------------------------------------------- Target Disclosure Schedule lists and describes all past and all currently effective written or, to Target's knowledge, oral consulting, independent contractor and/or employment agreements and other material agreements concluded with individual employees, independent contractors or consultants to which Target is a party. True and correct copies of all such written agreements have been provided to or made available to Acquiror or its representatives. All independent contractors have been properly classified as independent contractors for the purposes of federal and applicable state tax laws, laws applicable to employee benefits and other applicable law. All salaries and wages paid by Target are in compliance in all material respects with applicable federal, state and local laws. Also shown on the Target Disclosure Schedule are the names, positions and salaries or rates of pay, including bonuses, of all persons presently employed by Target. Section 3.18 Insurance. The fire, liability and other insurance policies --------- held by Target are of the type and in amounts which are customary and adequate for a company of its nature and size. The Target Disclosure Schedule contains a list of all claims made by Target under such policies. To the knowledge of Target, Target has not done anything, either by way of action or inaction, that might invalidate such policies in whole or in part. There is no claim pending under -22- any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Target is otherwise in compliance with the terms of such policies and bonds in all material respects. Target has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. Section 3.19 Litigation. There is no private or governmental action, suit, ---------- proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of Target, threatened against Target or any of its properties or any of its officers or directors (in their capacities as such). There is no judgment, decree or order against Target, or, to the knowledge of Target, any of its respective directors or officers (in their capacities as such). To Target's knowledge, no circumstances exist that could form a valid basis for a claim against Target as a result of the conduct of Target's business (including, without limitation, any claim of infringement of any intellectual property right). Section 3.20 Governmental Authorizations and Regulations. Target has ------------------------------------------- obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which Target currently operates or holds any interest in any of its properties or (ii) that is required for the operation of Target's business or the holding of any such interest, and all of such authorizations are in full force and effect, except where the failure to obtain or have any such Target authorizations could not reasonably be expected to have a Material Adverse Effect on Target. Section 3.21 Subsidiaries. Target has no subsidiaries. Target does not ------------ own or control (directly or indirectly) any capital stock, bonds or other securities of, and does not have any proprietary interest in, any other corporation, general or limited partnership, firm, association or business organization, entity or enterprise, and Target does not control (directly or indirectly) the management or policies of any other corporation, partnership, firm, association or business organization, entity or enterprise. Section 3.22 Compliance with Environmental Requirements. Target has ------------------------------------------ obtained all permits, licenses and other authorizations which are required under federal, state and local laws applicable to Target and relating to pollution or protection of the environment, including laws or provisions relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials, substances, or wastes into air, surface water, groundwater, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or hazardous or toxic materials, substances, or wastes or which are intended to assure the safety of employees, workers or other persons, except where the failure to obtain or have any such Target authorizations could not reasonably be expected to have a Material Adverse Effect on Target. Target is in compliance in all material respects with all terms and conditions of all such permits, licenses and authorizations. Target is not aware of, nor has Target received written notice of, any conditions, circumstances, activities, practices, incidents, or actions which may form a valid basis of any claim, action, suit, proceeding, hearing, or investigation of, by, against or relating to Target, based on or related to the manufacture, processing, distribution, use, treatment, storage, -23- disposal, transport, or handling, or the emission, discharge, release or threatened release into the environment, of any pollutant, contaminant, or hazardous or toxic substance, material or waste, or relating to the safety of employees, workers or other persons. Section 3.23 Corporate Documents. Target has furnished to Acquiror or its ------------------- representatives copies of: (a) its Certificate of Incorporation and Bylaws, as amended to date; (b) its minute book containing all records required to be set forth of all proceedings, consents, actions, and meetings of the stockholders, the board of directors and any committees thereof; (c) all material permits, orders, and consents issued by any regulatory agency with respect to Target, or any securities of Target, and all applications for such permits, orders, and consents; and (d) the stock transfer books of Target setting forth all transfers of any capital stock. The corporate minute books, stock certificate books, stock registers and other corporate records of Target are complete and accurate, and the signatures appearing on all documents contained therein are the true signatures of the persons purporting to have signed the same. All actions reflected in such books and records were duly and validly taken in compliance with the laws of the applicable jurisdiction. Section 3.24 No Brokers. Neither Target nor, to Target's knowledge, any ---------- Target stockholder is obligated for the payment of fees or expenses of any broker or finder in connection with the origin, negotiation or execution of this Agreement or the other Transaction Documents or in connection with any transaction contemplated hereby or thereby. Section 3.25 Pooling of Interests. To Target's knowledge, neither Target -------------------- nor any of its Affiliates has, through the date of this Agreement, taken or agreed to take any action which would prevent Acquiror from accounting for the business combination to be effected by the Merger as a pooling of interests. Section 3.26 Customers and Suppliers. No customer which individually ----------------------- accounted for more than 5% of Target's gross revenues during the 12-month period preceding the date hereof, and no supplier of Target, has canceled or otherwise terminated, or made any written threat to Target to cancel or otherwise terminate its relationship with Target, or has at any time on or after December 31, 1998 decreased materially its services or supplies to Target in the case of any such supplier, and to Target's knowledge, no such supplier or customer intends to cancel or otherwise terminate its relationship with Target. Target has not knowingly breached, so as to provide a benefit to Target that was not intended by the parties, any agreement with, or engaged in any fraudulent conduct with respect to, any customer or supplier or Target. Section 3.27 Target Action. The Board of Directors of Target, by ------------- unanimous written consent or at a meeting duly called and held, has by the unanimous vote of all directors (i) determined that the Merger is fair and in the best interests of Target and its stockholders, (ii) approved the Merger and this Agreement in accordance with the provisions of Delaware Law, and (iii) directed that this Agreement and the Merger be submitted to Target stockholders for their approval and resolved to recommend that Target stockholders vote in favor of the approval of this Agreement and the Merger. -24- Section 3.28 Offers. Target has suspended or terminated, and has the ------ legal right to terminate or suspend, all negotiations and discussions of Acquisition Transactions (as defined in Section 5.6) with parties other than Acquiror. Section 3.29 Information Statement. The information supplied by Target --------------------- for inclusion in the information statement to be sent to the stockholders of Target in connection with the notice required under Section 228(d) and Section 262(d)(2) of Delaware Law of Target (such information statement as amended or supplemented is referred to herein as the "Information Statement") shall not, on the date the Information Statement is first mailed to Target stockholders contain any statement which is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they are made, not false or misleading. Notwithstanding the foregoing, Target makes no representation, warranty or covenant with respect to any information supplied by or relating to Acquiror or Sub which is contained in any of the foregoing documents. Section 3.30 Accounts Receivable. Subject to any reserves set forth in ------------------- the Most Recent Balance Sheet, the accounts receivable shown on the Most Recent Balance Sheet represent and will represent bona fide claims against debtors for sales and other charges, and are not subject to discount except for normal cash and immaterial trade discounts. The amount carried for doubtful accounts and allowances disclosed in the Most Recent Balance Sheet is in the judgment of Target's management sufficient to provide for any losses which may be sustained on realization of the receivables. Section 3.31 Year 2000 Compliance. Except as would not reasonably be -------------------- expected to have a Material Adverse Effect on Target, all of Target's Information Technology (as defined below) effectively addresses the Year 2000 issue and will not cause an interruption in the ongoing operations of Target's business on or after January 1, 2000. For purposes of the foregoing, the term "Information Technology" shall mean and include all software, hardware, firmware, telecommunications systems, network systems, embedded systems and other systems, components and/or services that are owned or used by Target in the conduct of its business, or purchased by Target from third party suppliers. Section 3.32 Disclosure. No statements by Target contained in this ---------- Agreement, its exhibits and schedules nor in any of the certificates or documents, including any of the Transaction Documents, delivered or required to be delivered by Target to Acquiror or Sub under this Agreement contains any untrue statement of a material fact or omits (when read together with all such other statements) to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. -25- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB -------------------------------------------------- Acquiror and Sub represent and warrant to Target and the Former Target Stockholders that, the statements contained in this Article IV are true and correct. Section 4.1 Organization of Acquiror and Sub. Each of Acquiror and its -------------------------------- subsidiaries, including Sub, is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation and has all requisite corporate power to own, lease and operate its property and to carry on its business as now being conducted and is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the failure to be so qualified or licensed would have a Material Adverse Effect on Acquiror. Section 4.2 Acquiror Capital Structure. The authorized capital stock of -------------------------- Acquiror consists of 60,000,000 shares of Common Stock, par value of $0.01 per share ("Acquiror Common Stock") and 3,000,000 shares of Preferred Stock, par value $0.01 per share ("Acquiror Preferred Stock"), of which there were issued and outstanding as of the close of business on December 31, 1998, 23,362,772 shares of Acquiror Common Stock and no shares of Acquiror Preferred Stock. There are no other outstanding shares of capital stock or voting securities of Acquiror other than shares of Acquiror Common Stock issued after December 31, 1998 under Acquiror's 1997 Employee Stock Purchase Plan and the Acquiror's 1998 Employee Stock Purchase Plan (collectively, the "ESPP") or upon the exercise of options issued under Acquiror's 1982 Employee Incentive Stock Option Plan, 1992 Stock Option Plan or 1997 Director Stock Option Plan. The authorized capital stock of Sub consists of 1,000 shares of Common Stock, all of which are issued and outstanding and are held by Acquiror. All outstanding shares of Acquiror and Sub have been duly authorized, validly issued, fully paid and are nonassessable and free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof. As of the close of business on December 31, 1998, Acquiror has reserved an aggregate of 2,485,959 shares of Common Stock for issuance to employees, directors and independent contractors upon exercise of outstanding options to acquire shares of Acquiror Common Stock issued under the Acquiror stock option plans and an aggregate of 0 shares of Common Stock for issuance upon exercise of outstanding warrants. Other than as contemplated by this Agreement or under the ESPP, and except as described in this Section 4.2, there are no other options, warrants, calls, rights, commitments or agreements to which Acquiror or Sub is a party or by which either of them is bound obligating Acquiror or Sub to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of Acquiror or Sub or obligating Acquiror or Sub to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. The shares of Acquiror Common Stock to be issued pursuant to the Merger (including shares of Acquiror Common Stock issued upon exercise of Target Options assumed by Acquiror) have been reserved for issuance and will be duly authorized, validly issued, fully paid, and non- assessable and issued in compliance with all applicable federal or state securities laws. -26- Section 4.3 Authority; No Conflict; Required Filings and Consents. ----------------------------------------------------- (a) Each of Acquiror and Sub has all requisite corporate power and authority to enter into this Agreement and the other Transaction Documents to which it is or will become a party and to consummate the transactions contemplated by this Agreement and such Transaction Documents. The execution and delivery of this Agreement and such Transaction Documents and the consummation of the transactions contemplated by this Agreement and such Transaction Documents have been duly authorized by all necessary corporate action on the part of Acquiror and Sub. This Agreement has been and such Transaction Documents have been or, to the extent not executed as of the date hereof, will be duly executed and delivered by Acquiror and Sub. This Agreement and each of the Transaction Documents to which Acquiror or Sub is a party constitutes, and each of the Transaction Documents to which Acquiror or Sub will become a party when executed and delivered by Acquiror or Sub will constitute, the valid and binding obligation of Acquiror or Sub, enforceable in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding at law or in equity. (b) The execution and delivery by Acquiror or Sub of this Agreement and the Transaction Documents to which it is or will become a party does not, and consummation of the transactions contemplated by this Agreement or the Transaction Documents to which it is or will become a party will not, (i) conflict with, or result in any violation or breach of any provision of the Articles of Incorporation or Bylaws of Acquiror or Sub, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which Acquiror or Sub is a party or by which either of them or any of their properties or assets may be bound, or (iii) conflict or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Acquiror or Sub or any of their properties or assets, except in the case of (ii) and (iii) for any such conflicts, violations, defaults, terminations, cancellations or accelerations which would not have a Material Adverse Effect on Acquiror and its subsidiaries, taken as a whole. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Acquiror or Sub in connection with the execution and delivery of this Agreement or the Transaction Documents to which it is or will become a party or the consummation of the transactions contemplated hereby or thereby, except for (i) the filing of the Certificate of Merger with the Delaware Secretary of State, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and the laws of any foreign country, and (iii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not reasonably be expected to have a Material Adverse Effect on Acquiror and its subsidiaries, taken as a whole. -27- Section 4.4 Commission Filings; Financial Statements. ---------------------------------------- (a) Acquiror has filed with the Commission and made available to Target or its representatives all forms, reports and documents required to be filed by Acquiror with the Commission since March 31, 1998 (collectively, the "Acquiror Commission Reports"). The Acquiror Commission Reports constitute all of the documents required to be filed by the Acquiror under Section 13 or 14 of the Exchange Act with the Commission since March 31, 1998. The Acquiror Commission Reports (i) at the time filed, (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) complied in all material respects with the applicable requirements of the Securities Act of 1933, as amended, (the "Securities Act"), and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Acquiror Commission Reports or necessary in order to make the statements in such Acquiror Commission Reports, in the light of the circumstances under which they were made, not misleading. (b) Each of the financial statements (including, in each case, any related notes) contained in the Acquiror Commission Reports, including any Acquiror Commission Reports filed after the date of this Agreement until the Closing, complied or will comply as to form in all material respects with the applicable published rules and regulations of the Commission with respect thereto, was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q of the Commission) and fairly presented the consolidated financial position of Acquiror and its subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. Section 4.5 Absence of Certain Changes or Events. Except as otherwise ------------------------------------ disclosed in the Acquiror Commission Reports, since March 31, 1998, Acquiror and its subsidiaries have conducted their business in the ordinary course and, since such date, there has not been (i) any Material Adverse Change with respect to Acquiror any of its subsidiaries, taken as a whole (other than any change in the business of Acquiror occurring as a result of the execution or announcement of this Agreement and provided that changes in the trading prices of Acquiror Common Stock shall not constitute a change with respect to Acquiror); or (ii) any damage, destruction or loss (whether or not covered by insurance) with respect to Acquiror or any of its subsidiaries having a Material Adverse Effect on Acquiror and its subsidiaries, taken as a whole. Section 4.6 Compliance with Laws. Acquiror has complied with, is not in -------------------- violation of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for failures to comply or violations which would not have a Material Adverse Effect on Acquiror and its subsidiaries, taken as a whole. -28- Section 4.7 Pooling of Interests. To its knowledge, neither Acquiror -------------------- nor any of its affiliates has taken or agreed to take any action which would prevent Acquiror from accounting for the business combination to be effected by the Merger as a pooling of interests. Section 4.8 Interim Operations of Sub. Sub was formed solely for the ------------------------- purpose of engaging in the transactions contemplated by this Agreement, has engaged in no other business activities and has conducted its operations only as contemplated by this Agreement. Section 4.9 Disclosure. No statements by Acquiror contained in this ---------- Agreement, its exhibits and schedules, or any of the certificates or documents, including any of the Transaction Documents, required to be delivered by Acquiror or Sub to Target under this Agreement contain any untrue statement of material fact or omits (when read together with all such other statements) to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. Section 4.10 Stockholders Consent. No consent or approval of the -------------------- shareholders of Acquiror is required or necessary for Acquiror to enter into this Agreement or the Transaction Documents or to consummate the transactions contemplated hereby and thereby. Section 4.11 Litigation. Except as otherwise disclosed in the Acquiror ---------- Commission Reports, (i) there is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of Acquiror or any of its subsidiaries, threatened against Acquiror or any of its properties or any of its officers or directors (in their capacities as such), which, if determined adversely to Acquiror, would have a Material Adverse Effect on Acquiror and its subsidiaries, taken as a whole, and (ii) there is no judgment, decree or order against Acquiror, or, to the knowledge of Acquiror, any of its respective directors or officers (in their capacities as such) relating to the business of Acquiror, the presence of which would have Material Adverse Effect with respect to Acquiror and its subsidiaries, taken as a whole. To Acquiror's knowledge, no circumstances exist that could form a valid basis for a claim against Acquiror as a result of the conduct of Acquiror's business (including, without limitation, any claim of infringement of any intellectual property right) that would have a Material Adverse Effect with respect to Acquiror. ARTICLE V PRECLOSING COVENANTS OF TARGET ------------------------------ During the period from the date of this Agreement until the Effective Time, Target covenants and agrees as follows: Section 5.1 Notice to Target Stockholders. Prior to the Effective Time, ----------------------------- Target will send to all stockholders who have not consented to the Merger Agreement the notice required under Section 228(d) and Section 262(d)(2) of Delaware Law, along with the Information Statement. The notice and the Information Statement shall comply in all material respects with all applicable requirements of law and the rules and regulations promulgated thereunder. -29- Section 5.2 Advice of Changes. Target will promptly advise Acquiror in ----------------- writing of any event occurring subsequent to the date of this Agreement which would render any representation or warranty of Target contained in this Agreement, if made on or as of the date of such event or the Closing Date, untrue or inaccurate in any material respect. Section 5.3 Operation of Business. During the period from the date of --------------------- this Agreement and continuing until the earlier of the termination of the Agreement or the Effective Time, Target agrees (except to the extent that Acquiror shall otherwise consent in writing), to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and taxes when due, subject to good faith disputes over such debts or taxes, to pay or perform other obligations when due, and, to the extent consistent with such business, use all reasonable efforts consistent with past practices and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, to the end that its goodwill and ongoing businesses shall be unimpaired at the Effective Time. Target shall promptly notify Acquiror of any event or occurrence not in the ordinary course of business of Target. Except as expressly contemplated by this Agreement, Target shall not, without the prior written consent of Acquiror: (a) Accelerate, amend or change the period of exercisability or the vesting schedule of options or restricted stock granted under any employee stock plan or agreements or authorize cash payments in exchange for any Target Option or any options granted under any of such plans except as specifically required by the terms of such plans or any related agreements or any such agreements in effect as of the date of this Agreement and disclosed in the Target Disclosure Schedule; (b) Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of such party, or purchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service by such party; (c) Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than (i) the issuance of (A) shares of Target Common Stock issuable upon exercise of Target Options or pursuant to other commitments that are outstanding on the date of this Agreement and set forth in Schedule 3.2 or (B) shares of Target Common Stock issuable upon conversion of shares of Target Preferred Stock or (ii) the repurchase of shares of Common Stock from terminated employees pursuant to the terms of outstanding stock restriction or similar agreements; -30- (d) Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or substantial portion of the assets of, or by any other manner, any business or any corporation, partnership or other business organization or division, or otherwise acquire or agree to acquire any assets; (e) Sell, lease, license or otherwise dispose of any of its properties or assets which are material, individually or in the aggregate, to the business of Target, except in the ordinary course of business; (f) Except as set forth in Section 3.6 of the Disclosure Schedule, (i) increase or agree to increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of non-officer employees in accordance with past practices, (ii) grant any additional severance or termination pay to, or enter into any employment or severance agreements with, officers, (iii) grant any severance or termination pay to, or enter into any employment or severance agreement, with any non- officer employee, except in accordance with past practices, (iv) enter into any collective bargaining agreement, or (v) establish, adopt, enter into or amend in any material respect any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (g) Revalue any of its assets, including writing down the value of inventory or writing off notes or accounts receivable; (h) Incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities or guarantee any debt securities of others; (i) Amend or propose to amend its Certificate of Incorporation or Bylaws; (j) Incur or commit to incur any capital expenditures in excess of $50,000 in the aggregate or in excess of $15,000 as to any individual matter; (k) Lease, license, sell, transfer or encumber or permit to be encumbered any asset, Target Proprietary Right or other property associated with the business of Target (including sales or transfers to Affiliates of Target) except for Software License Agreements and Software Development Agreements entered into in the ordinary course of business. (1) Enter into any lease or contract for the purchase or sale of any property, real or personal, except in the ordinary course of business; (m) Fail to maintain its equipment and other assets in good working condition and repair according to the standards it has maintained up to the date of this Agreement, subject only to ordinary wear and tear; (n) Change accounting methods; -31- (o) Amend or terminate any material contract, agreement or license to which it is a party except in the ordinary course of business; (p) Loan any amount to any person or entity, or guaranty or act as a surety for any obligation; (q) Waive or release any material right or claim, except in the ordinary course of business; (r) Make or change any Tax or accounting election, change any annual accounting period, adopt or change any accounting method, file any amended Return, enter into any closing agreement, settle any Tax claim or assessment relating to Target, surrender any right to claim refund of Taxes or consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to Target if any such election, adoption, change, amendment, agreement, settlement, surrender, consent or other similar action or omission would have the effect of increasing the Tax liability of Target or Acquiror; (s) Take any action, or fail to take any action, that would cause there to be a Material Adverse Change with respect to Target; (t) Enter into any agreement in which the obligation of Target exceeds $25,000 or shall not terminate or be subject to termination for convenience within 180 days following execution; (u) Enter into any agreement not in the ordinary course of business (including without limitation any material licenses, any OEM agreements, any exclusive agreements of any kind, or any agreements providing for obligations that would extend beyond six months of the date of this Agreement); or (v) Take, or agree in writing or otherwise to take, any of the actions described in Sections (a) through (u) above, or any action which is reasonably likely to make any of Target's representations or warranties contained in this Agreement untrue or incorrect in any material respect on the date made (to the extent so limited) or as of the Effective Time. Section 5.4 Access to Information. Until the Closing, Target shall --------------------- allow Acquiror and its agents reasonable free access during normal business hours upon reasonable notice to its files, books, records, and offices, including, without limitation, any and all information relating to taxes, commitments, contracts, leases, licenses, and personal property and financial condition. Until the Closing, Target shall cause its accountants to cooperate with Acquiror and its agents in making available all financial information requested, including without limitation the right to examine all working papers pertaining to all financial statements prepared or audited by such accountants. No information or knowledge obtained in any investigation pursuant to this Section shall effect or be deemed to modify any representation or warranty contained in this Agreement or its exhibits and schedules. All such access shall be subject to the terms of the Confidentiality Agreement (as defined in Section 7.1). -32- Section 5.5 Satisfaction of Conditions Precedent. Target will use its ------------------------------------ best efforts to satisfy or cause to be satisfied all the conditions precedent which are set forth in Sections 8.1 and 8.2, and Target will use its best efforts to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties which may be necessary or reasonably required on its part in order to effect the transactions contemplated by this Agreement. Target shall use its best efforts to obtain any and all consents necessary with respect to those Material Contracts listed on Schedule 5.5 of the Target Disclosure Schedule in connection with the Merger (the "Material Consents"). Section 5.6 Other Negotiations. Target will not (and it will not permit ------------------ any of its officers, directors, employees, agents and Affiliates on its behalf to) take any action to solicit, initiate, seek, encourage or support any inquiry, proposal or offer from, furnish any information to, or participate in any negotiations with, any corporation, partnership, person or other entity or group (other than Acquiror) regarding any acquisition of Target, any merger or consolidation with or involving Target, or any acquisition of any material portion of the stock or assets of Target or any material license of Target Proprietary Rights, except for Software License Agreements and Software Development Agreements entered into in the ordinary course of business(any of the foregoing being referred to in this Agreement as an "Acquisition Transaction") or enter into an agreement concerning any Acquisition Transaction with any party other than Acquiror. If between the date of this Agreement and the termination of this Agreement pursuant to Section 9.1, Target receives from a third party any offer or indication of interest regarding any Acquisition Transaction, or any request for information regarding any Acquisition Transaction, Target shall (i) notify Acquiror immediately (orally and in writing) of such offer, indication of interest or request, including the identity of such party and the full terms of any proposal therein, and (ii) notify such third party of Target's obligations under this Agreement. ARTICLE VI PRECLOSING AND OTHER COVENANTS OF ACQUIROR AND SUB -------------------------------------------------- Section 6.1 Advice of Changes. Acquiror and Sub will promptly advise ----------------- Target in writing of any event occurring subsequent to the date of this Agreement which would render any representation or warranty of Acquiror or Sub contained in this Agreement, if made on or as of the date of such event or the Closing Date, untrue or inaccurate in any material respect. Section 6.2 Reservation of Acquiror Common Stock. Acquiror shall ------------------------------------ reserve for issuance, out of its authorized but unissued capital stock, the maximum number of shares of Acquiror Common Stock as may be issuable upon consummation of the Merger, including shares of Acquiror Common Stock that will be issued upon exercise of Target Options assumed by Acquiror. Section 6.3 Satisfaction of Conditions Precedent. Acquiror and Sub will ------------------------------------ use their best efforts to satisfy or cause to be satisfied all the conditions precedent which are set forth in Sections 8.1 and 8.3, and Acquiror and Sub will use their best efforts to cause the transactions -33- contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties which may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby. Section 6.4 Nasdaq National Market Listing. Acquiror shall cause the ------------------------------ shares of Acquiror Common Stock issuable to the stockholders of Target in the Merger, including shares of Acquiror Common Stock issuable upon exercise of Acquiror Options, to be authorized for listing on the Nasdaq National Market prior to the Closing. Section 6.5 Stock Options. ------------- (a) At the Effective Time, each outstanding Target Option under the Target Option Plan, whether vested or unvested, shall be assumed by Acquiror and deemed to constitute an option (a "Acquiror Option") to acquire, on the same terms and conditions as were applicable under the Target Option, the same number of shares of Acquiror Common Stock as the holder of such Target Option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Time (rounded down to the nearest whole number), at a price per share (rounded up to the nearest whole cent) equal to (i) the aggregate exercise price for the shares of Target Common Stock otherwise purchasable pursuant to such Target Option divided by (ii) the number of full shares of Acquiror Common Stock deemed purchasable pursuant to such Acquiror Option in accordance with the foregoing; provided, however, that, -------- ------- in the case of any Target Option to which Section 422 of the Code applies ("Incentive stock options"), the option price, the number of shares purchasable pursuant to such option and the terms and conditions of exercise of such option shall be determined in order to comply with Section 424(a) of the Code. The term, exercisability, vesting schedule, acceleration events, status as an "incentive stock option" under Section 422 of the Code, if applicable, and all of the other terms of the option shall otherwise remain unchanged. (b) As soon as practicable after the Effective Time, Acquiror shall deliver to the participants in the Target Option Plan appropriate notice setting forth such participants' rights pursuant thereto and the grants pursuant to the Target Option Plan shall continue in effect on the same terms and conditions (subject to the adjustments required by this Section 6.5 after giving effect to the Merger). Acquiror shall comply with the terms of the Target Option Plan and use best efforts to ensure, to the extent required by, and subject to the provisions of, such Target Option Plan and Sections 422 and 424(a) of the Code, that Target Options which qualified as incentive stock options prior the Effective Time continue to qualify as incentive stock options after the Effective Time. (c) Acquiror shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Acquiror Common Stock for delivery upon exercise of Target Options assumed in accordance with this Section 6.5. As soon as practicable after the Effective Time and in any event no later than 10 business days after the Closing Date, Acquiror shall file a registration statement on Form S-8 (or any successor or other appropriate forms) under the Securities Act or another appropriate form with respect to the shares of Acquiror Common Stock -34- subject to such options and shall use its best efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options remain outstanding. Section 6.6 Registration of Shares Issued in the Merger. ------------------------------------------- (a) Registrable Shares. For purposes of this Agreement, ------------------ "Registrable Shares" shall mean the shares of Acquiror Common Stock issued in the Merger, including any and all Escrow Shares, but excluding shares of Acquiror Common Stock issued in the Merger that have been sold or otherwise transferred without the consent of Acquiror (which shall not be unreasonably withheld) by the stockholders of Target who initially received such shares in the Merger prior to the effective date of the Registration Statement (as defined below) (collectively, the "Holders") and excluding shares of Acquiror Common Stock issuable upon exercise of Target Options (the issuance of which will be registered on Form S-8); provided however, that a distribution of shares of Acquiror Common Stock issued in the Merger without additional consideration, to underlying beneficial owners (such as the general and limited partners, stockholders or trust beneficiaries of a Holder) shall not be deemed such a sale or transfer for purposes of this Section 6.6 and such underlying beneficial owners shall be entitled to the same rights under this Section 6.6 as the initial Holder from which the Registrable Shares were received and shall be deemed Holders for the purposes of this Section 6.6. (b) Public Announcement of Combined Financial Results. In the ------------------------------------------------- event that the Effective Time occurs after March 1, 1999 but prior to March 18, 1999, the Acquiror shall use its best efforts to publicly announce the combined financial results of Target and Acquiror for the 30-day period following the Closing by April 22, 1999. In the event that the Effective Time occurs after March 18, 1999, the Acquiror will use its best efforts to publicly announce the combined financial results of Target and Acquiror for the 30-day period following the Closing within 45 days of the Effective Time. (c) Required Registration. Acquiror shall use its best efforts to --------------------- prepare and file with the Commission a registration statement on Form S-3 (or such successor or other appropriate form that Acquiror is eligible to use) under the Securities Act with respect to the Registrable Shares (the "Registration Statement") and to effect all such registrations, qualifications and compliances in connection therewith (including, without limitation, filing any Exchange Act reports or Financial Statements with the Commission and obtaining appropriate qualifications under applicable state securities or "blue sky" laws and compliance with any other applicable governmental requirements or regulations) as any selling Holder may reasonably request and that would permit or facilitate the public sale of Registrable Shares (provided however that Acquiror shall not be required in connection therewith to qualify to do business or to file a general consent to service of process in any such state or jurisdiction), in each case so that such Registration Statement and all other such registrations, qualifications and compliances may become effective no later than 30 days after the Closing Date, or as soon as practicable thereafter in the event such Registration Statement becomes subject to review by the Commission Staff. -35- (d) Effectiveness; Suspension Right. ------------------------------- (i) Acquiror will use its best efforts to maintain the effectiveness of the Registration Statement and other applicable registrations, qualifications and compliances for one (1) year from the Closing Date (the "Registration Effective Period"), and from time to time will amend or supplement the Registration Statement and the prospectus contained therein as and to the extent necessary to comply with the Securities Act, the Exchange Act and any applicable state securities statute or regulation, subject to the following limitations and qualifications. (ii) Following the date on which the Registration Statement is first declared effective and subject to the restrictions set forth in the Affiliates Agreements, the Holders will be permitted (subject in all cases to Section 6.7 below) to offer and sell Registrable Shares during the Registration Effective Period in the manner described in the Registration Statement provided that the Registration Statement remains effective and has not been suspended. (iii) Notwithstanding any other provision of this Section 6.6, Acquiror shall have the right at any time to require that all Holders suspend further open market offers and sales of Registrable Shares whenever, and for such period of time (but not to exceed sixty (60) days) as, in the reasonable judgment of Acquiror after consultation with counsel there is material undisclosed information or events with respect to Acquiror (the "Suspension Right"). In the event Acquiror exercises the Suspension Right, such suspension will continue for the period of time reasonably necessary for disclosure to occur at a time that is not detrimental to Acquiror and its stockholders or until such time as the information or event is no longer material, each as determined in good faith by Acquiror after consultation with counsel. Acquiror will promptly give the Holders notice of any such suspension and will use all reasonable efforts to minimize the length of the suspension. Notwithstanding the foregoing, Acquiror will not exercise its Suspension Right so as to suspend open market offers and sales of Registrable Securities for a total of more than 60 days in any fiscal quarter. (e) Expenses. Acquiror shall bear all costs and expenses for -------- purposes of this Section 6.6, including, without limitation, printing expenses (including a reasonable number of prospectuses for circulation by the selling Holders), reasonable legal fees and disbursements of counsel for Acquiror and one counsel for the selling Holders (up to $5,000), "blue sky" expenses, accounting fees and filing fees, but shall not include underwriting commissions or similar charges, legal fees and disbursements of other counsel for the selling Holders. (f) Indemnification. --------------- (i) To the extent permitted by law, Acquiror will indemnify and hold harmless each Holder, any underwriter (as defined in the Securities Act) for such Holder, its officers, directors, stockholders or partners and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, -36- damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (A) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (B) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (C) any violation or alleged violation by Acquiror of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and Acquiror will pay to each such Holder (and its officers, directors, stockholders or partners), underwriter or controlling person, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 6.6(e)(i) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of Acquiror; nor shall Acquiror be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon (a) a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in the Registration Statement by any such Holder, or (b) a Violation that would not have occurred if such Holder had delivered to the purchaser the version of the Prospectus most recently provided by Acquiror to the Holder as of the date of such sale. (ii) To the extent permitted by law, each selling Holder will indemnify and hold harmless Acquiror, each of its directors, each of its officers who has signed the Registration Statement, each person, if any, who controls Acquiror within the meaning of the Securities Act, any underwriter, any other Holder selling securities pursuant to the Registration Statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation (which includes without limitation the failure of the Holder to comply with the prospectus delivery requirements under the Securities Act, and the failure of the Holder to deliver the most current prospectus provided by Acquiror prior to such sale), in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in the Registration Statement or such Violation is caused by the Holder's failure to deliver to the purchaser of the Holder's Registrable Shares a prospectus (or amendment or supplement thereto) that had been made available to the Holder by Acquiror; and each such Holder will pay any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this Section 6.6(e)(ii) in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 6.6(e)(ii) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such Holder, which consent shall not be unreasonably withheld. The aggregate indemnification and contribution liability of each Holder under this Section 6.6(e)(ii) shall not exceed the net proceeds received by such Holder in connection with sale of shares pursuant to the Registration Statement. -37- (iii) Each person entitled to indemnification under this Section 6.6(e) (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought and shall permit the Indemnifying Party to assume the defense of any such claim and any litigation resulting therefrom, provided that counsel for the -------- Indemnifying Party who conducts the defense of such claim or any litigation resulting therefrom shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure -------- ------- of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 6.6 unless the Indemnifying Party is materially prejudiced thereby. No Indemnifying Party, in the defense of any such claim or litigation, shall (except with the consent of each Indemnified Party) consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. (iv) To the extent that the indemnification provided for in this Section 6.6(e) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (g) Current Public Information. Until the earlier of the second -------------------------- anniversary of the Closing Date (or, if any Holder is an affiliate of Acquiror, the third anniversary of the Closing Date) or the date all shares of Acquiror Common Stock subject to this Section 6.6 have been sold, Acquiror will timely file all reports required to be filed by it under the Exchange Act, and the rules and regulations adopted by the Commission thereunder, all to the extent required to enable such Holders to sell their shares pursuant to Rule 144 and the Registration Statement. Upon written request, Acquiror will deliver to such Holders a written statement as to whether it has complied with such requirements. -38- 6.7 Procedures for Sale of Shares Under Registration Statement. ---------------------------------------------------------- (a) Delivery of Prospectus. For any offer or sale of any of the ---------------------- Registrable Shares by a Holder in a transaction that is not exempt under the Securities Act, the Holder, in addition to complying with any other federal securities laws, shall deliver a copy of the final prospectus (or amendment of or supplement to such prospectus) of Acquiror covering the Registrable Shares in the form furnished to the Holder by Acquiror to the purchaser of any of the Registrable Shares on or before the settlement date for the purchase of such Registrable Shares. (b) Copies of Prospectuses. Acquiror shall, within two (2) trading ---------------------- days following the request, furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not as of the date of delivery to the Holder include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing. Section 6.8 Certain Employee Benefit Matters. From and after the -------------------------------- Effective Time, employees of Target at the Effective Time will be provided with employee benefits by the Surviving Corporation or Acquiror which in the aggregate are no less favorable to such employees than those provided from time to time by Acquiror to similarly situated employees. If any employee of Target becomes a participant in any employee benefit plan, program, policy or arrangement of Acquiror, such employee shall be given credit for all service prior to the Effective Time with Target to the extent permissible under such plan, program, policy or arrangement. All Target Options assumed by Acquiror at the Effective Time pursuant to the terms of Section 6.5(a) shall remain outstanding following the Effective on the same terms and conditions as prior to the Effective Time, subject to the adjustments contemplated by such Section 6.5. Employees of Target as of the Effective Time shall be permitted to participate in the ESPP commencing on the first enrollment date following the Effective Time, subject to compliance with the eligibility and other provisions of such plan. Section 6.9 Indemnity of Target Affiliates. ------------------------------ (a) Acquiror shall not, for a period of there years after the Effective Time, take any action to alter or impair any exculpatory or indemnification provisions now existing in the Certificate of Incorporation or By-laws of Target for the benefit of any individual who served as a director or officer of Target at any time prior to the Effective Time (the "Indemnified Executives"), except for any changes which do not affect the application of such provisions to acts or omissions of such individuals prior to the Effective Time. (b) From and after the Effective Time, Acquiror agrees to indemnify and hold harmless each Indemnified Executive against any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities or amounts paid in settlement incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to -39- the fullest extent permitted under Delaware law (and Acquiror shall also advance expenses as incurred to the fullest extent permitted under Delaware law, provided the Indemnified Executive to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such Indemnified Executive is not entitled to indemnification). ARTICLE VII OTHER AGREEMENTS ---------------- Section 7.1 Confidentiality. Each party acknowledges Acquiror and --------------- Target have previously executed a Mutual Non-Disclosure Agreement dated November 3, 1998 (the "Confidentiality Agreement"), which agreement shall continue in full force and effect in accordance with its terms. Section 7.2 No Public Announcement. The parties have agreed upon the ---------------------- form and substances of a joint press release announcing the consummation of the Merger, which shall be issued at a time and in a manner mutually agreed upon. Other than such joint press release, the parties shall make no public announcement concerning this Agreement, their discussions or any other memoranda, letters or agreements between the parties relating to the Merger; provided, however, that either of the parties, but only after reasonable - -------- ------- consultation with the other, may make disclosure if required under applicable law. Section 7.3 Regulatory Filings; Consents; Reasonable Efforts. Subject ------------------------------------------------ to the terms and conditions of this Agreement, Target and Acquiror shall use their respective best efforts to (i) make all necessary filings with respect to the Merger and this Agreement under the Exchange Act and applicable blue sky or similar securities laws and obtain required approvals and clearances with respect thereto and supply all additional information requested in connection therewith; (ii) make merger notification or other appropriate filings with federal, state or local governmental bodies or applicable foreign governmental agencies and obtain required approvals and clearances with respect thereto and supply all additional information requested in connection therewith; (iii) obtain all consents, waivers, approvals, authorizations and orders required in connection with the authorization, execution and delivery of this Agreement and the consummation of the Merger; and (iv) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement as promptly as practicable. Section 7.4 Pooling Accounting. Target and Acquiror shall each use its ------------------ best efforts to cause the business combination to be effected by the Merger to be accounted for as a pooling of interests. Neither Target nor Acquiror shall take any action that would adversely affect the ability of Acquiror to account for the business combination to be effected by the Merger as a pooling of interests. Section 7.5 Further Assurances. Prior to and following the Closing, ------------------ each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances, as may be reasonably requested by any -40- other party to better evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. Section 7.6 Escrow Agreement. On or before the Effective Date, Acquiror ---------------- shall, and the parties hereto shall exercise their best efforts to cause the Escrow Agent (as defined in Section 10.2) and the Stockholders' Agents (as defined in Section 10.9) to enter into an Escrow Agreement in the form attached hereto as Exhibit D. --------- Section 7.7 FIRPTA. Target shall, prior to the Closing Date, provide ------ Acquiror with a properly executed Foreign Investment and Real Property Tax Act of 1980 ("FIRPTA") FIRPTA Notification Letter which states that shares of capital stock of Target do not constitute "United States real property interests" under Section 897(c) of the Code, for purposes of satisfying Acquiror's obligations under Treasury Regulation Section 1.1445-2(c)(3). In addition, simultaneously with delivery of such FIRPTA Notification Letter, Target shall provide to Acquiror, as agent for Target, a form of notice to the Internal Revenue Service in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2), along with written authorization for Acquiror to deliver such notice form to the Internal Revenue Service on behalf of Target upon the Closing of the Merger. Section 7.8 Blue Sky Laws. Acquiror shall take such steps as may be ------------- necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the Acquiror Common Stock in connection with the Merger. Target shall use its best efforts to assist Acquiror as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of Acquiror Common Stock in connection with the Merger. Section 7.9 Other Filings. As promptly as practicable after the date of ------------- this Agreement, Target and Acquiror will prepare and file any other filings required under the Exchange Act, the Securities Act or any other Federal, foreign or state securities or blue sky laws relating to the Merger and the transactions contemplated by this Agreement (the "Other Filings"). The Other Filings will comply in all material respects with all applicable requirements of law and the rules and regulations promulgated thereunder. Whenever any event occurs which is required to be set forth in an amendment or supplement to any Other Filing, Target or Acquiror, as the case may be, will promptly inform the other of such occurrence and cooperate in making any appropriate amendment or supplement, and/or mailing to stockholders of Target, such amendment or supplement. Section 7.10 Tax Free Reorganization. No party shall take any action ----------------------- either prior to or after the Effective Time that could reasonably be expected to cause the Merger to fail to qualify as a "reorganization" under Section 368(a) of the Code. -41- ARTICLE VIII CONDITIONS TO MERGER -------------------- Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. ---------------------------------------------------------- The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions: (a) No Injunctions or Restraints; Illegality. No temporary ---------------------------------------- restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger shall have been issued, nor shall any proceeding brought by a domestic administrative agency or commission or other domestic Governmental Entity or other third party, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger which makes the consummation of the Merger illegal. (b) Nasdaq. The shares of Acquiror Common Stock to be issued in ------ the Merger (including pursuant to the assumption of Target Options) shall have been approved for quotation on the Nasdaq National Market. Section 8.2 Additional Conditions to Obligations of Acquiror and Sub. -------------------------------------------------------- The obligations of Acquiror and Sub to effect the Merger are subject to the satisfaction of each of the following conditions, any of which may be waived in writing exclusively by Acquiror and Sub: (a) Conversion of Preferred Stock; Dissenting Stockholders. All ------------------------------------------------------ outstanding shares of Target Preferred Stock shall be convertible into shares of Target Common Stock on a one-share for one-share basis, and holders of not more than 10% of Target's issued and outstanding capital stock as of the Closing shall have elected to exercise dissenters' or appraisal rights under Delaware Law or California Law as to such shares. (b) Escrow Agreement. The Escrow Agent and Stockholders' Agents ---------------- have executed and delivered to Acquiror the Escrow Agreement and such agreement shall remain in full force and effect. (c) Investment Representation Letter. Each stockholder of Target -------------------------------- who is not an "affiliate" of Target and who has executed a written consent in favor of the Merger shall have executed and delivered to Acquiror an Investment Representation Letter, in the form attached hereto as Exhibit E (each an --------- Representation Letter"), and such agreements shall remain in full force and effect. (d) Ancillary Agreements. Each of the Affiliates Agreements, -------------------- Employment Agreements and Noncompetition Agreements executed and delivered concurrently with the execution of this Agreement shall remain in full force and effect. -42- (e) Opinion of Target's Counsel. Acquiror shall have received an --------------------------- opinion dated the Closing Date of Hale and Dorr LLP, counsel to Target, as to the matters in the form attached hereto as Exhibit F. --------- (f) Approvals. All authorizations, consents (including the --------- Material Consents), or approvals of, or notifications to any third party, required by Target's contracts, agreements or other obligations in connection with the consummation of the Merger shall have occurred or been obtained except for any the absence of which is not reasonably likely to have a Material Adverse Effect on Target (it being agreed that the absence of consents listed on Schedule 3.3 would not have a Material Adverse Effect on Target). (g) Termination of Agreements. The following agreements between ------------------------- Target and certain of its stockholders shall have been terminated: (i) the Investor Rights Agreement dated January 15, 1998 among Target and certain stockholders of Target other than Article VI thereof, and (ii) Series A Convertible Preferred Stock Purchase Agreement. (h) Board Resignations. Target shall have received written ------------------ letters of resignation from each of the current members of the Target Board of Directors and from each officer of Target, in each case effective at the Effective Time. (i) Pooling Letter; Audit Report. Acquiror shall have received a ---------------------------- letter from Ernst & Young LLP dated as of the Closing Date and addressed to Acquiror regarding such firm's unqualified concurrence with Acquiror's management's conclusion that the business combination to be effected by the Merger will qualify as a pooling of interests transaction under generally accepted accounting principles if consummated in accordance with this Agreement. Target shall have received a letter from PricewaterhouseCoopers LLP regarding such firm's unqualified concurrence with Target's management's conclusion that Target is eligible to participate in a business combination to be accounted for as a pooling of interests and the audit report from PricewaterhouseCoopers LLP for the Target Financial Statements. Section 8.3 Additional Conditions to Obligations of Target. The ---------------------------------------------- obligation of Target to effect the Merger is subject to the satisfaction of each of the following conditions, any of which may be waived, in writing, exclusively by Target: (a) Tax Opinion. Target shall have received the opinion dated the ----------- Closing Date of Hale and Dorr LLP, counsel to Target, to the effect that the Merger will be treated for Federal income tax purposes as a tax-free reorganization within the meaning of Section 368(a) of the Code; provided, --------- however, that if the counsel to Target does not render such opinion, this - ------- condition shall nonetheless be deemed to be satisfied with respect to Target if Venture Law Group, A Professional Corporation, counsel to Acquiror renders such opinion to Target. In rendering such opinion, counsel for Target or Acquiror shall be entitled to rely upon, among other things, reasonable assumptions as well as representations of Acquiror, Sub and Target. (b) Opinion of Acquiror's Counsel. Target shall have received an ----------------------------- opinion dated the Closing Date of Venture Law Group, A Professional Corporation, counsel to Acquiror, as to the matters attached hereto as Exhibit G. --------- -43- ARTICLE IX TERMINATION AND AMENDMENT ------------------------- Section 9.1 Termination. This Agreement may be terminated at any time ----------- prior to the Effective Time: (a) by mutual written consent of Acquiror and Target; (b) by either Acquiror or Target, by giving written notice to the other party, if a court of competent jurisdiction or other Governmental Entity shall have issued a nonappealable final order, decree or ruling or taken any other action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger, except, if such party relying on such order, decree or ruling or other action shall not have complied with its respective obligations under Sections 5.5 or 6.3 of this Agreement, as the case may be; (c) by Acquiror, by giving written notice to Target, if the Closing shall not have occurred on or before 11:59 p.m. (Pacific Standard Time) on March 23, 1999 (the "Deadline") by reason of the failure of any condition precedent under Section 8.1 or 8.2 (unless the failure results primarily from a breach by Acquiror of any representation, warranty, or covenant of Acquiror contained in this Agreement or Acquiror's failure to fulfill a condition precedent to closing or other default); or (d) by Target, by giving written notice to Acquiror, if the Closing shall not have occurred on or before the Deadline, by reason of the failure of any condition precedent under Section 8.1 or 8.3 (unless the failure results primarily from a breach by Target of any representation, warranty, or covenant of Target contained in this Agreement or Target's failure to fulfill a condition precedent to closing or other default). Section 9.2 Effect of Termination. In the event of termination of this --------------------- Agreement as provided in Section 9.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of Acquiror, Target, Sub or their respective officers, directors, stockholders or Affiliates, except as set forth in Section 9.3 and further except to the extent that such termination results from the willful breach by any such party of any of its representations, warranties or covenants set forth in this Agreement. Section 9.3 Fees and Expenses. ----------------- (a) If the Merger fails to close by the Deadline, and such failure is due to a willful breach by Acquiror or Sub or because the conditions set forth in Section 8.1(b), 8.2(b) (insofar as it relates to the Escrow Agent) or 8.2(i) (other than as a result of a failure of PricewaterhouseCoopers LLP to deliver the letter and audit report referenced in the last sentence of Section 8.2(i)) are not satisfied or waived by the relevant parties by the Deadline, then Acquiror shall pay to Target a termination fee of U.S. $6,000,000, in immediately available funds to an account in the United States specified by Target within three business days after the Deadline. Acquiror, Merger Sub and Target agree that the agreement contained in the -44- immediately preceding sentence is an integral part of the transactions contemplated by this Agreement and constitutes liquidated damages and not a penalty; provided that such payment shall not deprive Target of any remedy it may have for a willful breach of this Agreement by Acquiror or Sub. Except as set forth in this Section 9.3, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Merger is consummated. Target has submitted a budget to Acquiror for completion of the Merger. (b) If the Merger is consummated, all legal, accounting, investment banking, broker's and finder's fees and expenses incurred by Target or its stockholders in connection with the Merger shall be deemed expenses of the stockholders of Target to the extent such fees and expenses exceed $300,000 and shall be borne by the stockholders of Target to such extent and will not become obligations of Target. Target will make arrangements for the payments of such fees acceptable to Acquiror. Any such fees and expenses in excess of $300,000 incurred by Target shall be recoverable by Acquiror from the Escrow Fund (as defined in Section 10.2) as Damages (as defined in Section 10.1) without regard to the damage threshold as contemplated by Section 10.3. ARTICLE X ESCROW AND INDEMNIFICATION -------------------------- Section 10.1 Indemnification. From and after the Effective Time and --------------- subject to the limitations contained in Section 10.2, the Former Target Stockholders will, severally and pro rata, in accordance with their Pro Rata Portion, indemnify and hold Acquiror harmless against any loss, expense, liability or other damage, including attorneys' fees, to the extent of the amount of such loss, expense, liability or other damage (collectively "Damages") that Acquiror has incurred by reason of the breach by Target of any representation, warranty, covenant or agreement of Target contained in this Agreement that occurs or becomes known to Acquiror during the Escrow Period (as defined in Section 10.4 below). Such indemnification shall be Acquiror's sole and exclusive remedy for any such breach by Target, provided, however, that, in -------- ------- addition to the Former Target Stockholders' Pro Rata Portion of the Escrow Fund, each Former Target Stockholder shall be fully liable to the Acquiror for any Damages relating to such Former Target Stockholder's willful misrepresentation or fraud in connection with the representations and warranties set forth herein and the transactions contemplated under this Agreement and in connection with the Merger without limitation. Acquiror acknowledges that, with respect to the evaluation of the Target Financial Statements for purposes of making any claim under this Section 10.1 for a breach of the representations set forth in Section 3.4(b), Acquiror and its independent public accountants, Ernst & Young LLP, have had the opportunity to review Target's accounting policies and methods and underlying assumptions inherent in the Target Financial Statements and, accordingly, Acquiror shall be required to consistently apply the accounting policies, methods and assumptions in the audited Target Financial Statements. Section 10.2 Escrow Fund. As security for the indemnities in Section ----------- 10.1, as soon as practicable after the Effective Date, the Escrow Shares shall be deposited with, Harris Trust -45- Company of California (or such other institution selected by Acquiror with the reasonable consent of Target) as escrow agent (the "Escrow Agent"), such deposit to constitute the Escrow Fund (the "Escrow Fund") and to be governed by the terms set forth in this Article X and in the Escrow Agreement. Notwithstanding the foregoing, the indemnification obligations of the Former Target Stockholders pursuant to this Article X shall be limited to the amount and assets deposited and present in the Escrow Fund and Acquiror shall not be entitled to pursue any claims for indemnification under this Article X against any Former Target Stockholder directly or personally and the sole recourse of Acquiror shall be to make claims against the Escrow Fund in accordance with the terms of the Escrow Agreement (except for cases involving willful misrepresentation or fraud as set forth above). Section 10.3 Damage Threshold. Notwithstanding the foregoing, the ---------------- Former Target Stockholders shall have no liability under Section 10.1 and Acquiror may not receive any shares from the Escrow Fund unless and until an Officer's Certificate or Certificates (as defined in Section 10.5 below) for an aggregate amount of Acquiror's Damages in excess of $300,000 has been delivered to the Stockholders' Agents and to the Escrow Agent; provided, however, that -------- ------- after an Officer's Certificate or Certificates for an aggregate of $300,000 in Damages has been delivered, Acquiror shall be entitled to receive Escrow Shares equal in value to the full amount of Damages identified in such Officer's Certificate or Certificates. The amount of Damages recoverable by Acquiror or a subsidiary of Acquiror under this Article X with respect to an indemnity clam shall be reduced by any proceeds received by Acquiror or a subsidiary of Acquiror, with respect to the Damages to which such indemnity claim relates, from an insurance carrier. Section 10.4 Escrow Periods. The Escrow Fund shall commence on the -------------- Closing Date and terminate on the earlier to occur of (i) the date 6 months after the date of the Closing or (ii) the date of issuance of the first independent audit report on Acquiror's financial statements after the Closing, which financial statements include the financial results of Target (the period from the Closing to such date referred to as the "Escrow Period"), provided, -------- however, that the number of Escrow Shares, which, in the reasonable judgment of - ------- Acquiror and as set forth in an Officer's Certificate delivered pursuant to Section 10.5, subject to the objection of the Stockholders' Agents and the subsequent resolution of the matter in the manner provided in Section 10.8, are necessary to satisfy any unsatisfied claims specified in any Officer's Certificate theretofore delivered to the Escrow Agent and the Stockholders' Agents (as defined in Section 10.9) prior to termination of the Escrow Period with respect to Damages incurred or litigation pending prior to expiration of the Escrow Period, shall remain in the Escrow Fund until such claims have been finally resolved. Section 10.5 Claims Upon Escrow Fund. Upon receipt by the Escrow Agent ----------------------- on or before the last day of the Escrow Period of a certificate signed by any appropriately authorized officer of Acquiror (an "Officer's Certificate"): (i) Stating the aggregate amount of Acquiror's Damages or an estimate thereof, in each case to the extent known or determinable at such time, and, -46- (ii) Specifying in reasonable detail the individual items of such Damages included in the amount so stated, the date each such item was paid or properly accrued or arose, and the nature of the misrepresentation, breach or claim to which such item is related, the Escrow Agent shall, subject to the provisions of Sections 10.3 and 10.8 hereof, deliver to Acquiror out of the Escrow Fund, as promptly as practicable, Escrow Shares having a value equal to such Damages all in accordance with the Escrow Agreement and Section 10.6 below. Amounts paid or distributed from the Escrow Fund shall be paid or distributed pro rata among the Holders (as defined in the Escrow Agreement) based upon their respective percentage interests therein at the time. Section 10.6 Valuation. For the purpose of compensating Acquiror for its --------- Damages pursuant to this Agreement, the value per share of the Escrow Shares shall be the Closing Stock Price. Section 10.7 Objections to Claims. At the time of delivery of any -------------------- Officer's Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate shall be delivered to the Stockholders' Agents (as defined in Section 10.9 below) and for a period of thirty (30) days after such delivery, the Escrow Agent shall make no delivery of Escrow Shares pursuant to Section 10.5 unless the Escrow Agent shall have received written authorization from the Stockholders' Agents to make such delivery. After the expiration of such thirty (30) day period, the Escrow Agent shall make delivery of the Escrow Shares in the Escrow Fund in accordance with Section 10.5, provided that no such delivery may be made if the Stockholders' Agents shall object in a written statement to the claim made in the Officer's Certificate, and such statement shall have been delivered to the Escrow Agent and to Acquiror prior to the expiration of such thirty (30) day period. Section 10.8 Resolution of Conflicts. ----------------------- (a) In case the Stockholders' Agents shall so object in writing to any claim or claims by Acquiror made in any Officer's Certificate, Acquiror shall have thirty (30) days to respond in a written statement to the objection of the Stockholders' Agents. If after such thirty (30) day period there remains a dispute as to any claims, the Stockholders' Agents and Acquiror shall attempt in good faith for thirty (30) days to agree upon the rights of the respective parties with respect to each of such claims. If the Stockholders' Agents and Acquiror should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and shall distribute the Escrow Shares from the Escrow Fund in accordance with the terms of the memorandum. (b) If no such agreement can be reached after good faith negotiation, either Acquiror or the Stockholders' Agents may, by written notice to the other, demand arbitration of the matter unless the amount of the damage or loss at issue is in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three arbitrators. Within fifteen (15) days after such written notice is sent, -47- Acquiror (on the one hand) and the Stockholders' Agents (on the other hand) shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of the arbitrators as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement, and notwithstanding anything in Section 10.5, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Escrow Fund in accordance with such decision. (c) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Chicago, Illinois under the commercial rules then in effect of the American Arbitration Association. The non-prevailing party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative fee of the American Arbitration Association, and the expenses, including, without limitation, the reasonable attorneys' fees and costs, incurred by the prevailing party to the arbitration or as otherwise ordered by the arbitrators. Section 10.9 Stockholders' Agents. -------------------- (a) Timothy Barrows and David Aronoff shall be constituted and appointed as agents (the "Stockholders' Agents") for and on behalf of the Former Target Stockholders to give and receive notices and communications, to authorize delivery to Acquiror of the Escrow Shares or other property from the Escrow Fund in satisfaction of claims by Acquiror, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of the Stockholders' Agents for the accomplishment of the foregoing. All actions of the Stockholders' Agents shall be taken jointly, not individually. Such agency may be changed by the holders of a majority in interest of the Escrow Shares from time to time upon not less than ten (10) days' prior written notice to Acquiror. No bond shall be required of the Stockholders' Agents, and the Stockholders' Agents shall receive no compensation for services. Notices or communications to or from the Stockholders' Agents shall constitute notice to or from each of the Former Target Stockholders. (b) The Stockholders' Agents shall not be liable for any act done or omitted hereunder as Stockholders' Agent while acting in good faith and in the exercise of reasonable judgment, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. The Former Target Stockholders shall severally and pro rata, in accordance with their Pro Rata Portion, indemnify the Stockholders' Agents and hold them harmless against any loss, liability or expense incurred without gross negligence or bad faith on the part of the Stockholders' Agents and arising out of or in connection with the acceptance or administration of their duties hereunder under this Agreement or the Escrow Agreement. (c) The Stockholders' Agents shall have reasonable access to information about Target and Acquiror and the reasonable assistance of Target's and Acquiror's officers and employees for purposes of performing their duties and exercising their rights under this Article X, provided that the -------- Stockholders' Agents shall treat confidentially and not disclose any -48- nonpublic information from or about Target or Acquiror to anyone (except on a need to know basis to individuals who agree to treat such information confidentially). Section 10.10 Actions of the Stockholders' Agents. A decision, act, ----------------------------------- consent or instruction of the Stockholders' Agents shall constitute a decision of all of the Former Target Stockholders for whom shares of Acquiror Common Stock otherwise issuable to them are deposited in the Escrow Fund and shall be final, binding and conclusive upon each such Former Target Stockholder, and the Escrow Agent and Acquiror may rely upon any decision, act, consent or instruction of the Stockholders' Agents as being the decision, act, consent or instruction of each and every such Former Target Stockholder. The Escrow Agent and Acquiror are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Stockholders' Agents. Section 10.11 Third-Party Claims. ------------------ (a) If any third party shall notify Acquiror or its affiliates with respect to any matter (hereinafter referred to as a "Third Party Claim"), ----------------- which may result in Damages, then Acquiror shall give prompt notice to Stockholders' Agents (and in any event within 30 days) of Acquiror becoming aware of any such Third Party Claim or of facts upon which any such Third Party Claim will be based setting forth such material information with respect to the Third Party Claim as is reasonably available to Acquiror; provided, however, that no delay or failure on the part of Acquiror in notifying Stockholders' Agents shall relieve Stockholders from any obligation hereunder unless Stockholders are thereby prejudiced (and then solely to the extent of such prejudice). The Former Target Stockholders shall not be liable for any attorneys fees or expenses incurred by Acquiror prior to Acquiror's giving notice to Stockholders' Agents of a Third Party Claim. (b) In case any Third Party Claim is asserted against Acquiror or its affiliates, and Acquiror notifies Stockholders' Agents thereof pursuant to Section 10.11(a) above, Stockholders' Agents will be entitled, if they so elect by written notice delivered to Acquiror within 30 days after receiving Acquiror's notice, to assume the defense thereof, at the expense of Stockholders' Agents (independent of the Escrow Fund), so long as (i) Acquiror has reasonably determined that Damages which may be incurred as a result of the Third Party Claim do not exceed either individually, or when aggregated with all other Third Party Claims, the total dollar value of the Escrow Shares determined in accordance with the Escrow Agreement; (ii) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief; (iii) settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith judgment of Acquiror, likely to establish a precedential custom or practice adverse to the continuing business interests of Acquiror which could have a material adverse effect on the business or operations of Acquiror; and -49- (iv) counsel selected by Stockholders' Agents is reasonably acceptable to Acquiror. If Stockholders' Agents so assume any such defense, they shall conduct the defense of the Third Party Claim actively and diligently. Stockholders' Agents shall not compromise or settle such Third Party Claim or consent to entry of any judgment in respect thereof without the prior written consent of Acquiror. (c) In the event that Stockholders' Agents assume the defense of the Third Party Claim in accordance with Section 10.11(b) above, Acquiror or its affiliates may retain separate counsel and participate in the defense of the Third Party Claim, but the fees and expenses of such counsel shall be at the expense of Acquiror unless Acquiror or its affiliates shall reasonably determine that there is a material conflict of interest between or among Acquiror or its affiliates and Stockholders with respect to such Third Party Claim, in which case the reasonable fees and expenses of such counsel will be borne by the Former Target Stockholders. Acquiror or its affiliates will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of Stockholders' Agents. Acquiror will cooperate in the defense of the Third Party Claim and will provide full access to documents, assets, properties, books and records reasonably requested by Stockholders' Agents and material to the claim and will make available all officers, directors and employees reasonably requested by Stockholders' Agents for investigation, depositions and trial. (d) In the event that Stockholders' Agents fail or elect not to assume the defense of Acquiror or its affiliates against such Third Party Claim, which Stockholders' Agents had the right to assume under Section 10.2(b) above, (i) Acquiror or its affiliates shall have the right to undertake the defense and (ii) Acquiror shall not compromise or settle such Third Party Claim or consent to entry of any judgment in respect thereof without the prior written consent of Stockholders' Agents. In the event that the Stockholders' Agents are not entitled to assume the defense of Acquiror or its affiliates against such Third Party Claim pursuant to Section 10.2(b) above, Acquiror or its affiliates shall have the right to undertake the defense, consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim in any manner it may deem appropriate (and Acquiror or its affiliates need not consult with, or obtain any consent from, Stockholders' Agents in connection therewith); provided, however, that except with the written consent of Stockholders' Agents, no settlement of any such claim or consent to the entry of any judgment with respect to such Third Party Claim shall alone be determinative of the validity of the claim against the Escrow Fund. In each case, Acquiror or its affiliates shall conduct the defense of the Third Party Claim actively and diligently, and Former Target Stockholders and Stockholders' Agents will cooperate with Acquiror or its affiliates in the defense of that claim and will provide full access to documents, assets, properties, books and records reasonably requested by Acquiror and material to the claim and will make available all individuals reasonably requested by Acquiror for investigation, depositions and trial. -50- ARTICLE XI MISCELLANEOUS ------------- Section 11.1 Survival of Representations and Covenants. All ----------------------------------------- representations and warranties of Target, Acquiror and Sub contained in this Agreement shall survive the Closing and any investigation at any time made by or on behalf of Acquiror or Target until the end of the Escrow Period; provided that the maximum amount recoverable under this Agreement by the Former Target Stockholders for a breach of the representations and warranties of Acquiror or Sub shall be an amount equal to 10% of the total number of shares of Acquiror Common Stock issued in the Merger multiplied by the Closing Stock Price. Such limit shall not apply to remedies the Former Target Stockholders may have, independent of this Agreement, under applicable law. If Escrow Shares or other assets are retained in the Escrow Fund beyond expiration of the period specified in the Escrow Agreement, then (notwithstanding the expiration of such time period) the representation, warranty, covenant or agreement applicable to such claim shall survive until, but only for purposes of, the resolution of the claim to which such retained Escrow Shares or other assets relate. All covenants and agreements of Target, Acquiror and Sub shall continue in effect in accordance with their terms. Section 11.2 Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or two business days after being mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): with a copy to: (a) if to Acquiror or Sub: Applied Micro Circuits Corporation 6290 Sequence Drive San Diego, California 92121 Attention: Chief Executive Officer Fax No. (619) 450-9885 Telephone No: (619) 450-9333 with a copy at the same address to the attention of the General Counsel and Secretary and with a copy to: Venture Law Group A Professional Corporation 2800 Sand Hill Road Menlo Park, California 94025 Attention: Mark A. Medearis Fax No: (650) 233-8386 -51- Telephone No: (650) 854-4488 (b) if to Target, to: Cimaron Communications Corporation 200 Brickstone Square Andover, Massachusetts 01810 Attention: President Fax No: (978) 623-0024 Telephone No: (978) 623-0009 with a copy to: Hale and Dorr LLP 60 State Street Boston, MA 02109 Attention: Patrick J. Rondeau, Esq. Fax No: (617) 526-5000 ------------- Telephone No: (617) 526-6000 -------------- Section 11.3 Interpretation. When a reference is made in this Agreement -------------- to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. References to the "knowledge of Target" or "Target's knowledge" or any similar expression shall mean the actual knowledge, after reasonable inquiry, of Ram Sudireddy, Gary Martin and Steve Boulanger and any other individual who is an executive officer or director of Target. Section 11.4 Counterparts. This Agreement may be executed in two or ------------ more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 11.5 Entire Agreement; No Third Party Beneficiaries. This ---------------------------------------------- Agreement (including the documents and the instruments referred to herein), the Confidentiality Agreement, and the Transaction Documents (a) constitute the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) are not intended to confer upon any person other than the parties hereto (including without limitation any Target employees) any rights or remedies hereunder; provided that the provisions in Article II concerning issuance of shares of Acquiror Common Stock in the Merger, the representations and warranties in Article IV and the provisions in -52- Section 6.6 concerning registration rights are intended for the benefit of all Target stockholders and may be enforced by them; and the provisions in Section 6.9 concerning indemnification of directors and officers are intended for the benefit of such individuals and may be enforced by them. Section 11.6 Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of Delaware without regard to any applicable conflicts of law. Section 11.7 Assignment. Neither this Agreement nor any of the rights, ---------- interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Section 11.8 Amendment. This Agreement may be amended by the parties --------- hereto, at any time before or after approval of matters presented in connection with the Merger by the stockholders of Target, but after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 11.9 Extension; Waiver. At any time prior to the Effective ----------------- Time, the parties hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or the other acts of the other parties hereto, (ii) waive any inaccuracies in the representations or warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. Section 11.10 Specific Performance. The parties hereto agree that -------------------- irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to injunctive relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. [Signature Page Follows] -53- IN WITNESS WHEREOF, Acquiror, Sub and Target have caused this Agreement and Plan of Reorganization to be signed by their respective officers thereunto duly authorized as of the date first written above. APPLIED MICRO CIRCUITS CORPORATION By:_______________________________ Title:____________________________ WILEY ACQUISITION CORPORATION By:_______________________________ Title:____________________________ CIMARON COMMUNICATIONS CORPORATION By:_______________________________ Title:____________________________ EX-5.1 3 OPINION OF VENTURE LAW GROUP EXHIBIT 5.1 April 13, 1999 Applied Micro Circuits Corporation 6290 Sequence Drive San Diego, CA 92121 Registration Statement on Form S-3 ( File No. 333-_____) -------------------------------------------------------- Ladies and Gentlemen: We have examined the Registration Statement on Form S-3 to be filed by you with the Securities and Exchange Commission on or about April 13, 1999 (the "Registration Statement") in connection with the registration under the Securities Act of 1933 of shares of your common stock (the "Shares"), to be sold by certain stockholders listed in the Registration Statement (the "Selling Stockholders"). As your legal counsel in connection with this transaction, we have examined the proceedings taken and are familiar with the proceedings proposed to be taken by you in connection with the sale of the Shares. It is our opinion that the Shares, when sold by the selling stockholders in the manner described in the Registration Statement, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever it appears in the Registration Statement and in any amendment to it. Sincerely, VENTURE LAW GROUP A Professional Corporation /s/ VENTURE LAW GROUP -----END PRIVACY-ENHANCED MESSAGE-----