-----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, O3AxEHwlI0logCV7rvvcadEt1jddpNBzf8hd1RTm9cjEZGeHW0DmXEk+ZUamGjjG pqy5G+fzqqxHE5EEn488ZA== 0000912057-00-008506.txt : 20000228 0000912057-00-008506.hdr.sgml : 20000228 ACCESSION NUMBER: 0000912057-00-008506 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIA 100 INC CENTRAL INDEX KEY: 0000713138 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 042532613 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14779 FILM NUMBER: 553836 BUSINESS ADDRESS: STREET 1: 290 DONALD LYNCH BLVD CITY: MARLBOROUGH STATE: MA ZIP: 01752-4748 BUSINESS PHONE: 5084813700 MAIL ADDRESS: STREET 1: 290 DONALD LYNCH BLVD CITY: MARLBOROUGH STATE: MA ZIP: 01752 FORMER COMPANY: FORMER CONFORMED NAME: DATA TRANSLATION INC DATE OF NAME CHANGE: 19920703 10-K 1 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: November 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-14779 MEDIA 100 INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2532613 (State or other jurisdiction of (I.R.S. Employer Identification Number) organization or incorporation) 290 DONALD LYNCH BOULEVARD MARLBOROUGH, MASSACHUSETTS 01752-4748 (Address of principal executive offices, including zip code) (508) 460-1600 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: (NONE) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on January 31, 2000 as reported on the Nasdaq National Market System, was approximately $143,278,740. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 31, 2000, registrant had 8,599,823 Common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required in response to certain portions of Part III of Form 10-K is hereby incorporated by reference to the specified portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held in April 2000. ================================================================================ PART I This Report includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors That May Affect Future Results" and elsewhere in this Report, that could cause actual results to differ materially from historical results of those currently anticipated. In this Report, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned not to place undo reliance on these forward-looking statements, which speak only as of the date hereof. ITEM 1. BUSINESS COMPANY OVERVIEW Media 100 Inc., a Delaware corporation, (the "Company") develops, markets, sells, and supports digital video and web-based streaming media software and systems, or tools, that enable new Internet broadcasters and traditional broadcasters, corporate marketing professionals, and educators to create and deliver high-quality video programs quickly, easily, and with great creative flexibility. The Company markets and delivers its products to end users through its web sites as well as through a worldwide channel of specialized value-added resellers ("VARs") that sell, assemble, and install turnkey systems using personal computers, disk drives, and ancillary video equipment. Since the Company began first shipments of its products in 1993, it has shipped over 170,000 software applications and 25,000 systems to users in over 50 countries. The customers of the Company's digital video and streaming media software and systems include organizations that use video, including web-based streaming media, to teach, train, promote, communicate, document, and entertain. Many adopt the Company's tools for streaming media applications in which digital video is processed into specialized data streams that can be delivered from a web site. In addition, the Company is adding new customers who use its tools to edit and compress video for authoring DVD's. The Company's customers include major Internet-based networks and portals, traditional broadcasters and media companies, regional cable television stations, web site design and advertising agencies, film and video post-production facilities, independent production companies, performing arts facilities, professional sports organizations, university media departments, corporate training and marketing communications departments, as well as government, hospital, religious, and charity organizations. The Company's software and systems typically cost less than videotape-based systems and other computer-based products. Because of this lower cost, and because of their personal computer-based open architecture; their ease of use, and their support of Internet standards such as DV, RealNetworks' RealSystem G2, Microsoft's Windows Media, Apple Computer's QuickTime 4, and the variants of MPEG (Motion Pictures Experts Group), including MPEG1, MPEG2, MP3, and MPEG4, make the Company's products attractive to web site designers, media professionals, and educators. Many in the Internet and video industries consider the picture and sound output quality of the Company's products to be superior to other compression-based digital tools. This makes the Company's products attractive to advanced users at web-based, cable-based, and over-the-air television networks. The Company's strategy is to further simplify content creation and delivery by introducing additional streaming media capabilities that allow a large market of consumer, corporate, educational, and professional content creators to create and send a video over the Internet. The Company's Internet strategy includes introducing more products that are low cost, easy for consumers to use, easy to upgrade, and deliver high picture and sound quality regardless of media format or bit rate. The Company's products consist of software and, in the case of its advanced integrated systems, specialized hardware and embedded video processors that give users higher picture and sound quality and greater real-time capability. The high output quality in both Internet-based streaming media and traditional video applications, 2 combined with real-time performance, simplifies the process of creating and delivering a video. In comparison, traditional video creation and delivery methods, which rely on recording, storing, manipulating, and distributing a video using video tape; neither support real-time editing nor allow content creators to deliver video digitally over the Internet. Video tape-based systems also require content creators to separately purchase, assemble, learn to operate, and maintain numerous pieces of equipment, including multiple video tape recorders, time base correctors, an edit controller, switcher, separate effects devices, and a sound mixing console. This equipment is more expensive, difficult, and often results in lower quality output than creating and delivering video using personal computer-based tools from the Company. The Company's software and systems allow users to both create and deliver a high-quality video using disk storage and the Internet instead of video tape. Viewers can watch an Internet video using free media player software that lets them click on a web site and deliver video to their personal computer. The Company believes the simplicity of Internet video will allow it to succeed in a market of many new consumer, corporate, institutional, and professional media users. MARKET The Company believes that digital techniques for video editing, effects creation, and sound mixing, along with emerging Internet-specific techniques for delivering video, are changing how audio-visual content is created and distributed. Much as personal computer-based desktop publishing changed the technology and economics of offset printing, and made it possible for individuals to create and distribute their own publications easily and affordably, the Company's personal computer-based software and systems permit virtually any personal computer user to be a broadcaster. With the Company's products, individuals can both create and deliver a video themselves, especially through streaming, using the Internet as a broadcasting medium. The Company believes that as digital video (DV) camcorders, personal computers, and Internet access decrease in cost and increase in popularity, millions of businesses, schools, new media companies, and individuals will adopt digital video and streaming media technology. The Company classifies the digital video and streaming media market into three broad categories: consumers, the middle market; and media professionals. The consumer segment is new and driven by the convergence of DV camcorders, home PCs, and the Internet. The middle market consists of businesses and institutions adding Internet video to their web sites. The media professionals segment consists of new Internet-based broadcasters that are building streaming media web sites, which they plan to expand into commerce-oriented entertainment and communications powerhouses. CONSUMERS The Company uses the term, "consumers," to include individuals, businesses, and institutions that need to edit video at low cost and without complication. The Company believes this segment will grow rapidly in the future as consumers increase their purchases of DV camcorders that connect directly and easily to personal computers. The DV camcorder format allows consumers to capture video at high quality, then transfer the video digitally using an interface (cable and connector) standard, called IEEE 1394, that DV camcorders and a growing number of personal computers share. The Company believes that as more consumers adopt DV camcorders and personal computers, particularly for home Internet access, and as more personal computers incorporate the IEEE 1394 interface, this segment will grow to represent a significant opportunity. THE MIDDLE MARKET The middle market segment comprises businesses, schools, the government, self-employed independent producers, and small post-production facilities that provide video editing services to businesses and broadcast facilities. Businesses create video programs for internal purposes, like employee training, and external purposes such as corporate and marketing communications. Schools create video programs to support classroom instruction, create curricula, or capture a guest speaker or football game. Post-production facilities and independent producers create professional, broadcast-quality video programs for large corporate clients and regional and national broadcasting facilities. Middle market users are often computer and video literate, and invest in new personal computer-based technology to advance productivity, increase quality, and lower costs. Increasingly, these users are adopting video editing and streaming to add audio-visual content to their web sites. For web site developers at 3 schools, streaming media provides a low cost means to support distance learning and curriculum development using personal computers. Many of the Company corporate customers are creating web sites with streaming media to support marketing promotions and e-commerce. MEDIA PROFESSIONALS The media professionals segment comprises media companies, advertising agencies, specialized firms that design corporate web sites, and independent post-production facilities that service all of these groups as well as traditional broadcasters. Media companies include corporations like Disney, Viacom, and Time Warner that create original programming (content) for video, film, and print, as well as a new generation of web-based networks creating video content for deployment on a web site. Post-production companies are facilities that own state-of-the-art content creation equipment and employ full-time editors, graphic designers, and engineers, which they "rent out" to corporate, broadcast, agency, and film clients at hourly rates based on the sophistication of the selected people and equipment. Internet-based networks comprise new web sites that permit Internet users to stream video. The market for the Company's products is characterized by rapidly changing technology, evolving industry standards, and frequent new product introductions. The Company's future success will depend in part upon its ability to enhance its existing products and to introduce new products and features in a timely manner to address customer requirements, respond to competitive offerings, adapt to new emerging industry standards and take advantage of new enabling technologies that could render the Company's existing products obsolete. For a further discussion of the risks and uncertainties associated with new product development and product introductions and transitions, see "Certain Factors That May Affect Future Results" included in Part II, Item 7 of this Annual Report on Form 10-K. STRATEGY Media 100's mission is to be the leading supplier of digital video and streaming media tools to businesses, schools, institutions, and media organizations, particularly ones that are adopting the Internet as a medium for distributing audio-visual content. In 1999, the Company established a leading position in the market for streaming media tools. The Company introduced software and systems that allow web site designers, IT professionals, and new web-based broadcasters to create digital audio and digital video content, then stream this content over the Internet. The Company's products encompass support for multiple major streaming formats, both audio and video; and the Company intends to continue adding new support for emerging formats. To help accelerate its entry into the streaming media market place, the Company completed two acquisitions in calendar 1999 and announced a third. The first acquisition was Terran Interactive, Inc., which the Company closed in June 1999. On December 17, 1999, the Company announced it has entered into a definitive agreement to acquire the assets of Wired, Inc. Wired, Inc. is a fast growing supplier of MPEG streaming media production tools for the Internet and DVD authoring. The Company completed the acquisition at the end of December 1999. On December 28, 1999, the Company announced it had entered into a definitive agreement to acquire Digital Origin, Inc. Digital Origin, Inc. is a leading developer of digital video editing and effects software applications designed to support the new low-cost, high-quality DV camcorders used for acquiring video for Internet applications. The Company expects that the merger will be completed as a pooling of interest for accounting purposes, and a tax-free transaction. Under the agreement, the Company will issue 0.5347 shares of its common stock for each share of Digital Origin, Inc. common stock. The transaction is subject to the approval of the stockholders of Media 100 Inc. and Digital Origin, Inc. and other customary closing conditions. The merger is expected to be completed in the first half of calendar 2000. In addition, the company entered into a non-exclusive, four year OEM development and license agreement with Digital Origin by which Media 100 will use Digital Origin's consumer level editing and effects software with the Company's Internet streaming media software in exchange for royalty payments. 4 To increase its range of customers, the Company has developed relationships with popular content sites on the Internet while it also added thousands of corporate, educational, and government Internet users to its installed base. In 1999, the Company also announced new partnerships with major Internet developers like Apple Computer, encoding.com (renamed Loudeye.com), ExciteAtHome, and Microsoft that the Company believes will help further promote and distribute its solutions, services, and technology. An important element of the Company's strategy is that its software and systems tools support all three of the major competing streaming media player standards--these are Real Networks' RealSystem G2, Microsoft's Windows Media, and Apple's QuickTime 4--each can be downloaded by Internet users quickly, easily, and free of charge. The Company plans to continue to work directly with RealNetworks, Microsoft, and Apple Computer to help develop and popularize each of their respective media player standards, and to provide users with the capability to convert between the formats, which are all incompatible. The Company believes that this strategy gives it the advantage of being able to offer to customers--web site designers adding video to their web sites--the ability to create video programs that can be streamed--viewed--by the largest possible Internet audience. The Company estimates over 100 million individuals to date play audio and video content on the web using media players from RealNetworks, Microsoft, and Apple Computer. PRODUCTS The Company's product lines consist of digital video streaming media software and systems and a service line called Platinum. The first product line, Media Cleaner, comprises mainly cross-platform software applications used by web site designers for processing video into streams that web viewers can access with any standard media player. The second product line, sold under the iFinish and Media 100 names, comprises advanced, integrated, Windows NT-based and advanced Macintosh-based workstations that permit web site designers, corporate communicators, educators, and media professionals to digitally edit video, create effects, mix sound, and process finished video programs into standard media player-compatible or MPEG-compatible streams. The Company's Platinum service line comprises service and support packages that give users access to free, automatic software upgrades, 24-hour-per-day support, and other benefits such as extended warranties and fast turn-around on hardware swaps. INTERNET TOOLS MEDIA CLEANER PRODUCT LINE - WINDOWS AND MACINTOSH
Product Date of First Shipment by Product Features Media 100 Media Cleaner November 1999 Advanced system with Power Suite hardware-based streaming media acceleration Media Cleaner Pro June 1999 Flagship streaming media software application Media Cleaner EZ June 1999 Novice streaming media software application--"Wizard" based
MEDIA CLEANER PRODUCT LINE The Media Cleaner product line gives web site designers software tools to process audio and video originating from virtually anywhere into streams that they can host on their web sites for Internet users to click on and download 5 (stream) with the free media player software available from RealNetworks, Microsoft, and Apple Computer. The Media Cleaner products support the Windows and Macintosh platforms. In addition to supporting Internet video applications, the Media Cleaner tools also give video editors and content creators the ability to output video to CD-ROM and DVD. The software is easy to use and makes creating Internet video streams in multiple, different, incompatible formats--at multiple data rates--an easy, automated process, which saves time, money, and reduces complexity for the content creator. Today, the Company believes the picture and sound output quality of the streams that users can deliver using Media Cleaner products is the best in the industry, per format and bit rate. Media Cleaner is compatible with many third-party digital video systems, and gives iFinish and Media 100 users, in particular, interoperability features that simplify using the products together DIGITAL VIDEO SYSTEMS iFINISH PRODUCT LINE - WINDOWS NT PLATFORM
Product Date of First Shipment by Product Features Media 100 iFinish V80 December 1999 (1) High performance streaming media production with built-in DV, real-time editing, effects, and sound mixing iFinish V60 December 1999 (1) Complete streaming media production system with built-in DV, real-time audio processing, static chroma and luma key iFinish V40 December 1999 (1) Long-form editing system iFinish V20 DV December 1999 (1) Assembly system SDI Option June 1999 Add-on for serial digital I/O equipment MPEG Option February 2000 Add-on for real-time MPEG2 encoding
- ---------------- (1) Version 3.0 release iFINISH PRODUCT LINE iFinish is the name of the Company's new product line of high performance Windows NT streaming media production systems, which the Company began shipping in December 1999. These systems give middle market users and media professionals advanced content creation--video editing, effects, graphics, and sound mixing--along with integrated features for creating streams, based on technology in Media Cleaner. These systems are designed to allow content creators to assemble video programs using source material from virtually anywhere, analog or digital, then output their finished productions anywhere--to the web, to DVD, to tape, to cable, or to air. This workflow flexibility means iFinish users can invest themselves in creating valuable content once, then deliver it--"repurpose" it--in many different forms as traditional or new media. The iFinish products give content creators advanced performance, including real-time editing, effects design and processing in real time, and real-time sound mixing of numerous, CD-quality audio tracks. The systems are fully integrated, which means users find them easy to set up, easy to learn, and highly reliable in the field. 6 MEDIA 100 PRODUCT LINE - MACINTOSH PLATFORM
Product Date of First Shipment by Product Features Media 100 Media 100 xr November 1999 (2) High performance streaming media production with built-in DV, real-time editing, effects, and sound mixing Media 100 xs November 1999 (2) Complete streaming media production system with built-in DV, real-time audio processing, static chroma and luma key Media 100 xe November 1999 (2) Real-time graphics system: insert/assemble editing; uncompressed alpha channel; EDL support Media 100 lx November 1999 (2) Editing with component video connections Media 100 le November 1999 (2) Entry-level real-time editing SDI Option June 1999 Add-on for serial digital I/O equipment
- --------------- (2) Version 6.0 release. MEDIA 100 PRODUCT LINE The Company began first shipments of the version 6.0 release of the Media 100 product line in November 1999, giving Macintosh users new effects design capabilities, especially improved interoperability with Adobe's After Effects, and for the first time new streaming media features, based on technology in Media Cleaner. Version 6.0 also supports Apple Computer's latest generation of computers called "G4," giving users faster host-based processing. Like the iFinish systems, the Media 100 systems give a wide range of middle market users and media processionals high-quality, real-time content creation capability. The Company has shipped greater than 25,000 Media 100 systems worldwide since the version 1.0 release in 1993; the Media 100 installed base is active and purchases new releases of the Company's system software. SERVICES Platinum Support Services comprise technical support and service packages offered to customers for an annual fee. Customers purchase Platinum packages with options such as: toll-free telephone technical support (either during business hours, five days a week, or 24 hours per day, seven days a week); automatic free software updates; temporary replacement hardware; extended warranty; and a quarterly newsletter. In addition, the Company has from time to time offered hardware upgrades, replacement hardware, and new products to Platinum subscribers at preferred prices. The Company has also introduced the Platinum One-Stop service, in which subscribers can obtain telephone technical support for compatible third-party products integrated with their digital video system. 7 The Company develops all its software and systems tools with an open design to permit them to work directly, easily, reliably, and at high quality with other software applications, different host computer systems, peripherals, and video equipment. For its systems products, the Company's open system design strategy also facilitates utilization of value-added resellers ("VAR") as a sales channel. The VAR's regard as a business opportunity the configuration and sales of turnkey solutions to meet end user requirements. Therefore, although it sells hardware that integrates with personal computers, the Company does not typically resell the commodity personal computers and peripherals itself that are integral to digital video workstations. However, to ensure its systems are configured properly with the highest quality and latest computers and peripherals, the Company employs a formal continuous process of working with computer, disk storage, and various other peripherals suppliers to test, authorize, and promote specific configurations to the reseller channel. The Company believes this process fosters integral relations between the Company and its channel as well as a positive reputation for reliability among end users. In addition, the Company sells its Platinum services, which enables the Company to talk directly to the end users of its products all over the world, and provide a direct means for capturing and quantifying end user satisfaction with its products, channel partners, and services. TECHNOLOGY AND PRODUCT FEATURES The Company has designed its products as software applications or integrated software and hardware systems that offer high performance on a Windows or Macintosh personal computer. The basic performance of its tools produces broadcast-quality picture and compact disc-quality sound, with an open system design. The Company's control of the development, design and manufacturing of the software and hardware of its products allows it to conform one to the other, specifically and solely to support the user requirements of the target market. The Company's iFinish and Media 100 systems comprise two general categories of software: a user interface application level of software; and embedded system software, which controls real-time data movement in concert with the host computer operating system, while also serving to control hardware functions as an intermediary between the application and the hardware circuits. This software design shields users from technical concerns while providing efficient, reliable management over numerous, simultaneous low-level computing tasks. In addition, the Company's user interface provides a means for accessing other applications to bring graphics or specialized video and audio effects processing into the hub editing environment. The Company believes its application software is strategically valuable because it is at the center of its users' workflow. Each of the Company's systems use a digital video hardware engine designed and manufactured by the Company specifically to support essential video and audio processing functions. The hardware engine comprises one or two PCI cards that fit into the backplane of either a Windows NT or Macintosh computer. The hardware includes broadcast-quality video input and output decoder/encoder subsystems, a proprietary, dynamically-variable compression subsystem, a 16-bit eight-track compact disc-quality digital audio subsystem, and two high-speed 32-bit microprocessors responsible for transferring digital audio and video data, at throughput rates of up to 30 megabytes per second, inside the host computer's central processing unit ("CPU"). The Company's hardware engine is the primary technical facilitator of real-time, nonlinear performance with output that provides broadcast-quality video and compact disc-quality audio. The Company's auxiliary HDRfx effects card, when used in conjunction with a core digital video hardware engine, enables the processing of a second stream of video of similar quality. The output video is 30 frames per second, 60 fields per second (NTSC) or 25 frames per second, 50 fields per second (PAL) and synchronized with up to eight tracks of audio. SALES AND DISTRIBUTION The Company markets and delivers its products to end users through a worldwide channel of specialized value-added resellers ("VARs"), distributors, and direct to end users through its telemarketing group and its website. VARs and distributors account for the majority of the Company's sales and VARs typically sell, assemble, and install turnkey systems using personal computers, disk drives, and ancillary video equipment. For a further discussion of the risks and uncertainties associated with the Company's dependence on an indirect sales channel of independent VAR's, see "Certain Factors That May Affect Future Results" included in Part II, Item 7 of this Annual Report on Form 10-K. 8 Internationally, the Company has adopted the same sales channels. In the United Kingdom, France, Germany and Italy, the Company has subsidiaries which manage web site sales, VAR networks, and contract with distributors who may sell directly to end users or through VAR networks of their own. Elsewhere, the Company sells through distributors, which may sell directly to end users, or act as VARs, or manage VAR networks in their respective territories. Sales of Media 100 products outside of the United States represented approximately 39%, 44% and 44% of the Company's net sales for fiscal years 1999, 1998, and 1997, respectively. For additional information as to revenue by geographic location, see Note 12 in the Notes to Consolidated Financial Statements. For a further discussion of the risks and uncertainties associated with international operations, see "Certain Factors That May Affect Future Results" included in Part II, Item 7 of this Annual Report on Form 10-K. COMPETITION The digital video and streaming media software and systems market is highly competitive. A large number of suppliers provide different types of products, including video tape-based analog systems and disk-based digital systems such as the Company's products to different segments of the market. In the market, there is continuous pressure to reduce prices, incorporate new features, and improve functionality. The Company encounters competition primarily from Accom, Inc., Apple Computer, Avid Technology, Inc., Discreet Logic, Inc., a division of Autodesk ("Discreet"), Matrox Electronic Systems Ltd., Pinnacle Systems, Inc., RealNetworks, and Sonic Foundry. Competition also comes from Matsushita Electric Industrial Company Ltd. ("Matsushita") and Sony Corporation ("Sony"), which have either introduced or announced plans to introduce disk-based digital video systems. Because the digital video and streaming media market is constantly changing, it is difficult to predict future sources of competition; however, competitors are likely to continue to include larger vendors, such as Apple Computer, Matsushita, and Sony. Many of these competitors have substantially greater financial, technical and marketing resources than the Company. For a further discussion of the risks and uncertainties associated with the competitive landscape for the Company's products, see "Certain Factors That May Affect Future Results" included in Part II, Item 7 of this Annual Report on Form 10-K. RESEARCH AND DEVELOPMENT The Company invests in research and development for new products and for enhancements to its existing products. The Company employed, as of January 14, 2000, 80 full-time employees whose primary duties relate to product development and research on potential new products and technologies. Outside firms and consultants are selectively engaged to develop or assist with development of products when favorable opportunities exist. In order to compete successfully, the Company believes it must attract and retain qualified personnel and maintain a program of improvement of existing products, as well as the research and development of new products. For a further discussion of the risks and uncertainties associated with new product development, see "Certain Factors That May Affect Future Results" included in Part II, Item 7 of this Annual Report on Form 10-K. For the fiscal years ended November 30, 1999, 1998 and 1997, the Company invested approximately $13,074,000, $16,414,000 and $8,508,000, respectively, on the development of enhancements to its existing products and for the research and development of new products and technologies. MANUFACTURING The Company's manufacturing operations consist primarily of manufacturing and testing of printed circuit assemblies, final product assembly, quality assurance and shipping, and are conducted at its facility located in Marlboro, Massachusetts. The Company believes that its control of manufacturing significantly contributes to hardware design improvements, allows for quicker development of products for shipment to market, results in superior product quality, and lowers the total cost of goods for products manufactured by the Company. The Company periodically assesses its production efficiencies against the benefits of out-sourcing certain hardware production and has, on occasion, out-sourced certain products to third parties when it was determined to be more cost effective than internally manufacturing the product. 9 Components used in the assembly of the Company's hardware products are generally available from several distributors and manufacturers. However, the Company is dependent on single or limited source suppliers for several key components used in its products that have no ready substitutes, including various audio and video signal processing integrated circuits manufactured in each case only by Crystal Semiconductor Corp., Raytheon Company, LSI Logic Corp., Philips Semiconductors or Zoran Corp. The availability of many of these components is dependent on the Company's ability to provide suppliers with accurate forecasts of its future requirements, and certain components used by the Company have been subject to industry-wide shortages. For a further discussion of the risks and uncertainties associated with the Company's dependence on single or limited source suppliers, see "Certain Factors That May Affect Future Results" included in Part II, Item 7 of this Annual Report on Form 10-K. PROPRIETARY RIGHTS The Company's ability to compete successfully and achieve future revenue growth will depend, in part, on its ability to protect its proprietary technology and operate without infringing the rights of others. The Company relies on a combination of patent, copyright, trademark and trade secret laws and other intellectual property protection methods to protect its proprietary technology. In addition, the Company generally enters into confidentiality agreements with its employees and with third parties with which it shares its proprietary information, and limits access to and distribution of such information. The Company owns seven United States patents, beginning to expire in 2012, and has nine pending patent applications in the United States, none of which the Company believes are material. Although the Company pursues a policy of obtaining patents for appropriate inventions, the Company believes that its success depends primarily on the proprietary know-how, innovative skills, technical competence and marketing abilities of its employees, rather than upon the ownership of patents. Certain technology used in the Company's products is licensed from third parties on a royalty-bearing basis. Generally, such agreements grant to the Company non-exclusive, worldwide rights to the subject technology and are either renewable on a periodic basis or provide for fully paid-up non-cancellable rights upon the receipt of certain aggregate payments. In certain cases the licensor may terminate the license for convenience, although the Company believes that the effect of any such termination would not be material. For a further discussion of the risks and uncertainties associated with proprietary rights in the Company's industry and certain pending litigation, see Item 3 and "Certain Factors That May Affect Future Results" included in Part II, Item 7 of this Annual Report on Form 10-K. BACKLOG Most customers (VARs) order products on an as-needed basis relying, in the case of most products, on the Company's five-day delivery capability. As a result, the Company believes that its backlog at any point in time is not indicative of its future sales. EMPLOYEES As of January 14, 2000, the Company employed approximately 272 persons worldwide. None of the employees is represented by a labor union. The Company believes it has good relations with its employees. Competition for employees with the skills required by the Company is intense in the geographic areas in which the Company's operations are located. The Company believes that its future success will depend on its continued ability to attract and retain qualified employees, especially in research and development. OTHER Media 100, Finish, P6000, Vincent, HDRfx, Terran Interactive, Media Cleaner and Platinum are trademarks of Media 100 Inc. and may be registered in certain jurisdictions. All other trademarks and registered trademarks are the property of their respective holders, and are hereby acknowledged. 10 ITEM 2. PROPERTIES The Company's headquarters are located at 290 Donald Lynch Boulevard, Marlboro, Massachusetts where it occupies approximately 56,500 square feet in a leased facility and includes executive and manufacturing operations, along with certain engineering, and sales and marketing operations. The lease for this facility terminates on March 31, 2002. Prior to moving into its current facility on May 2, 1997, the Company's operations occupied approximately 31,000 square feet in a facility that it shared with Data Translation, Inc. located in Marlboro, Massachusetts. Total rental expense including operating expenses pursuant to the lease agreement with respect to the Company's current Marlboro facility for fiscal years 1999, 1998, and 1997 was $879,000, $822,000, and $542,000, respectively, and with respect to its former Marlboro facility the amount was $527,000 in fiscal year 1997. Rental expense with respect to the former Marlboro facility for fiscal 1997 reflected the Company's pro rata portion of the rental charges and operating expenses associated with that facility and the use by the Company of certain manufacturing equipment belonging to Data Translation, Inc. As part of the acquisition of Terran in June 1999, the Company occupies additional office space located at 15951 Los Gatos Boulevard, Suite 6, Los Gatos, California. The Company operates its Terran subsidiary out of this location where a majority of the engineering and sales and marketing for the Terran Interactive subsidiary is conducted. As part of the acquisition of Wired in December 1999, the Company also occupies additional space located at 1040-155 Grant Road, Building 155, Mountain View, California. Currently, the Company operates its Wired subsidiary out of this location where a majority of the distibution, engineering and sales and marketing is conducted. The Company also occupies sales and customer support facilities in or near Paris, France; Bracknell, England; Munich, Germany; and Brescia, Italy. ITEM 3. LEGAL PROCEEDINGS On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. ("Avid") in the United States District Court for the District of Massachusetts. The complaint generally alleges patent infringement by the Company arising from the manufacture, sale, and use of the Company's Media 100 products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In July 1995, the Company filed an answer and counterclaim denying any infringement and asserting that the Avid patent in question is invalid. The Company intends to vigorously defend the lawsuit. In addition, Avid is seeking reissue of the patent, including claims that it asserts are broader than in the existing patent, and these reissue proceedings remain pending before the U.S. Patent and Trademark Office. On January 16, 1998, the court dismissed the lawsuit without prejudice to either party moving to restore it to the docket upon completion of all matters pending before the U.S. Patent and Trademark Office. There can be no assurance that the Company will prevail in the lawsuit asserted by Avid or that the expense or other effects of the lawsuit, whether or not the Company prevails, will not have a material adverse effect on the Company's business, operating results and financial condition. From time to time the Company is involved in other disputes and/or litigation encountered in its normal course of business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company's business, operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders during the fourth quarter of fiscal year 1999. 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company trades on the National Market tier of The Nasdaq Stock Market under the symbol "MDEA." The following table sets forth, for the periods indicated, the high and low sales prices per share of the Company's common stock as reported on the Nasdaq National Market:
Fiscal year ended November 30, HIGH LOW 1998: First Quarter............................................ $ 5 7/8 3 1/4 Second Quarter........................................... $ 5 5/16 3 6/32 Third Quarter............................................ $ 4 1/4 3 1/8 Fourth Quarter........................................... $ 4 13/16 2 1/2 1999: First Quarter............................................ $ 6 5/16 4 3/16 Second Quarter........................................... $ 6 3/4 4 5/16 Third Quarter............................................ $ 7 1/16 4 11/16 Fourth Quarter........................................... $ 17 7/8 5 1/4
The last reported sale price per share of the Company's common stock as reported on the Nasdaq National Market on January 31, 2000 was $22.50. As of January 31, 2000, there were 217 stockholders of record, and the Company believes that as of such date there were approximately 2,700 beneficial owners of the Company's common stock, based upon information provided by the Company's transfer agent. The Company has never paid a cash dividend on its common stock, and the Board of Directors does not anticipate paying cash dividends in the foreseeable future. 12 ITEM 6. SELECTED FINANCIAL DATA The selected financial data should be read in conjunction with, and are qualified in their entirety by, the Company's consolidated financial statements, related notes and other financial information included herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: FISCAL YEARS ENDED NOVEMBER 30, - ------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Net sales: Products $42,624 $ 34,597 $ 41,950 $ 48,739 $ 29,872 Services 8,855 7,191 4,710 2,087 406 -------- --------- --------- --------- --------- Total net sales 51,479 41,788 46,660 50,826 30,278 Cost of sales 19,704 17,367 19,184 20,782 12,879 -------- --------- --------- --------- --------- Gross profit 31,775 24,421 27,476 30,044 17,399 Operating expenses: Research and development 13,074 16,414 8,508 6,227 4,806 Selling and marketing 14,208 13,870 15,115 14,330 8,920 General and administrative 4,225 3,810 4,330 5,034 2,024 Amortization of intangible assets 231 - - - - Acquired in-process research and development 430 - - - - Restructuring expense 424 - 526 - - -------- --------- --------- --------- --------- Total operating expenses 32,592 34,094 28,479 25,591 15,750 -------- --------- --------- --------- --------- Operating income (loss) (817) (9,673) (1,003) 4,453 1,649 Interest income 1,387 1,622 1,781 1,588 771 -------- --------- --------- --------- --------- Income (loss) from continuing operations before tax provision 570 (8,051) 778 6,041 2,420 Tax provision - - 161 1,208 75 -------- --------- --------- --------- --------- Income (loss) from continuing operations 570 (8,051) 617 4,833 2,345 -------- --------- --------- --------- --------- Discontinued operations: Income (loss) from discontinued operations - - - (6,672) 2,426 -------- --------- --------- --------- --------- Net income (loss) $ 570 $(8,051) $ 617 $ (1,839) $ 4,771 ======== ========= ========= ========= ========= Basic earnings (loss) per share: Continuing operations $ 0.07 $ (0.97) $ 0.07 $ 0.60 $ 0.39 Discontinued operations - - - (0.83) 0.40 -------- --------- --------- --------- --------- Basic earnings (loss) per share $ 0.07 $ (0.97) $ 0.07 $ (0.23) $ 0.79 ======== ========= ========= ========= ========= Diluted earnings (loss) per share: Continuing operations $ 0.06 $ (0.97) $ 0.07 $ 0.57 $ 0.35 Discontinued operations - - - (0.79) 0.36 -------- --------- --------- --------- --------- Diluted earnings (loss) per share $ 0.06 $ (0.97) $ 0.07 $ (0.22) $ 0.71 ======== ========= ========= ========= ========= Weighted average common shares outstanding: Basic 8,347 8,273 8,148 7,993 6,058 ======== ========= ========= ========= ========= Diluted 8,807 8,273 8,247 8,470 6,701 ======== ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA: FISCAL YEARS ENDED NOVEMBER 30, (IN THOUSANDS) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Cash, cash equivalents and marketable securities $ 28,400 $ 32,434 $ 32,934 $ 30,716 $ 35,161 Working capital 22,750 21,797 29,146 34,496 42,798 Total assets 45,843 48,472 50,759 59,990 60,984 Total stockholders' equity 31,249 30,473 37,843 50,065 46,909
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes forward-looking statements, including, but not limited to, statements with respect to the Company's future financial performance, operating results, plans and objectives, and actual results may differ materially from those currently anticipated depending upon a variety of factors, including those described below. See "Certain Factors That May Affect Future Results" herein. OVERVIEW Media 100 Inc., a Delaware corporation, (the "Company") engineers, markets, sells, and supports digital video and web-based streaming media software and systems--tools--that enable new Internet broadcasters and traditional broadcasters, corporate marketing professionals, and educators to create and deliver high-quality video programs quickly, easily, and with great creative flexibility. The Company markets and delivers its products to end users through its web sites as well as through a worldwide channel of specialized value-added resellers ("VARs") that sell, assemble, and install turnkey systems using personal computers, disk drives, and ancillary video equipment. Since the Company began first shipments of its products in 1993, it has shipped over 170,000 software applications and 25,000 systems to users in over 50 countries. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position, "Software Revenue Recognition" (SOP 97-2). SOP 97-2 provides revised and expanded guidance on software revenue recognition and applies to all entities that earn revenue from licensing, selling and otherwise marketing computer software. The Company adopted the provisions of SOP 97-2 as of December 1, 1997. In 1999, SOP 97-2 was modified by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain Transactions". Neither the adoption of 97-2, nor the adoption of 98-9, had a material impact on the Company. Net sales are recognized following establishment of persuasive evidence of an arrangement, provided that the license fee is fixed and determinable, delivery of product has occurred via physical shipment or electronically, a determination has been made by management that collection is probable and the Company has no remaining obligations. The Company provides for estimated returns at the time of shipment. The Company recognizes maintenance revenue from the sale of post-contract support services ratably over the life of the contract. RESULTS OF OPERATIONS The following table sets forth for the years indicated certain consolidated statements of operations data as a percentage of net sales.
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 ---- ---- ---- Net sales: Products 82.8% 82.8% 89.9% Services 17.2 17.2 10.1 ---------- ---------- ---------- Total net sales 100.0 100.0 100.0 Cost of sales 38.3 41.6 41.1 ---------- ---------- ---------- Gross profit 61.7 58.4 58.9 ---------- ---------- ---------- Operating expenses: Research and development expenses 25.4 39.3 18.2 Selling and marketing expenses 27.6 33.2 32.4 General and administrative expenses 8.2 9.1 9.3 Amortization of intangible assets 0.5 - - Acquired in-process research and development 0.8 Restructuring expense 0.8 - 1.1 ---------- ---------- ---------- Total operating expenses 63.3 81.6 61.0 Operating loss (1.6) (23.2) (2.1) Interest income 2.7 3.9 3.8 ---------- ---------- ---------- Income (loss) from operations before tax provision 1.1 (19.3) 1.7 Tax provision - - 0.4 ---------- ---------- ---------- Net income (loss) 1.1% (19.3)% 1.3% ========== ========== ==========
COMPARISON OF FISCAL 1999 TO FISCAL 1998 14 Net sales. The Company's total net sales for fiscal 1999 increased 23.2% to $51.5 million from $41.8 million for fiscal 1998. Net sales from products for fiscal 1999 increased 23.2% to $42.6 million from $34.6 million for fiscal 1998. The increase in net sales from products is due primarily to the shipment of Finish, the Company's high performance Windows NT-based product line, along with internet tools sales from the Company's wholly-owned subsidiary Terran Interactive. Internet tools sales increased to $4.1 million in fiscal 1999 from $0 in fiscal 1998. The Company completed the acquisition of Terran Interactive, Inc., ("Terran") a leading developer of streaming media tools for preparing high-quality video for broadcast on the Internet in June 1999. Net sales from services for fiscal 1999 increased 23.1% to $8.9 million from $7.2 million for fiscal 1998. The increase in net sales from services is due to new customers purchasing and current customers renewing their support contracts. Net sales from customers outside of the United States accounted for approximately 39% and 44% of net sales in fiscal 1999 and fiscal 1998, respectively. The Company is continuing to develop its indirect distribution channels in the United States, Canada, Europe and Asia and currently anticipates that customers outside the United States will continue to account for a substantial portion of its net sales, and as a percentage of net sales, to remain approximately the same. No customer accounted for more than 10% of the Company's total net sales in fiscal 1999. Gross profit. The Company's gross profit increased 30.1% to $31.8 million in fiscal 1999 from $24.4 million in fiscal 1998. In the first quarter of fiscal 1999, the Company reclassified certain costs associated with its Platinum support services. The Company now classifies these costs as part of cost of goods sold. The change in presentation had the affect of increasing cost of goods sold and reducing selling and marketing expenses by the same amount. Certain amounts in the comparable period last year have been reclassified to conform to the current year's presentation. Overall gross profit as a percentage of net sales increased to 61.7% in fiscal 1999 from 58.4% in fiscal 1998. Gross profit as a percentage of net sales of products increased to 56.7% in fiscal 1999 from 53.0% in fiscal 1998, while gross profit as a percentage of net sales of services increased to 85.7% in fiscal 1999 from 84.2% in fiscal 1998. The increase in gross profit in fiscal 1999 over fiscal 1998 is due primarily to increased service revenue, which generate higher gross profit than products, and standalone software sales as a result of the acquisition of Terran in June 1999. Research and development. Research and development expenses decreased 20.3% to $13.1 million in fiscal 1999 from $16.4 million in fiscal 1998. The majority of the decrease in research and development expenses represented lower development costs due to the completion of Finish, the Company's high-performance Windows NT-based product line, which began shipping in the first quarter of fiscal 1999. The Company currently anticipates research and development expenses will increase in absolute dollars in fiscal 2000 versus fiscal 1999 due to the acquisitions of Terran and Wired, Inc. and the planned development of their products. Selling and marketing. Selling and marketing expenses increased 2.4% to $14.2 million in fiscal 1999 from $13.9 million in fiscal 1998. Selling expenses consist primarily of salaries and related benefits, commissions, travel, occupancy and depreciation. Marketing expenses consist primarily of salaries and related benefits, trade shows, seminars, advertising, sales literature and lead generation activities. The increase in selling and marketing expenses resulted primarily from the acquisition of Terran and the Company's promotion of the streaming media tools acquired as part of the transaction. The Company currently anticipates that its selling and marketing expenses will increase in absolute dollars in fiscal 2000 versus fiscal 1999 as the Company increases its focus on the Internet and the related support of the Company's promotion of its streaming media tools. General and administrative. General and administrative expenses increased 10.9% to $4.2 million in fiscal 1999 from $3.8 million in fiscal 1998. General and administrative expenses include the cost of human resources, finance, information technology, legal and other administrative functions of the Company. The increase in general and administrative expenses resulted primarily from increased personnel costs in support of higher net sales. The Company currently anticipates that its general and administrative expenses will increase modestly in fiscal 2000 compared to fiscal 1999 in support of higher anticipated net sales. Amortization of intangible assets. The Company recorded an expense for the amortization of intangible assets of $231,000 in fiscal 1999 as a result of the acquisition of Terran. In fiscal 2000 the Company will record additional amortization expense for Terran and for the acquisition of Wired, Inc., an acquisition that closed in early fiscal 2000. There was no similar expense recorded in fiscal 1998. 15 Acquired in-process research and development. In connection with the acquisition, the Company allocated $430,000 of the purchase price to in-process research and development projects. These allocations represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. In fiscal 2000, the Company anticipates it will incur additional acquired in-process research and development expense related to the acquisition of Wired, Inc. Restructuring expense. In the third quarter of fiscal 1999, the Company implemented a restructuring plan to better align its organization with its corporate strategy. The major component of the restructuring charge relates to the elimination of approximately 12 employees across the following functions: research and development (4), selling and marketing (7) and general and administration (1). At November 30, 1999 approximately $232,000 of the accrued restructuring charge remained, which is entirely comprised of severance-related costs. The total cash impact of the restructuring amounted to approximately $424,000. The total cash paid as of November 30, 1999 was $192,000 and the remaining amount will be paid by the end of the first quarter in fiscal 2000. Interest income. Interest income decreased 14.5% to $1.4 million in fiscal 1999 from $1.6 million in fiscal 1998. The decrease in interest income is due primarily to lower cash and cash equivalent balances in fiscal 1999 versus 1998. The Company currently anticipates interest income will decline in fiscal 2000 versus 1999 due to a reduction in cash early in fiscal year 2000 resulting from the acquisition of Wired, Inc., which the Company completed in December 1999, and due to an additional cash payment due to the shareholders of Terran. Tax provision. The Company did not provide for a tax provision in fiscal 1999 due to the utilization of net operating loss carryforwards and tax credits available to the Company to offset against operating income. Net income (loss). As a result of the above factors, the Company had net income in fiscal 1999 in the amount of $570,000, or $0.06 per diluted share, compared to a net loss of ($8,051,000), or ($0.97) per share, in fiscal 1998. COMPARISON OF FISCAL 1998 TO FISCAL 1997 Net sales. The Company's net sales for fiscal 1998 decreased 10.4% to $41.8 million from $46.7 million for fiscal 1997. The decline is due primarily to decreased unit sales of Macintosh product and the Company not having a product available for sale on the Windows NT platform until late in the year. Net sales from the Company's products running on the Macintosh platform declined in 1998 from 1997 due to lower unit sales as more customers opted to either wait until the Company introduces products running on the Windows NT platform or chose other products from the Company's competitors. Net sales from Platinum Support Services, the Company's technical support and service products, increased 52.7% to $7.2 million from $4.7 million for fiscal 1997 as new customers purchased support contracts and existing customers renewed their support contracts. Net sales from customers outside of the United States accounted for approximately 44% of net sales in both fiscal 1998 and fiscal 1997. The Company is continuing to develop its indirect distribution channels in the United States, Canada, Europe and Asia and currently anticipates that customers outside the United States will continue to account for a substantial portion of its net sales, and as a percentage of net sales, to remain approximately the same. No customer accounted for more than 10% of the Company's total net sales in fiscal 1998. Gross profit. The Company's gross profit decreased 11.1% to $24.4 million in fiscal 1998 from $27.5 million in fiscal 1997. In the first quarter of fiscal 1999, the Company reclassified certain costs associated with its Platinum support services. The Company now classifies these costs as part of cost of goods sold. The change in presentation had the affect of increasing cost of goods sold and reducing selling and marketing expenses by the same amount. Certain amounts in fiscal 1998 and fiscal 1997 have been reclassified to conform to the current year's presentation. Overall gross profit as a percentage of net sales decreased to 58.4% in fiscal 1998 from 58.9% in fiscal 1997. Gross profit as a percentage of net sales of products decreased to 53.0% in fiscal 1998 from 56.5% in fiscal 1997, while gross profit as a percentage of net sales of services increased to 84.2% in fiscal 1998 from 79.9% in fiscal 1998. The decrease in the gross profit as a percentage of net sales from products is due to a decrease in the average selling price for the Company's products. 16 Research and development. Research and development expenses increased 92.9% to $16.4 million in fiscal 1998 from $8.5 million in fiscal 1997. Early in 1998, the Company announced a major research and development expansion to develop multiple new Windows NT products, while continuing to develop its products that use Macintosh as a platform. Research and development expenses consist primarily of the cost of personnel, outside consulting services, depreciation on capital equipment, and occupancy. Selling and marketing. Selling and marketing expenses decreased 8.2% to $13.9 million in fiscal 1998 from $15.1 million in fiscal 1997. Selling expenses consist primarily of salaries and related benefits, commissions, travel, occupancy and depreciation. Marketing expenses consist primarily of salaries and related benefits, trade shows, seminars, advertising, sales literature and lead generation activities. General and administrative. General and administrative expenses decreased 12.0% to $3.8 million in fiscal 1998 from $4.3 million in fiscal 1997. General and administrative expenses include the cost of human resources, finance, information technology, legal and other administrative functions of the Company. The decrease in general and administrative expenses resulted primarily from lower personnel costs due to attrition. Interest income. Interest income decreased 8.9% to $1.6 million in fiscal 1998 from $1.8 million in fiscal 1997. The decrease in interest income is due to slightly lower cash and cash equivalent balances in fiscal 1998 versus 1997 and to a reduction in interest rates for the securities in held in the portfolio. Tax provision. The Company did not provide for a tax provision in fiscal 1998 due to the significant net loss. Net income (loss). As a result of the above factors, the Company incurred a net loss for fiscal 1998 in the amount of ($8,051,000), or ($0.97) per share, compared to net income of $617,000, or $0.07 per share. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily from public offerings of equity securities and cash flows from operations. As of November 30, 1999 the Company's principal sources of liquidity included cash and cash equivalents and marketable securities totaling approximately $28,400,000. During fiscal 1999, cash used in operating activities was approximately $653,000 compared to cash provided by operating activities of approximately $1,922,000 for the same period a year ago. Cash used in operations during fiscal 1999 resulted from increases in accounts receivable of $831,000, inventories of $511,000, prepaid expenses of $93,000, other assets of $69,000, reductions in accounts payable of $709,000, accrued expenses of $2,515,000 primarily related to the payment of certain consulting fees, deferred revenue of $855,000. Net cash provided by investing activities was approximately $2,947,000 in fiscal 1999 compared to approximately $957,000 for the same period a year ago. Cash provided by investing activities during 1999 was derived from the proceeds of sales of marketable securities, net of purchases of approximately $6,556,000. This was offset by approximately $1,571,000 of capital expenditures for equipment and purchased software for internal use, purchase of intangible assets of $147,000 and the acquisition of Terran Interactive, Inc. of $1,890,000. Cash provided by financing activities during 1999 was approximately $700,000 compared to $278,000 for the same period a year ago. In 1999, cash provided by financing activities resulted from the proceeds from the sale of treasury shares and stock plans of $990,000 and was partially offset by the repurchases of the Company's common stock of $290,000. The Company believes its existing cash balance, including cash equivalents and marketable securities, will be sufficient to meet the Company's cash requirements for at least the next twelve months. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Except for the historical information contained herein, the matters discussed in this Form 10-K are forward-looking statements, and are based on current expectations, and involve known and unknown risks, uncertainties and other 17 factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those expressed in such forward-looking statements. The risks and uncertainties associated with such statements include the following: ACQUISITION RELATED RISKS. During fiscal year ended November 30, 1999, the Company completed the Terran acquisition. In addition, the Company has completed the acquisition of Wired, Inc. and has also signed a definitive agreement to acquire Digital Origin, Inc. The transaction is subject to the approval of the stockholders of Media 100 Inc. and Digital Origin, Inc. and other customary closing conditions. The Company anticipates the merger will be completed in the first half of calendar 2000. The Company's business and results of operations could be materially adversely affected in the event the Company fails to complete publicly announced acquisitions or to successfully integrate the business and operations of these acquisitions. The Company may continue in the future to acquire existing businesses, products, and technologies to enhance and expand its line of products. Such acquisitions may be material in size and in scope. There can be no assurance that the Company will be able to identify, acquire, or profitably manage additional business or successfully integrate any acquired businesses into the Company without substantial expenses, delays, or other operational or financial problems. Acquisitions involve a number of special risks and factors, including increasing competition for attractive acquisition candidates in the Company's markets, the technological enhancement and incorporation of acquired products into existing product lines and services, the assimilation of the operations and personnel of the acquired companies, failure to retain key acquired personnel, adverse short-term effects on reported operating results, the amortization of acquired intangible assets, the assumption of undisclosed liabilities of any acquired companies, the failure to achieve anticipated benefits such as cost savings and synergies, as well as the diversion of management's attention during the acquisition and integration process. Some or all of these special risks and factors may have a material adverse impact on the Company's business, operating results, and financial condition. SIGNIFICANT FLUCTUATIONS AND UNPREDICTABILITY OF OPERATING RESULTS. The Company's quarterly operating results may vary significantly for a number of reasons, including new product announcements and introductions by the Company or its competitors, changes in pricing, and the volume and timing of orders received during the quarter. The Company has also in the past experienced delays in the development of new products and enhancements, and such delays may occur in the future. These factors make the forecasting of revenue inherently uncertain. Additionally, a significant portion of the Company's operating expenses is relatively fixed, and operating expense levels are based primarily on internal expectations of future revenue. As a consequence, quarterly operating expense levels cannot be reduced rapidly in the event that quarterly revenue levels fail to meet internal expectations. Therefore, if quarterly revenue levels fail to meet internal expectations, the Company's operating results would be adversely affected. EMERGING MARKETS. The Company is targeting the emerging market of new Internet-based broadcasters that are building streaming media web sites and businesses and institutions that are adding Internet video to their web sites. This market and the products utilized by these users are relatively new. The Company's success in this emerging market will depend on the rate at which the market develops and the Company's ability to penetrate that market. In addition, in fiscal 2000, the Company plans to begin targeting consumers who are looking to edit video at low cost and without complication. The Company believes this market will grow rapidly in the future as consumers increase their purchases of DV camcorders that connect directly to personal computers. Using a DV camcorder, a home PC and the Internet, the Company believes consumers will be able to capture, edit and stream video simply and easily. The Company's future growth will depend, in part, on the rate at which consumers purchase DV camcorders and adopt editing and streaming technology. There can be no assurance that the use of digital video editing and streaming products, like the ones offered by the Company, will expand among existing users of video production processes or the market for new users. Any failure of the Company's products to achieve market acceptance in these markets, as a result of competition, technological change or other factors, could have a material adverse effect on the Company's business and operating results. RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. New product announcements by the Company's competitors and by the Company itself could have the effect of reducing customer demand for the Company's existing products. The introduction of new or enhanced products by the Company also requires the Company to manage the transitions from existing products. New product introductions require the Company to devote time and resources to the training of its sales channel in the features and target customers for such new 18 products, which efforts could result in less selling efforts being made by the sales channel during such training period. New product announcements or introductions could contribute to significant quarterly fluctuations in operating results as orders for new products commence and orders for existing products decline. RAPID TECHNOLOGICAL CHANGE. The market for the Company's products is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. The Company's future success will depend in part upon its ability to enhance its existing products and to introduce new products and features in a timely manner to address customer requirements, respond to competitive offerings, adapt to new emerging industry standards and take advantage of new enabling technologies that could render the Company's existing products obsolete. The Company plan in fiscal 2000 is to continue its investment in research and development, in connection with the Company's development strategy. Any delay or failure of the Company in developing additional new products or features for existing products or any failure of such new products or features to achieve market acceptance, could have a material adverse effect on the Company's business and operating results. COMPETITION. The market for the Company's products is highly competitive and characterized by pressure to reduce prices, incorporate new features and accelerate the release of new products. A number of companies currently offer products that compete directly or indirectly with the Company's products, including Accom, Inc., Apple Computer Inc., Avid Technology, Inc., Discreet (a division of Autodesk, Inc.), FAST Electronic GmbH, Matrox Electronic Systems Ltd., Pinnacle Systems, Inc., Real Networks Inc., and Sonic Foundry, Inc. In addition, the Company expects much larger vendors, such as Matsushita Electric Industrial Company Ltd., Microsoft Corporation, and Sony Corporation, to develop and introduce digital editing systems that may compete with the Company's products. Many of these current and potential competitors have greater financial, technical and marketing resources than the Company. As a result, such competitors may be able to develop products comparable to or superior to the Company's products, adapt more quickly than the Company to new technologies, evolving industry standards or customer requirements, or lower their product costs and thus be able to lower prices to levels at which the Company could not operate profitably, the occurrence of any of which could have a material adverse effect on the Company's business and operating results. In this regard, the Company believes that it will continue to experience competitive pressure to reduce prices, particularly for its high data rate systems. The Company has historically realized higher gross profit on the sale of its high data rate systems than its entry-level systems, and such continued competitive pricing pressure could result in lower sales and gross margin, which in turn could adversely affect the Company's operating results. DEPENDENCE ON AND COMPETITION WITH APPLE COMPUTER, INC. As a competitor, Apple Computer, Inc. ("Apple") could, in the future, inhibits the Company's ability to develop its products that operate on the Macintosh platform. Additionally, new products and enhancements to existing products from Apple such as Final Cut Pro could cause customers to delay purchases of the Company's products or alter their purchase decision altogether. Furthermore, as the sole supplier of Macintosh computers, any disruption in the availability of these computers could cause customers to defer or alter their purchase of the Company's products. The Company relies on access to key information from Apple to continue development of its products and any failure to continue supplying the Company's engineers with this information could have a material adverse affect on the Company's business and financial results. DEPENDENCE ON MICROSOFT CORPORATION. Many of the Company's products operate in the Windows environment and the Company's engineers depend upon access to information in advance from Microsoft Corporation ("Microsoft"). Any failure to continue supplying the Company's engineers with this information could have a material adverse affect on the Company's business and financial results. DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS. The Company is dependent on single or limited source suppliers for several key components used in its products. The availability of many of these components is dependent on the Company's ability to provide suppliers with accurate forecasts of its future requirements, and certain components used by the Company have been subject to industry-wide shortages. The Company does not carry significant inventories of these components and has no guaranteed supply arrangements with such suppliers. There can be no assurance that the Company's inventories would be adequate to meet the Company's production needs during any interruption of supply. The Company's inability to develop alternative supply sources, if required, 19 or a reduction or stoppage in supply, could delay product shipments until new sources of supply become available, and any such delay could adversely affect the Company's business and operating results in any given period. DEPENDENCE ON PROPRIETY TECHNOLOGY. The Company's ability to compete successfully and achieve future revenue growth will depend, in part, on its ability to protect its proprietary technology and operate without infringing the rights of others. The Company has in the past received, and may in the future continue to receive, communications suggesting that its products may infringe patents or other intellectual property rights of third parties. The Company's policy is to investigate the factual basis of such communications and negotiate licenses where appropriate. While it may be necessary or desirable in the future to obtain licenses relating to one or more products, or relating to current or future technologies, there can be no assurance that the Company will be able to do so on commercially reasonable terms or at all. There can be no assurance that these or other future communications can be settled on commercially reasonable terms or that they will not result in protracted and costly litigation. RISKS OF THIRD-PARTY CLAIMS OF INFRINGEMENT. There has been substantial industry litigation regarding patent, trademark and other intellectual property rights involving technology companies. In the future, litigation may be necessary to enforce any patents issued to the Company or to enforce trade secrets, trademarks and other intellectual property rights owned by the Company, to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. For a description of certain pending litigation instituted against the Company, see Item 3, Legal Proceedings and Note 7(b) to the Consolidated Financial Statements included herein. Any such litigation could be costly and a diversion of management's attention, which could adversely affect the Company's business, operating results and financial condition. Adverse determinations in any such litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products, any of which could adversely affect the Company's business, operating results and financial condition. DEPENDENCE ON RESELLERS. The Company relies primarily on its worldwide network of independent VARs to distribute and sell its content creation products to end-users. The Company's resellers generally offer products of several different companies, including in some cases products that are competitive with the Company's products. In addition, many of these VARs are small organizations with limited capital resources. There can be no assurance that the Company's resellers will continue to purchase the Company's products or provide them with adequate levels of support, or that the Company's efforts to expand its VAR network will be successful, any significant failure of which could have a material adverse effect on the Company's business and operating results. RELIANCE ON INTERNATIONAL SALES. International sales and operations may be subject to risks such as the imposition of government controls, export license requirements, restrictions on the export of critical technology, less effective enforcement of proprietary rights; currency exchange fluctuations, generally longer collection periods, political instability, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations, potential insolvency of international resellers and difficulty in collecting accounts receivable. The Company's international sales are also subject to more seasonal fluctuation than domestic sales. In this regard, the traditional summer vacation period, which occurs during the Company's third fiscal quarter, may result in a decrease in sales, particularly in Europe. There can be no assurance that these factors will not have an adverse effect on the Company's future international operations and consequently, on the Company's business and operating results. INTERNET-BASED SALES. In fiscal 1999, the Company implemented e-commerce systems allowing customers to purchase the Company's products directly from its web site. Although the portion of revenue derived from its e-commerce web site was less than five percent in fiscal 1999, the Company anticipates revenue derived from its e-commerce web site to ramp up in fiscal 2000. There can be no assurances that the Company's customers will continue to purchase the Company's products from its web site or that the web site will not experience technical difficulties thereby causing customers to delay purchases. Any significant technical difficulties could have a material adverse effect on the Company's business and operating results. DEPENDENCE ON KEY PERSONNEL. Competition for employees with the skills required by the Company is intense in the geographic areas in which the Company's operations are located. The Company believes that its future success 20 will depend on its continued ability to attract and retain qualified employees, especially in research and development. EURO CONVERSION. On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the euro. As of January 1, 2002, the transition to the euro will be complete. The Company has operations within the European Union and has prepared for the euro conversion. The Company does not expect the costs associated with the transition to be material. However, the overall effect of the transition to the euro may have a material adverse affect on the Company's business, financial condition and financial results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company is not a party to any derivative financial instruments or other financial instruments for which the fair value disclosure would be required under Statement of Financial Accounting Standards No. 107 DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY INSTRUMENTS ( SFAS No. 107). All of the Company's investments are in short-term, investment grade commercial paper, certificates of deposit and U.S. Government and agency securities that are carried at fair value on the Company's books. Accordingly, the Company believes that the market risk of such investments is minimal. Primary Market Risk Exposures. The Company's primary market risk exposures are in the area of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. The Company's business in Europe is conducted in local currency. In Asia, business is conducted in US currency. The Company has no foreign exchange contracts, option contracts or other foreign hedging arrangements. However, the Company estimates that any market risk associated with its foreign operations is not significant and is unlikely to have a material adverse effect on the Company's business, results of operations, or financial condition. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements, together with the auditors' report thereon, appear on pages F-1 through F-21 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 21 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The Company will furnish to the Securities and Exchange Commission not later than 120 days after the close of its fiscal year ended November 30, 1999 a definitive Proxy Statement (the "Proxy Statement") for the Annual Meeting of Stockholders to be held in April 2000. The information required by this Item is incorporated herein by reference to "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to "Election of Directors" and "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to "Certain Relationships and Related Transactions" in the Proxy Statement. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report:
PAGE ---- (a) (1) Consolidated Financial Statements. MEDIA 100 INC. AND SUBSIDIARIES Report of Independent Public Accountants............................................ F-2 Consolidated Balance Sheets as of November 30, 1999 and 1998........................ F-3 Consolidated Statements of Operations for the Fiscal Years Ended November 30, 1999, 1998 and 1997............................................... F-4 Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended November 30, 1999, 1998 and 1997............................................... F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended November 30, 1999, 1998 and 1997............................................... F-6 Notes to Consolidated Financial Statements.......................................... F-7
(a) (2) Financial Statement Schedules. Not applicable. (a) (3) List of Exhibits. 3.1 Restated Certificate of Incorporation of Media 100 Inc. (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 3.2 By-laws of Media 100 Inc., as amended through June 17, 1998 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31,1998 and incorporated by reference herein). 22 4 Specimen Certificate representing the Company's Common Stock (filed as Exhibit 4 to the Company's Registration Statement on Form S-1, File No. 2-94121 and incorporated by reference herein). 10.1* Key Employee Incentive Plan (1982), as amended through November 15, 1996 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.2* 1986 Employee Stock Purchase Plan, as amended through April 14, 1999 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated by reference herein). 10.3* Key Employee Incentive Plan (1992), as amended through April 14, 1999 (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated by reference herein). 10.4* Media 100 Inc. 401(k) Savings Plan (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein). 10.5.1 Lease dated January 31, 1997 relating to 290 Donald Lynch Boulevard, Marlboro, MA (filed as Exhibit 10.5.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.5.2 License Agreement dated as of January 31, 1997 relating to 290 Donald Lynch Boulevard, Marlboro, MA (filed as Exhibit 10.5.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.6.1 Distribution Agreement dated as of November 19, 1996 with Data Translation II, Inc. (DTI) (filed as Exhibit 10.8.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.6.2 Intellectual Property Agreement dated as of December 2, 1996 with DTI (filed as Exhibit 10.8.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.6.3 Corporate Services Agreement dated as of December 2, 1996 with DTI (filed as Exhibit 10.8.3 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.6.4 Amendment to Corporate Services Agreement dated November 18, 1997 (filed as Exhibit 10.6.4 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein). 10.9 Offer Letter from the Company to B. Robert Feingold (filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31,1998 and incorporated by reference herein). 10.10 Agreement and Plan of Merger and Reorganization, dated May 6, 1999 with Terran Interactive, Inc. (files as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated by reference herein). 10.11 Asset Purchase Agreement, dated December 17, 1999 with Wired, Inc. (files as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended November 30, 1999 and incorporated by reference herein). 10.12 Agreement and Plan of Merger By and Among Media 100 Inc. and Digital Origin, Inc., dated December 28, 1999. 23 10.13 OEM Development and License Agreement, dated December 28, 1999 with Digital Origin, Inc. 21 Subsidiaries of Media 100 Inc. (filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein). 23 Consent of Arthur Andersen LLP. 24 Power of Attorney (included in the signature page of this Annual Report on Form 10-K). 27 Financial Data Schedule. * Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Media 100 Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 25, 2000. Media 100 Inc. By: /s/ John A. Molinari -------------------------------- John A. Molinari Chief Executive Officer and President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and directors of Media 100 Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints John A. Molinari and Steven D. Shea, and each of them, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully for all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ John A. Molinari Chief Executive Officer, President February 25, 2000 - ---------------------------------- and Director John A. Molinari (Principal Executive Officer) /s/ Steven D. Shea Vice President of Finance February 25, 2000 - ---------------------------------- and Treasurer Steven D. Shea (Principal Financial Officer) /s/ Maurice L. Castonguay Director February 25, 2000 - ---------------------------------- Maurice L. Castonguay /s/ Roger W. Redmond Director February 25, 2000 - ---------------------------------- Roger W. Redmond /s/ Bruce Sachs Director February 25, 2000 - ---------------------------------- Bruce Sachs /s/ Paul J. Severino Director February 25, 2000 - ---------------------------------- Paul J. Severino
25 INDEX TO FINANCIAL STATEMENTS PAGE MEDIA 100 INC. AND SUBSIDIARIES Report of Independent Public Accountants.............................................. F-2 Consolidated Balance Sheets as of November 30, 1999 and 1998.......................... F-3 Consolidated Statements of Operations for the Fiscal Years Ended November 30, 1999, 1998 and 1997................................................. F-4 Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended November 30, 1999, 1998 and 1997................................................. F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended November 30, 1999, 1998 and 1997................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Media 100 Inc.: We have audited the accompanying consolidated balance sheets of Media 100 Inc. (a Delaware corporation) and subsidiaries as of November 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended November 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Media 100 Inc. and subsidiaries as of November 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Boston, Massachusetts January 4, 2000 F-2 MEDIA 100 INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
November 30, November 30, 1999 1998 -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 10,231 $ 7,249 Marketable securities 18,169 25,185 Accounts receivable, net of allowance for doubtful accounts of $402 in 1999 and $395 in 1998 6,381 5,372 Income tax refund receivable 149 280 Inventories 1,478 967 Prepaid expenses 936 743 -------------- -------------- Total current assets 37,344 39,796 Property and equipment, net 6,509 8,363 Intangible assets, net 1,560 - Other assets, net 430 313 -------------- -------------- Total assets $ 45,843 $ 48,472 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,892 $ 2,259 Accrued expenses 7,509 9,692 Deferred revenue 5,193 6,048 -------------- -------------- Total current liabilities 14,594 17,999 Commitments and contingencies (Note 7) Stockholders' equity: Preferred stock, $.01 par value, Authorized - 1,000,000 shares, none issued - - Common stock, $.01 par value, Authorized - 25,000,000 shares Issued - 8,485,835 and 8,327,847 shares at November 30, 1999 and 1998, respectively Outstanding - 8,485,714 and 8,279,847 shares at November 30, 1999 and 1998, respectively 85 83 Capital in excess of par value 41,452 40,917 Accumulated deficit (10,028) (10,598) Treasury stock, at cost - 121 and 48,000 shares at November 30, 1999 and 1998 - (163) Accumulated other comprehensive income (loss) (260) 234 -------------- -------------- Total stockholders' equity 31,249 30,473 -------------- -------------- Total liabilities and stockholders' equity $ 45,843 $ 48,472 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-3 MEDIA 100 INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 ------------ ------------ ------------- Net sales: Products $ 42,624 $ 34,597 $41,950 Services 8,855 7,191 4,710 ------------ ------------ ------------- Total net sales 51,479 41,788 46,660 Cost of sales 19,704 17,367 19,184 ------------ ------------ ------------- Gross profit 31,775 24,421 27,476 ------------ ------------ ------------- Operating expenses: Research and development 13,074 16,414 8,508 Selling and marketing 14,208 13,870 15,115 General and administrative 4,225 3,810 4,330 Amortization of intangible assets 231 - - Acquired in-process research and development 430 - - Restructuring expense 424 - 526 ------------ ------------ ------------- Total operating expenses 32,592 34,094 28,479 ------------ ------------ ------------- Operating loss (817) (9,673) (1,003) Interest income 1,387 1,622 1,781 ------------ ------------ ------------- Income (loss) from operations before tax provision 570 (8,051) 778 Tax provision - - 161 ------------ ------------ ------------- Net income (loss) $ 570 $ (8,051) $ 617 ============ ============ ============= Basic earnings (loss) per share $ .07 $ (0.97) $ 0.07 ============ ============ ============= Diluted earnings (loss) per share $ .06 $ (0.97) $ 0.07 ============ ============ ============= Weighted average common shares outstanding: Basic 8,347 8,273 8,148 ============ ============ ============= Diluted 8,807 8,273 8,247 ============ ============ =============
The accompanying notes are an integral part of these consolidated financial statements. F-4 MEDIA 100 INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Stock Retained Accumulated $.01 Par Value Capital in Earnings/ Other Comprehensive -------------------- Excess of (Accumulated Treasury Comprehensive Income (loss) Shares Amount Par Value Deficit) Stock Income (loss) - ---------------------------------------------------------------------------------------------------------------------------- Balance, November 30, 1996 - 8,087,884 $ 81 $ 40,035 $ 9,826 $ - $ 123 Issuance of common stock under stock plans - 104,470 1 442 - - - Dividend of Data Translation II, Inc. stock to stockholders - - - - (12,990) - - Comprehensive Income: Net income 617 - - - 617 - - Unrealized loss on available for sale securities (82) - - - - - (82) Translation adjustment (210) - - - - - (210) ------- Comprehensive income 325 - - - - - - ------- ------------- ------ --------- --------- ------ ------- Balance, November 30, 1997 - 8,192,354 $ 82 $ 40,477 $ (2,547) $ - $ (169) Issuance of common stock under stock plans - 135,493 1 440 - - - Purchase of treasury stock - (48,000) - - - (163) - Comprehensive loss: Net loss (8,051) - - - (8,051) - - Unrealized gain on available for sale securities 353 - - - - - 353 Translation adjustment 50 - - - - - 50 ------- Comprehensive loss (7,648) - - - - - - ------- ------------- ------ --------- --------- ------ ------- Balance, November 30, 1998 - 8,279,847 $ 83 $ 40,917 $ (10,598) $ (163) $ 234 Issuance of common stock under stock plans - 261,867 3 535 - 452 - Purchase of treasury stock - (56,000) (1) - - (289) - Comprehensive income: Net income 570 - - - 570 - - Unrealized loss on available for sale securities (482) - - - - - (482) Translation adjustment (12) - - - - - (12) ------- Comprehensive income 76 - - - - - - ------- ------------- ------ --------- --------- ------ ------- Balance, November 30, 1999 - 8,485,714 $ 85 $ 41,452 $ (10,028) $ - $ (260) ============= ====== ========= ========= ====== =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 MEDIA 100 INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------ FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 570 $(8,051) $ 617 Adjustments to reconcile net income (loss) from operations to net cash provided by (used in) operating activities: Depreciation and amortization 3,590 2,925 1,614 Acquired in-process research and development 430 - - Amortization of acquisition-related intangible assets 231 - - (Gain) loss on sale of marketable securities (22) (81) 19 Changes in assets and liabilities, excluding effects of acquisitions: Accounts receivable (831) 2,317 3,976 Income tax refund receivable 131 (280) - Inventories (511) (271) 777 Prepaid expenses (93) - (175) Other assets (69) 280 (481) Accounts payable (709) 306 (28) Accrued expenses (2,515) 2,734 1,167 Deferred revenue (855) 2,043 1,852 ----------------------------------- Net cash (used in) provided by operating activities (653) 1,922 9,338 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Terran Interactive, Inc., net of cash acquired (1,890) - - Purchase of equipment (1,572) (3,184) (7,251) Purchase of intangible assets (147) - - Purchases of marketable securities (40,504) (76,675) (65,716) Proceeds from sales of marketable securities 47,060 80,816 64,706 ----------------------------------- Net cash provided by (used in) investing activities 2,947 957 (8,261) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock pursuant to stock plans 990 441 442 Purchase of treasury stock (290) (163) - ----------------------------------- Net cash provided by financing activities 700 278 442 EFFECT OF EXCHANGE RATE CHANGES ON CASH (12) 50 (210) NET INCREASE IN CASH AND CASH EQUIVALENTS 2,982 3,207 1,309 CASH AND CASH EQUIVALENTS, beginning of period 7,249 4,042 2,733 ----------------------------------- CASH AND CASH EQUIVALENTS, end of period $ 10,231 $ 7,249 $ 4,042 =================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ 13 $ 349 $ 92 =================================== OTHER TRANSACTIONS NOT PROVIDING (USING) CASH: Dividend of Data Translation II, Inc. stock to stockholders $ - $ - $(12,990) ======== ======= ========= Change in value of marketable securities $ 482 $ 353 $ (82) ======== ======= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (SEE NOTE 3): In connection with the acquisition of Terran Interactive, Inc., the following transaction occurred: Fair value of assets acquired $ 2,558 - - Liabilities assumed 668 - - ----------------------------------- Cash paid for acquisition and acquisition costs $ 1,890 - - ===================================
The accompanying notes are an integral part of these consolidated financial statements. F-6 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS Media 100 Inc., a Delaware corporation, (the "Company") develops, markets, sells, and supports digital video and web-based streaming media software and systems, or tools, that enable new Internet broadcasters and traditional broadcasters, corporate marketing professionals, and educators to create and deliver high-quality video programs quickly, easily, and with great creative flexibility. The Company markets and delivers its products to end users through its web sites as well as through a worldwide channel of specialized value-added resellers ("VARs") that sell, assemble, and install turnkey systems using personal computers, disk drives, and ancillary video equipment. Since the Company began first shipments of its products in 1993, it has shipped over 170,000 software applications and 25,000 systems to users in over 50 countries. In June 1999, the Company acquired Terran Interactive Inc. ("Terran") of Los Gatos, CA, a leading supplier of software tools for high quality Internet and DVD video. With this acquisition, the Company develops, markets, sells and supports software tools for streaming media for the Internet. In addition to delivering Terran's products to end users through the Company's worldwide channel of VARs and distributors, the Company sells the products acquired from the Terran acquisition direct to end users using the Company's telemarketing groups and its website. In connection with the acquisition, the Company paid $1,890,000 in cash for all outstanding shares of Terran's common stock. The acquisition was accounted for under the purchase method of accounting and is described further in Note 3. Subsequent to year-end, the Company entered into definitive agreements to acquire two additional companies (See Note 13). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of significant intercompany transactions and balances. These consolidated financial statements reflect the use of the following significant accounting policies, as described below and elsewhere in the notes to consolidated financial statements. These consolidated financial statements are prepared in accordance with generally accepted accounting principles. (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. (b) Cash and Cash Equivalents and Marketable Securities Cash equivalents are carried at cost, which approximates market value, and have original maturities of less than three months. Cash equivalents include money market accounts and repurchase agreements with overnight maturities. The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under this standard, the Company is required to classify all investments in debt and equity securities into one or more of the following three categories: held-to-maturity, available-for-sale or trading. Available-for-sale securities are recorded at fair market value with unrealized gains and losses excluded from earnings and included as a component of stockholders' equity. All of the Company's marketable securities are classified as available-for-sale. F-7 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (b) Cash and Cash Equivalents and Marketable Securities (continued) Marketable securities held as of November 30, 1999 and 1998 consist of the following (in thousands):
MATURITY 1999 1998 -------- ---- ---- Investments available for sale: U.S. Treasury Notes less than 1 year $ - $ 1,535 U.S. Treasury Notes 1 - 5 years 4,538 5,760 ------------- ----------- Total U.S. Treasury Notes 4,538 7,295 Municipal Bonds less than 1 year 1,797 3,837 Municipal Bonds 1 - 5 years - 1,067 ------------- ----------- Total Municipal Bonds 1,797 4,904 U.S. Agency Bonds less than 1 year - 4,298 U.S. Agency Bonds 1 - 5 years 3,008 4,136 ------------- ----------- Total U.S. Agency Bonds 3,008 8,434 Money Market Instruments less than 1 year 3,689 3,395 Corporate Obligations less than 1 year 4,042 516 Corporate Obligations 1 - 5 years 4,784 6,847 ------------- ----------- Total Corporate Obligations 8,826 7,363 Total Investments available for sale 21,858 31,391 Less: Cash equivalents (3,689) (6,206) ------------- ----------- Total marketable securities $ 18,169 $ 25,185 ============= ===========
Marketable securities had a cost of $18,380 and $24,914 at November 30, 1999 and 1998, respectively, and a market value of $18,169 and $25,185, respectively. To adjust the carrying amount of the November 30, 1999 and 1998 marketable securities portfolio to market value, an unrealized gain (loss) has been reflected as a separate component of stockholders' equity pursuant to the provisions of SFAS No. 115. (c) Inventories Inventories at November 30, 1999 and 1998 are stated at the lower of first-in, first-out (FIFO) cost or market and consist of the following (in thousands):
1999 1998 ----------- ----------- Raw materials $ 556 $ 230 Work-in-process 424 336 Finished goods 498 401 ----------- ----------- $ 1,478 $ 967 =========== ===========
Work-in-process and finished goods inventories include material, labor and manufacturing overhead. Management performs periodic reviews of inventory and disposes of items not required by their manufacturing plan. (d) Depreciation and Amortization The Company provides for depreciation and amortization, using the straight-line method by charges to operating expenses in amounts that allocate the cost of the equipment over the following estimated useful lives:
DESCRIPTION USEFUL LIVES -------------------------------------------------------- Machinery and equipment 3 to 5 years Purchased software 3 to 5 years Furniture and fixtures 7 years Vehicles 3 years Leasehold Improvements Life of Lease
F-8 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (e) Property and equipment, net Property and equipment, net at November 30, 1999 and 1998 is stated at cost, less accumulated depreciation and amortization, and consists of the following (in thousands):
1999 1998 -------------- ---------------- Machinery and equipment $ 8,212 $ 7,174 Purchased software 4,162 3,616 Furniture and fixtures 1,252 1,240 Vehicles 11 12 Leasehold improvements 1,554 1,482 ------------- ---------------- $ 15,191 $ 13,524 Less accumulated depreciation and amortization (8,682) (5,161) ------------- ---------------- $ 6,509 $ 8,363 ============= ================
(f) Intangible Assets Intangible assets consist of the following as of November 30, 1999 and 1998:
1999 1998 ---------------- -------------------- Patents and Trademarks 169 $ - Acquired Technology 1,560 - Goodwill 101 - ---------------- -------------------- $ 1,830 $ - Less accumulated amortization (270) - ---------------- -------------------- $ 1,560 $ - ================ ====================
The Company is amortizing goodwill and acquired technology related to the acquisition of Terran (See Note 3) using a straight-line method over 3 years, their estimated useful lives. Patents and trademarks are being amortized over periods ranging from 3 to 5 years, their estimated useful lives. The Company follows the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and Accounting Principles Board (APB) Opinion No. 17, INTANGIBLES ASSETS. SFAS No. 121 and APB No. 17 require that long-lived and intangible assets be reviewed for impairment. Any write-downs are to be treated as permanent reductions in the carrying amount of the assets and are determined based on fair value of the assets. The Company believes that the carrying values of its long-lived and intangible assets are realizable as of November 30, 1999. (g) Foreign Currency The financial statements of the Company's subsidiaries are translated from their functional currency into U.S. dollars using the current rate method in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Accordingly, assets and liabilities of the Company's foreign subsidiaries are translated at the rates of exchange in effect at year-end. Revenues and expenses are translated using exchange rates in effect during the year. Gains and losses from foreign currency translation are credited or charged to "Cumulative translation adjustment" included in stockholders' equity in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. The Company realized net foreign currency transaction gains (losses) of ($77,000), $81,000 and ($215,000) in 1999, 1998 and 1997, respectively. F-9 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (h) Revenue Recognition In October 1997, the American Institute of Certified Public Accountants issued Statement of Position, "Software Revenue Recognition" (SOP 97-2). SOP 97-2 provides revised and expanded guidance on software revenue recognition and applies to all entities that earn revenue from licensing, selling and otherwise marketing computer software. The Company adopted the provisions of SOP 97-2 as of December 1, 1997. In 1999, SOP 97-2 was modified by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain Transactions". Neither the adoption of 97-2, nor the adoption of 98-9, had a material impact on the Company. Net sales are recognized following establishment of persuasive evidence of an arrangement, provided that the license fee is fixed and determinable, delivery of product has occurred via physical shipment or electronically, a determination has been made by management that collection is probable and the Company has no remaining obligations. The Company provides for estimated returns at the time of shipment. The Company recognizes maintenance revenue from the sale of post-contract support services ratably over the life of the contract. (i) Net Income (Loss) Per Common Share Effective December 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128). In accordance with SFAS No. 128, basic net income (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted income (loss) per share is computed using the weighted-average number of common shares outstanding and potential common shares from the assumed exercise of options outstanding during the period, if any, using the treasury stock method. Prior periods have been restated to reflect the new standard. The following is a reconciliation of the shares used in the computation of basic and diluted earnings per share (in thousands):
- ---------------------------------------------------------------------------------------------------- FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Basic net income - weighted average shares of common stock outstanding 8,347 8,273 8,148 Effect of potential common shares - stock options outstanding (unless antidilutive) 460 - 99 ----------------------------------------- Diluted net income - weighted average shares and potential common shares outstanding 8,807 8,273 8,247 =========================================
The Company excludes potentially dilutive securities from its diluted net income (loss) per share computation when either the exercise price of the securities exceeds the fair value of the Company's common stock or when the Company reported net losses and the effect of including such securities would be antidilutive. During fiscal year 1999, options to purchase approximately 234,000 weighted average shares of common stock were excluded because the options' exercise price was greater than the average market price of the common stock. Options to purchase approximately 1,032,000 weighted average shares of common stock were outstanding at November 30, 1998, but were not included in the computation of diluted net income (loss) per share as a result of their antidilutive effect due to the loss available to common stockholders. During fiscal year 1997, options to purchase approximately 1,022,000 weighted average shares of common stock were excluded because the options' exercise price was greater than the average market price of the common stock. (j) Capitalized Software Development Costs The Company capitalizes certain computer software development costs. Capitalization of costs commences upon establishing technological feasibility. Capitalized costs, net of accumulated amortization, were approximately $29,000 and $89,000 as of November 30, 1999 and 1998, respectively, and are included in other assets. These costs are amortized on a straight-line basis over two years, which approximates the economic life of the product. Amortization expense, included in cost of sales in the accompanying consolidated statements of operations, was approximately $60,000, $60,000 and $80,000 in 1999, 1998 and 1997, respectively. F-10 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (k) Restructuring Expense In the third quarter of fiscal 1999, the Company implemented a restructuring plan to better align its organization with its corporate strategy. Substantially all of the restructuring charge of $424,000 relates to the elimination of approximately 12 employees across the following functions: research and development (4), selling and marketing (7) and general and administration (1). At November 30, 1999, approximately $232,000 of the accrued restructuring charge remained, which is entirely comprised of severance-related costs. The total cash impact of the restructuring amounted to approximately $424,000. The total cash paid as of November 30, 1999 was $192,000 and the remaining amount will be paid by the end of the first quarter in fiscal 2000. In the third quarter of fiscal 1997, the Company incurred restructuring expenses of $526,000 for severance and related costs associated with a reduction of the Company's workforce. All of these expenses have been paid as of the end of the Company's first quarter of fiscal 1998. (l) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Concentration of Credit Risk and Significant Customers SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK, requires disclosure of any significant off-balance-sheet and credit risk such as foreign exchange contract, options contracts or other foreign hedging arrangements. The Company maintains its cash, cash equivalents and marketable securities with established financial institutions. The Company does not believe it has accounts receivable collection risk in excess of existing reserves. For the years ended November 30, 1999, 1998 and 1997, no customer accounted for more than 10% of the Company's total net sales. (n) Single of Limited Source Suppliers The Company currently is dependent on single or limited source suppliers for several key components used in its products that have no ready substitutes, including various audio and video signal processing integrated circuits. These components are purchased through purchase orders from time to time. The Company generally does not carry significant inventories of these single or limited source components and has no guaranteed supply arrangements for them. Although there are a limited number of manufactures of the key components, management believes that the other suppliers could provide similar components on comparable terms. An extended interruption in its source of supply, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. (o) Recent Accounting Pronouncements In July 1997, the Financial Accounting Standards Board issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for public companies to report operating segment information in annual financial statements and requires those enterprises to report selected operating segment information in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has adopted SFAS No. 131 in its fiscal 1999 annual consolidated financial statements (See Note 12). (p) Reclassifications Certain amounts in the prior years' financial statements have been reclassified to conform with the current year's presentation. F-11 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (q) Financial Instruments The estimated fair values of the Company's financial instruments, which include cash equivalents, marketable securities, accounts receivable and accounts payable, approximate their carrying value. 3. ACQUISITION OF TERRAN On June 28, 1999, the Company acquired Terran of Los Gatos, CA, a leading supplier of software tools for high quality Internet and DVD video. In connection with the acquisition, the Company paid $1,850,000 in cash for all outstanding shares of Terran's common stock. The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of Terran's operations and the fair market value of the acquired assets and assumed liabilities have been included in the financial statements of the Company as of the acquisition date. In connection with the acquisition, the purchase price could increase depending on Terran's net sales and operating income over the next two years. Any contingent payments based on meeting the earn-out conditions will be considered additional goodwill and amortized over the appropriate useful life. The aggregate purchase price consisted of the following (in thousands):
DESCRIPTION AMOUNT Cash $ 1,850 Liabilities assumed 668 Acquisition costs 40 ------- Total purchase price: $ 2,558 -------
The purchase price has been allocated to the acquired assets and assumed liabilities as follows (in thousands): Current assets $ 278 Equipment and other assets 189 Acquired technology 1,560 In-process research and development 430 Goodwill 101 ------- $ 2,558 -------
Amounts allocated to tangible and intangible assets, including acquired in-process research and development, were based on results of an independent appraisal. The amount allocated to developed technology is being amortized on a straight-line basis over an expected useful life of three years. In connection with the acquisition, the Company allocated $430,000 of the purchase price to in-process research and development projects. This allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. The Company allocated values to the in-process research and development based on an in depth assessment of the R&D projects. The value assigned to these assets were limited to significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of the acquired next-generation technologies. The value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected F-12 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. The resulting net cash flows from such projects are based on management's estimates of revenues, cost of sales, research and development costs, selling, general and administrative costs, and income taxes from such projects. Aggregate revenues for Terran were estimated to grow at a compounded annual growth rate of approximately 60% through 2003, at which time revenue growth is expected to gradually decline to a normalized long-term growth rate. The nature of the efforts to develop the acquired in-process technologies into commercially viable products and services principally related to the completion of certain planning, designing, coding, prototyping, and testing activities that were necessary to establish that the developmental Terran technologies met their design specifications including functional, technical, and economic performance requirements. Anticipated completion dates ranged from 6 to 12 months, at which times the Company expected to begin selling the developed products. Development costs to complete the R&D were estimated at approximately $1.2 million. Terran's primary in-process R&D projects involved designing a technology and application platform for a next-generation Media Cleaner product and the development of new live broadcast software technologies. The estimated revenues for the in-process projects were expected to peak within two years of acquisition and then decline sharply as other new products and technologies are expected to enter the market. Operating expenses were estimated based on historical results and discussions with management regarding anticipated profit margin improvements. Due to purchasing power increases and general economies of scale, estimated operating expense as a percentage of revenues were expected to decrease after the acquisitions. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, a discount rate of 35% was considered appropriate for the in-process R&D, and discount rates of 25% were appropriate for the existing products and technologies. These discount rates were commensurate with the Terran's stage of development and the uncertainties in the economic estimates described above. With respect to the acquired in-process technology, the calculations of value were adjusted to reflect the value creation efforts of Terran prior to the close of the acquisition. In doing so, consideration was given to each major project's stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the projected cost to complete the projects. Management's estimate of net cash flow was discounted to present value. The discount rate used in discounting the net cash flows from purchased in-process technology is 35%. In the selection of the appropriate discount rate, consideration was given to the Weighted Average Cost of Capital ("WACC"), which was determined, in part, by using the Capital Asset Pricing Model. The discount rate utilized for the in-process technology was higher than Media 100's WACC due to the inherent uncertainties in the financial forecasts, including the uncertainty surrounding the successful development of the purchased in-process technology, the useful life of such technology, the profitability levels of such technology and the uncertainty of technological advances that are unknown at this time. If these projects are not successfully developed the sales and profitability of the combined company may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. The following unaudited pro forma financial information presents the combined results of operations of Media 100 and Terran as if the acquisition occurred as of December 1, 1997. The pro forma data are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations for future periods or the results that actually would have occurred had Media 100 and Terran been a F-13 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS combined company during the specified periods. The pro forma results include the effects of the amortization of acquisition-related intangible assets and exclude the charge for the purchased in-process technology.
(IN THOUSANDS) 1999 1998 ------------ --------------- Net sales $ 53,061 $ 44,271 Net income (loss) $ 237 $ (8,529) Net income (loss) per common share - basic $ 0.03 $ (1.03) Net income (loss) per common share - diluted $ 0.03 $ (1.03) Weighted average common share outstanding - basic 8,347 8,273 Weighted average common share outstanding - diluted 8,807 8,273
4. STOCK OPTIONS Prior to April 1992, options were granted under the Company's 1982 Key Employee Inventive Plan (the "1982 Plan"). Subject to certain limitations imposed by the 1982 Plan, options were granted at a price determined by the Board. The Board resolved to issue options under the 1982 Plan at not less than 100% of fair market value. The options expire six years from the date of grant and become exercisable at the rate of 20% per year beginning one year from the date of grant. No further options may be granted under the 1982 Plan. In 1992, the Company adopted the 1992 Key Employee Incentive Plan (the "1992 Plan"). The number of shares of common stock reserved for issuance under the 1992 Plan is 2,200,000. Options granted pursuant to the 1992 Plan may, at the discretion of the Board, be incentive stock options as defined by the Internal Revenue Code. Subject to the provisions of the 1992 Plan, options granted are at a price as specified by the Board. The Board has, to date, issued options under the 1992 Plan at not less than 100% of fair market value. The options become exercisable at a rate of 25% per year beginning one year from the date of grant unless otherwise specified by the Board. The Board will determine when the options will expire, but in no event will the option period exceed ten years. No options may be granted under the 1992 Plan on or after February 29, 2002. Information concerning stock options for each of the three years ended November 30, 1999 follows:
Weighted Average Number of Option Price Options Price Ranges per Share - -------------------------------------------------------------------------------------------------------------------- Outstanding at November 30, 1996 1,215,830 $ 1.73 - 16.91 $ 10.20 Granted 474,225 4.19 - 10.00 8.48 Exercised (37,940) 1.73 - 4.72 3.72 Expired/canceled (504,189) 1.73 - 16.91 9.93 - -------------------------------------------------------------------------------------------------------------------- Outstanding at November 30, 1997 1,147,926 $ 1.73 - 16.91 $ 9.80 Granted 1,262,180 2.75 - 5.00 3.72 Exercised (42,420) 1.73 - 4.29 2.57 Expired/canceled (978,570) 1.73 - 16.91 8.54 - -------------------------------------------------------------------------------------------------------------------- Outstanding at November 30, 1998 1,389,116 $ 2.68 - 15.48 $ 5.34 Granted 654,715 5.13 - 16.25 6.26 Exercised (149,803) 3.22 - 4.29 3.83 Expired/canceled (167,180) 3.25 - 10.48 4.46 - -------------------------------------------------------------------------------------------------------------------- Outstanding at November 30, 1999 1,726,848 $ 2.68 - 16.25 $ 5.91 ==================================================================================================================== Exercisable at November 30, 1999 534,065 $ 2.68 - 15.48 $ 6.73 ==================================================================================================================== Exercisable at November 30, 1998 389,453 $ 2.68 - 15.48 $ 6.79 ==================================================================================================================== Exercisable at November 30, 1997 315,204 $ 1.73 - 16.91 $ 5.31 ==================================================================================================================== Available for grant at November 30, 1999 77,779 ====================================================================================================================
F-14 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average fair market value of the options as of the date of grant for the periods ended November 30, 1999, 1998 and 1997, is $6.10, $2.83, and $6.03, respectively. The Company also issues shares of common stock to employees pursuant to the terms of the 1986 Employee Stock Purchase Plan (the "Plan"). The Company has reserved 1,000,000 shares of common stock for issuance under the Plan, as amended. Effective July 1, 1995, employees who have worked for the Company for at least one month are eligible to participate in the Plan. The Plan allows participants to purchase common stock of the Company at 85% of the fair market value as defined. Under the Plan, the Company issued 112,064, 93,073 and 67,311 shares in fiscal years 1999, 1998 and 1997, respectively. At November 30, 1999, there were 294,194 shares available for issuance under the Plan. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION (SFAS No. 123), which requires the measurement of the fair market value of stock options or warrants to be included in the statement of operations or disclosed in the notes to the financial statements. As permitted by SFAS No. 123, the Company will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and has elected the disclosure-only alternative under SFAS No. 123 for options granted using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions are as follows:
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 ---------------- ----------------- ------------------- Risk-free interest rate........ 4.6% - 6.0% 4.2% - 5.8% 6.0% - 6.1% Expected dividend yield........ - - - Expected lives................. 6 years 6 years 6 years Expected volatility............ 152.0% 73.3% 75.9%
The table below presents pro forma net income (loss) and earnings per share, had compensation cost for the Company's stock-based employee compensation plans been determined using the provisions of SFAS No. 123 (in thousands, except per share amounts).
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 ------------- ------------ ------------- Income (loss) from operations: As reported $ 570 $ (8,051) 617 Pro forma $ (953) $ (9,157) (153) Income (loss) per share from operations: Basic: As reported $ 0.07 $ (0.97) $ 0.07 Pro forma $ (0.11) $ (1.11) $ (0.02) Diluted: As reported $ 0.06 $ (0.97) $ 0.07 Pro forma $ (0.11) $ (1.11) $ (0.02)
Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation may not be representative of that to be expected in future years. The following table summarizes information about options outstanding at November 30, 1999:
Options Outstanding Options Exercisable ----------------------------------------------------------- ------------------------------------- Weighted Average Weighted Average Weighted Average Range of Number Remaining Exercise Price Number Exercise Price Exercise Price Outstanding Contractual Life per Share Outstanding per Share - ---------------- -------------- --------------------- -------------------- --------------- -------------------- $2.68 - 3.57 321,518 4.4 $2.93 98,414 $2.90 3.94 412,470 4.1 3.94 222,552 3.94 4.25 - 5.56 319,799 6.5 4.95 36,175 4.25 5.63 - 6.31 387,175 5.4 5.73 12,000 5.84 9.25 - 16.25 285,886 2.6 13.84 164,924 13.40 -------------- --------------- 1,726,848 534,065 ============== ===============
F-15 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 1998, the Company offered employees the opportunity to participate in an option-repricing program, pursuant to which each employee could elect to replace his or her then outstanding, options with new options on a one-for-one basis. The per share exercise price of the replacement options is $3.94. The replacement options are exercisable as follows: replacement options that were granted in exchange for exercisable old options become exercisable six months following the new grant date; replacement options that were granted in exchange for unexercisable old options become exercisable over four years from the new grant date, 12.5% six months following the new grant date and 6.25% quarterly thereafter; and all replacement options expire ten years after the new grant date. An aggregate of 694,810 options were granted in exchange for options cancelled in connection with this program. The option-repricing program resulted in a new measurement date for all options replaced. Since the new exercise price was equal to the fair market value of the Company's common stock on the new measurement date, the Company did not record any compensation cost in connection with this program. 5. RETIREMENT PLAN In November 1985, the Company adopted an employee savings plan (the "Savings Plan") in compliance with Section 401(k) of the Internal Revenue Code. Effective April 1, 1995, the Savings Plan provides for annual Company contributions of up to 15% of the first 6% of total compensation per participant. Effective January 1, 1998, these contributions vest in full after a three-year period of service. Effective January 1, 1999, the Savings Plan was amended to provide for annual contributions of up to 40% of the first 6% of total compensation, with a maximum matching contribution of $3,000 annually. The Company's contributions to the Savings Plan were $203,000, $86,000 and $98,000 in 1999, 1998 and 1997, respectively. The Company does not provide postretirement benefits to any employees as defined under Statement of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. 6. BANK FACILITIES The Company renewed an irrevocable standby letter of credit agreement for a sum not to exceed $196,808 effective April 1, 1999 and terminating March 31, 2000. This facility was entered into in connection with the lease of the Company's office and manufacturing facility (Note 7(a)). This letter of credit is automatically extended without amendment annually from the termination date, unless written notice is provided electing not to renew for any such additional period. Notwithstanding the above, this letter of credit expires on March 31, 2002. 7. COMMITMENTS AND CONTINGENCIES (a) Commitments The Company's principal executive, engineering, manufacturing and sales operations occupy approximately 56,500 square feet in a leased facility located at 290 Donald Lynch Boulevard, Marlboro, Massachusetts. The lease for this facility terminates on March 31, 2002, but is renewable at the Company's option through March 31, 2007. Prior to moving into its current facility on May 2, 1997, the Company's operations occupied approximately 31,000 square feet in a facility which it shared with Data Translation, Inc. ("DTI") located in Marlboro, Massachusetts. Total rent expense including operating expenses pursuant to the lease agreement charged to operations with respect to the Company's current Marlboro facility for fiscal years 1999, 1998 and 1997 was $879,000, $822,000 and $542,000, and with respect to its former Marlboro facility was $527,000 for the fiscal year 1997. Rent expense with respect to the former Marlboro facility for fiscal 1997 reflected the Company's pro rata portion of the rental charges and operating expenses associated with that facility and the use by the Company of certain manufacturing equipment belonging to DTI. Rent expense including operating expenses pursuant to the lease agreement charged to operations for the consolidated Company for fiscal years 1999, 1998, and 1997 was $1,187,000, $999,000, and $1,249,000, respectively. F-16 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum lease payments, excluding operating costs, under all operating leases are as follows (in thousands): FISCAL YEARS ENDING NOVEMBER 30,
AMOUNT 2000 $959 2001 959 2002 579 2003 392 2004 350 - ---------------------------------------------------------------------------- Total minimum lease payments $3,239 ============================================================================
(b) Contingencies On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. ("Avid") in the United States District Court for the District of Massachusetts. The complaint generally alleges patent infringement by the Company arising from the manufacture, sale, and use of the Company's Media 100 products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In July 1995, the Company filed an answer and counterclaim denying any infringement and asserting that the Avid patent in question is invalid. The Company intends to vigorously defend the lawsuit. In addition, Avid is seeking reissue of the patent, including claims that it asserts are broader than in the existing patent, and these reissue proceedings remain pending before the U.S. Patent and Trademark Office. On January 16, 1998, the court dismissed the lawsuit without prejudice to either party moving to restore it to the docket upon completion of all matters pending before the U.S. Patent and Trademark Office. There can be no assurance that the Company will prevail in the lawsuit asserted by Avid or that the expense or other effects of the lawsuit, whether or not the Company prevails, will not have a material adverse effect on the Company's business, operating results and financial condition. From time to time the Company is involved in other disputes and/or litigation encountered in its normal course of business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company's business, operating results or financial condition. 8. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. The components of the net deferred tax asset recognized in the accompanying consolidated balance sheets are as follows (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------- FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Net operating loss carryforwards $ 4,933 $ 3,866 $ - Other temporary differences, principally nondeductible accruals 1,662 3,112 1,587 Research and development credit carryforwards 1,666 1,119 685 Acquired technology (624) - - - ---------------------------------------------------------------------------------------------------------------------------- Subtotal 7,637 8,097 2,272 - ---------------------------------------------------------------------------------------------------------------------------- Valuation allowance (7,637) (7,873) (1,768) - ---------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ - $ 224 $ 504 ====================================================================================================================================
Due to the uncertainty surrounding the realization of the benefits of its favorable tax attributes in future income tax returns, the Company has placed a valuation allowance against its deferred tax assets, except for previously paid taxes that the Company believes are refundable. These deferred tax assets are included as a component of other assets, net on the accompanying consolidated balance sheets. The tax credit carryforwards expire at various dates through 2019. The Tax Reform Act of 1986 contains provisions that may limit the tax credit carryforwards available to be used in any given year in the event of significant changes in ownership, as defined. F-17 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The income (loss) from continuing operations before tax provision in the accompanying consolidated statements of operations consisted of the following (in thousands):
- ------------------------------------ ----------------- ----------------- ----------------- FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 - ------------------------------------ ----------------- ----------------- ----------------- United States $ 503 $ (8,039) $ 792 Foreign 67 (12) (14) ----------------- ----------------- ----------------- $ 570 $ (8,051) $ 778 ================= ================= =================
The income tax provision shown in the accompanying consolidated statements of operations consists of the following (in thousands):
- -------------------------------------------------------------------------------------------------- FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Federal: Current $ (224) $ (280) $ 581 Deferred - 280 (504) - -------------------------------------------------------------------------------------------------- - - 77 - -------------------------------------------------------------------------------------------------- State: Current - - 24 Deferred - - - - -------------------------------------------------------------------------------------------------- - - 24 - -------------------------------------------------------------------------------------------------- Foreign - Current - - 60 - -------------------------------------------------------------------------------------------------- $ - $ - $ 161 - --------------------------------------------------------------------------------------------------
The effective income tax rate varies from the amount computed using the statutory U.S. income tax rate as follows:
- ------------------------------------------------------------------------------------------------------ FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ Tax provision (benefit) at statutory rate 34.0% (34.0)% 34.0% Federal benefit from loss carryforward - - - Utilization of research and development credits - - (30.5) State taxes 6.0 (6.0) 3.1 Change in valuation allowance (40.0) 40.0 - Foreign taxes - - 7.7 Tax credits - - 1.8 Other permanent differences - - 4.5 - ------------------------------------------------------------------------------------------------------ -% -% 20.6% ======================================================================================================
9. ACCRUED EXPENSES Accrued expenses at November 30, 1999 and 1998 consist of the following (in thousands):
1999 1998 -------------- -------------- Payroll and payroll related taxes $ 2,576 $ 1,691 Accrued warranty 463 463 Accrued product development 40 2,220 Accrued selling and marketing 296 878 Accrued legal and other 4,134 4,440 - ------------------------------------------------------------------------------- $7,509 $9,692 ===============================================================================
F-18 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. VALUATION AND QUALIFYING ACCOUNTS The following table sets forth activity in the Company's accounts receivable reserve account (in thousands):
- ------------------------------------------------------------------------------------------------ Balance at Charges to Cost and Deductions Balance at Beginning of Expense End of Fiscal Year Fiscal Year - ------------------------------------------------------------------------------------------------ For the Fiscal Year Ended $328 $187 $104 $411 November 30, 1997 ================================================================================================ For the Fiscal Year Ended $411 $340 $356 $395 November 30, 1998 ================================================================================================ For the Fiscal Year Ended $395 $154 $147 $402 November 30, 1999
11. SELECTED QUARTERLY INFORMATION (UNAUDITED)
Fiscal 1999 (in thousands, except per share amounts) February 28 May 31 August 31 November 30 - ----------------------------------------------------------------------------------------------------------------------------- Net sales $ 12,139 $ 12,537 $ 13,116 $ 13,687 Gross profit $ 7,375 $ 7,674 $ 8,102 $ 8,624 Net income (loss) $ (689) $ 177 $ (172) $ 1,254 Net income (loss) per share - basic $ (0.08) $ .02 $ (0.02) $ 0.15 Net income (loss) per share - diluted $ (0.08) $ .02 $ (0.02) $ 0.14 Shares - net income (loss) per share - basic 8,294 8,300 8,342 8,454 Shares - net income (loss) per share - diluted 8,294 8,609 8,342 9,257 ============================================================================================================================= Fiscal 1998 (in thousands, except per share amounts) February 28 May 31 August 31 November 30 - ----------------------------------------------------------------------------------------------------------------------------- Net sales $ 10,521 $ 9,637 $ 10,124 $ 11,506 Gross profit $ 6,428 $ 5,878 $ 6,173 $ 7,076 Net income (loss) $ (752) $ (3,350) $ (2,419) $ (1,530) Net income (loss) per share - basic $ (0.09) $ (0.41) $ (0.29) $ (0.18) Net income (loss) per share - diluted $ (0.09) $ (0.41) $ (0.29) $ (0.18) Shares - net income (loss) per share - basic 8,232 8,258 8,306 8,297 Shares - net income (loss) per share - diluted 8,232 8,258 8,306 8,297 =============================================================================================================================
12. SEGMENT INFORMATION In July 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS No. 131). SFAS No. 131 establishes standards for public companies to report operating segment information in annual and interim financial statements filed with the SEC and shareholders effective for fiscal years beginning after December 15, 1997. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is composed of the Chief Executive Officer and members of senior management. The Company's reportable operating segments are internet tools, digital video systems and services. F-19 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Revenues are attributed to geographic areas based on where the customer is located. Segment information for the years November 30, 1999, 1998 and 1997 is as follows:
Digital Internet Video 1997 Tools Services Systems Corporate Total - ---- ----------- -------------- --------------- ------------ --------------- Net sales from external customers $ - $ 4,710 $ 41,950 $ - $ 46,660 =========== ============== =============== ============ =============== Gross profit - 3,764 23,712 - 27,476 =========== ============== =============== ============ =============== Depreciation - 42 1,572 - 1,614 =========== ============== =============== ============ =============== Restructuring - - - 526 526 =========== ============== =============== ============ =============== Interest income - - - 1,781 1,781 =========== ============== =============== ============ =============== Income taxes $ - $ - $ - $ 161 $ 161 =========== ============== =============== ============ =============== 1998 ---- Net sales from external customers $ - $ 7,191 $ 34,597 $ - $ 41,788 =========== ============== =============== ============ =============== Gross profit - 6,057 18,364 - 24,421 =========== ============== =============== ============ =============== Depreciation - 40 2,885 - 2,925 =========== ============== =============== ============ =============== Interest income $ - $ - $ - $ 1,622 $ 1,622 =========== ============== =============== ============ =============== 1999 ---- Net sales from external customers $ 4,058 $ 8,855 $ 38,566 $ - $ 51,479 =========== ============== =============== ============ =============== Gross profit $ 2,793 $ 7,592 $ 21,390 $ - $ 31,775 =========== ============== =============== ============ =============== Depreciation 20 71 3,499 - 3,590 =========== ============== =============== ============ =============== Amortization of intangibles assets $ - $ - $ - $ 231 $ 231 =========== ============== =============== ============ =============== Acquired in-process research and development 430 430 =========== ============== =============== ============ =============== Restructuring $ - $ - $ - $ 424 $ 424 =========== ============== =============== ============ =============== Interest income $ - $ - $ - $ 1,387 $ 1,387 =========== ============== =============== ============ ===============
Interest income, restructuring, and income taxes are considered corporate level activities and are, therefore, not allocated to segments. Management believes transfers between geographic areas are accounted for on an arms length basis. Net sales by geographic area for the years ended November 30, 1999, 1998 and 1997 were as follows (in thousands):
1999 1998 1997 --------------- ----------------- --------------- United States 31,260 $ 23,353 $ 26,556 United Kingdom, Sweden, Denmark and Norway 5,169 4,168 3,710 Germany, Austria and Switzerland 2,825 2,168 1,812 France, Spain and Benelux 3,475 2,822 2,274 Japan 2,072 1,440 2,274 Other foreign countries 6,678 7,837 10,034 --------------- ----------------- --------------- $ 51,479 $ 41,788 $ 46,660 =============== ================= ===============
F-20 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-lived tangible assets by geographic area were as follows for the years ended November 30, 1999, 1998 and 1997 were as follows (in thousands):
1999 1998 --------------- --------------- United States 6,151 $ 7,935 United Kingdom 146 186 Germany 97 80 Italy 26 54 France 89 108 --------------- --------------- $ 6,509 $ 8,363 =============== ===============
13. SUBSEQUENT EVENTS On December 21, 1999, the Company completed its acquisition of Wired, Inc. Wired, Inc. is a fast-growing supplier of Moving Pictures Experts Group ("MPEG") streaming media production tools for the Internet and digital video disk ("DVD") authoring. In connection with the acquisition, the Company will pay $3,000,000 in cash for all outstanding shares of Wired, Inc. common stock. The first payment in the amount of $1,500,000 was paid upon completion of the acquisition and the remaining $1,500,000 to be paid on the first anniversary of the closing. In connection with the acquisition, the purchase price could increase depending on Wired's net sales and operating income over the next two years. Any contingent payments based on meeting the earn-out conditions will be considered additional goodwill and amortized over the appropriate useful life. The Company will treat the acquisition as a purchase for accounting purposes. On December 28, 1999, the Company announced it has entered into a definitive agreement to acquire Digital Origin, Inc. Digital Origin, Inc. is a leading developer of digital video editing and effects software applications designed to support the new low-cost, high-quality digital video ("DV") camcorders used for acquiring video for Internet applications. The Company expects that the merger will be completed as a pooling of interest for accounting purposes, and a tax-free transaction. Under the agreement, the Company will issue 0.5347 shares of its common stock for each share of Digital Origin, Inc. common stock. The transaction is subject to the approval of the stockholders of Media 100 Inc. and Digital Origin, Inc. and other customary closing conditions. The merger is expected to be completed in the Company's second fiscal quarter of 2000. In addition, the company entered into a non-exclusive, four year OEM development and license agreement with Digital Origin by which Media 100 will use Digital Origin's consumer level editing and effects software with the Company's Internet streaming media software in exchange for royalty payments. F-21 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Restated Certificate of Incorporation of Media 100 Inc. (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 3.2 By-laws of Media 100 Inc., as amended through June 17, 1998 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31,1998 and incorporated by reference herein). 4 Specimen Certificate representing the Company's Common Stock (filed as Exhibit 4 to the Company's Registration Statement on Form S-1, File No. 2-94121 and incorporated by reference herein). 10.1* Key Employee Incentive Plan (1982), as amended through November 15, 1996 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.2* 1986 Employee Stock Purchase Plan, as amended through April 14, 1999 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated by reference herein). 10.3* Key Employee Incentive Plan (1992), as amended through April 14, 1999 (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated by reference herein). 10.4* Media 100 Inc. 401(k) Savings Plan (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein). 10.5.1 Lease dated January 31, 1997 relating to 290 Donald Lynch Boulevard, Marlboro, MA (filed as Exhibit 10.5.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.5.2 License Agreement dated as of January 31, 1997 relating to 290 Donald Lynch Boulevard, Marlboro, MA (filed as Exhibit 10.5.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.6.1 Distribution Agreement dated as of November 19, 1996 with Data Translation II, Inc. (DTI) (filed as Exhibit 10.8.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.6.2 Intellectual Property Agreement dated as of December 2, 1996 with DTI (filed as Exhibit 10.8.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.6.3 Corporate Services Agreement dated as of December 2, 1996 with DTI (filed as Exhibit 10.8.3 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein). 10.6.4 Amendment to Corporate Services Agreement dated November 18, 1997 (filed as Exhibit 10.6.4 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein). 10.9 Offer Letter from the Company to B. Robert Feingold (filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31,1998 and incorporated by reference herein). 10.10 Agreement and Plan of Merger and Reorganization, dated May 6, 1999 with Terran Interactive, Inc. (files as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated by reference herein). 10.11 Asset Purchase Agreement, dated December 17, 1999 with Wired, Inc. (files as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended November 30, 1999 and incorporated by reference herein). 10.12 Agreement and Plan of Merger By and Among Media 100 Inc. and Digital Origin, Inc., dated December 28, 1999. 10.13 OEM Development and License Agreement, dated December 28, 1999 with Digital Origin, Inc. 21 Subsidiaries of Media 100 Inc. (filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein). 23 Consent of Arthur Andersen LLP. 24 Power of Attorney (included in the signature page of this Annual Report on Form 10-K). 27 Financial Data Schedule. * Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates. EX-10.11 2 EXHIBIT 10.11 Exhibit 10.11 ASSET PURCHASE AGREEMENT Asset Purchase Agreement ("Agreement") dated as of December __, 1999, by and among Media 100 Inc., a Delaware corporation ("Parent"); Winchester Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent ("Purchaser"); Wired Incorporated, a California corporation (the "Corporation"); Wired, a California general partnership (the "Partnership"), and the general partners of the Partnership listed on the signature page hereto (each a "Partner" and, collectively, the "Partners"). Certain other capitalized terms used in this Agreement are defined in Exhibit B. As used in this Agreement, the term "Companies" includes both the Corporation and the Partnership collectively and the term "Company" includes both of the Corporation or Partnership individually. RECITALS The parties desire that Purchaser acquire substantially all of the assets of the Companies (the "Acquisition") in accordance with this Agreement and the General Corporation Law of the State of California (the "CGCL") and the Delaware General Corporation Law (the "DGCL"). AGREEMENT The parties to this Agreement agree as follows: 1. PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES; CLOSING. 1.1 SALE OF ASSETS. (a) Subject to the terms and conditions of this Agreement, at the Closing, the Companies shall sell, transfer, convey, assign and deliver to Purchaser and Purchaser shall purchase, acquire and accept: (i) from the Partnership the Partnership Assets; and (ii) from the Corporation the Corporation Assets. (b) It is the intention of the parties that this Agreement shall not constitute an assignment or attempted assignment of any lease, license, commitment or other contract or agreement if any such assignment or attempted assignment would constitute a breach or violation thereof; it being understood, however, that the preceding does not relieve any party from any liability to Purchaser that a party would otherwise have hereunder by reason of a breach of representations, warranties, covenants or conditions resulting from the failure of the Companies to transfer such lease, license, commitment or other contract or agreement to the Purchaser. 1 1.2 PURCHASE PRICE. (a) As consideration for the sale of the Purchased Assets to Purchaser, at the Closing: (i) Purchaser shall pay to Companies the amounts set forth on Exhibit A, which terms and conditions are hereby incorporated herein by reference. (ii) assume the Assumed Liabilities. (b) Following the Closing, Purchaser shall pay to the Companies the amounts set forth on Exhibit A as post-closing payments on the dates specified in such Exhibit and subject to the conditions set forth in such Exhibit, which terms and conditions are hereby incorporated herein by reference 1.3 CLOSING; CLOSING DATE. (a) The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Lucash, Gesmer & Updegrove, LLP, 40 Broad Street, Boston, Massachusetts 02109 at 10:00 a.m. on December 20, 1999, or at such other time and date during the period from December 20, 1999 through December 31, 1999 as Purchaser and the Companies may mutually agree (the "Scheduled Closing Time"). (The date on which the Closing actually takes place is referred to in this Agreement as the "Closing Date"). (b) At the Closing: (i) the Companies shall execute and deliver to Purchaser such a bill of sale in the form of Exhibit A and such other bills of sale, endorsements, assignments and other documents and records as may (in the reasonable judgment of Purchaser or its counsel) be necessary or appropriate to assign, convey, transfer and deliver to Purchaser good, valid and marketable title to the Purchased Assets free of any Encumbrances; (ii) the Companies will assign and Purchaser will assume the contracts listed on Exhibit F ("List of Assumed Contracts"), subject to Purchaser's review and acceptance of such contract, (each an "Assumed Contract" and collectively the "Assumed Contracts"); Company shall assume the Assumed Contracts and assume the Assumed Liabilities under the Assumed Contracts by delivering to Purchaser an Assumption Agreement in substantially the form of Exhibit H; and (iii) The President and Secretary of Company and each of the Partners shall execute and deliver to Purchaser a certificate (the "Closing Certificate") setting forth their respective representations and warranties that (a) each of the representations and warranties made by the Companies in this Agreement was accurate in all respects as of the date of this Agreement, (b) each of the representations and 2 warranties made by the Companies in this Agreement is accurate in all respects as of the Closing Date as if made on the Closing Date, (c) each of the covenants and obligations that the Companies are required to have complied with or performed pursuant to this Agreement at or prior to the Closing has been duly complied with and performed in all respects, and (d) each of the conditions set forth in Section 5 has been satisfied in all respects. (c) On the later of (i) January 3, 2000 or (ii) the Closing, and conditional on the Closing occurring, Purchaser shall pay the Purchase Price (described in Exhibit A) to the Corporation and the Partnership due on such date, and make such other payment of the Purchase Price as are required under the terms and condition of such Exhibit. 1.4 TAXES. Purchaser shall bear and pay, and shall reimburse the Companies for any local or state sales and use taxes incurred that may become payable as a result of the sale of the Purchased Assets to Purchaser hereunder that, under applicable law, is the responsibility of Purchaser. Purchaser and the Companies each agree to use best efforts to minimize all such taxes. The Companies will be responsible for all taxes associated with operation of Company at any time and any income or similar taxes incurred by the Companies as a result of the sale of the Purchased Assets and the payments by Purchaser hereunder. 1.5 TAX ALLOCATION; FURTHER ASSURANCES; CHANGE OF NAME; MAIL. (a) The consideration referred to in Section 1.2 is to be allocated among the Purchased Assets as specified on Exhibit A. This allocation shall be conclusive and binding upon Purchaser and the Companies for all purposes, and neither Purchaser nor the Companies shall file any tax return or other document with, or make any statement or declaration to, any state or federal taxing authority that is inconsistent with such allocation. Notwithstanding the foregoing, the Purchaser may not so allocate consideration payable to the Partnership to assets acquired from the Corporation, nor allocate consideration payable to the Corporation to assets acquired from the Partnership. (b) After the Closing, the Companies shall from time to time, at the request of Purchaser and without further cost or expense to Purchaser, execute and deliver such other instruments of conveyance and transfer and take such other actions as Purchaser may reasonably request, in order to more effectively consummate the transactions contemplated hereby and to vest in Purchaser good and marketable title to the Purchased Assets hereunder. (c) The Corporation will amend its Charter on the Closing Date so as to change its name to "Wired Liquidating Corp." and the Partnership will change its name to "Wired Liquidating Partnership" and each will file as promptly as practicable after the Closing, in all jurisdictions in which it is qualified to do business, any documents necessary to reflect such change in its corporate name or to terminate its qualification therein. In connection with enabling Purchaser, at or as soon as practicable after the 3 Closing, to be named "Wired Incorporated", the Companies will, at or prior to the Closing, execute and deliver to Purchaser all consents related to such change of name as may be reasonably requested by Purchaser, and will otherwise reasonably cooperate with Purchaser. (d) Following the Closing, Purchaser may receive and open all mail addressed to the Companies and deal with the contents thereof in its discretion to the extent that such mail and the contents thereof relate to the business, assets or properties of the Companies sold to Purchaser and any of the obligations or liabilities assumed by Purchaser pursuant to this Agreement. 1.6 NO OTHER LIABILITIES. Purchaser shall not assume or be responsible for or liable to any Person or Entity for any Liabilities of Corporation, the Partnership or the Partners whatsoever, other than the Assumed Liabilities in the event the Closing occurs. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Companies and each of the Partners represents and warrants, jointly and severally, to and for the benefit of the Indemnitees, and except as set forth on the Disclosure Schedule attached hereto, as follows: 2.1 DUE ORGANIZATION; NO SUBSIDIARIES; ETC. (a) (i) The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all necessary power and authority: (A) to conduct its business in the manner in which its business is currently being conducted; (B) to own and use its assets in the manner in which its assets are currently owned and used; and (C) to perform its obligations under all Company Contracts. (ii) The Company has not conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other name, other than the name "Wired Incorporated". (b) (i) The Partnership is a general partnership duly organized, validly existing and in good standing under the laws of the State of California and has all necessary power and authority: (A) to conduct its business in the manner in which its business is currently being conducted; (B) to own and use its assets in the manner in which its assets are currently owned and used; and (C) to perform its obligations under all Partnership Contracts. (ii) The Partnership has not conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other name, other than the name "Wired". 4 (c) Neither Companies is nor has it been required to be qualified, authorized, registered or licensed to do business as a foreign corporation in any jurisdiction other than the jurisdictions identified in Part 2.1 of the Disclosure Schedule, except where the failure to be so qualified, authorized, registered or licensed has not had and will not have a Material Adverse Effect on the Companies. The Companies are in good standing as a foreign corporation or entities in each of the jurisdictions identified in Part 2.1 of the Disclosure Schedule. (b) Neither the Company nor the Partnership owns any controlling interest in any Entity and neither the Company nor the Partnership has never owned, beneficially or otherwise, any shares or other securities of, or any direct or indirect equity interest in, any Entity. Neither the Partnership nor the Company has agreed and neither is obligated to make any future investment in or capital contribution to any Entity. 2.2 CHARTER AND BYLAWS; RECORDS. (a) The Companies have delivered to Purchaser accurate and complete copies of: (1) the Company's respective Charter and bylaws, including all amendments thereto; (2) the stock and other equity membership records of the Companies; and (3) the minutes and other records of the meetings and other proceedings (including any actions taken by written consent or otherwise without a meeting) of the shareholders of the Companies, the board of directors of the Company and all committees of the board of directors of the Company. (b) There has not been any violation of any of the provisions of the Corporation's Certificate of Incorporation or bylaws, or the Partnership's partnership agreement and neither Company has not taken any action that is inconsistent in any respect with any resolution adopted by the Company's shareholders, the Company's board of directors, any committee of the Company's board of directors or the Partners, except any such violation or action which would not have a Material Adverse Effect on the Purchaser's ownership or enjoyment of Purchased Assets. (c) The books of account, stock records, minute books and other records of the Companies are accurate, up-to-date and complete in all respects, and have been maintained in accordance with prudent business practices. 2.3 CAPITALIZATION, ETC. (a) The Partnership is the only stockholder of the Corporation, and no other Person otherwise holds a equity interest in the Corporation. (b) The Partners are the only partners of the Partnership, and no other Person holds a partnership interest in the Partnership. 2.3 FINANCIAL STATEMENTS. (a) The Corporation has delivered to Purchaser the following financial statements and notes (collectively, the "Corporation Financial Statements"): 5 (i) The unaudited balance sheets of the Corporation as of September 30, 1999 and September 30, 1998 and the related unaudited income statements for the year then ended; and (ii) the unaudited balance sheet of the Corporation (the "Interim Balance Sheet") as of November 30, 1999 (the "Statement Date"), and the related unaudited income statement of the Corporation for the period then ended. (b) The Corporation Financial Statements are each (i) in accordance with the books and records of the Corporation, (ii) accurate and complete in all material respects and present fairly the financial position of the Corporation as of the respective dates thereof and the results of operations of the Corporation for the periods covered thereby and (iii) prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered. The Corporation Financial Statements are (i) in accordance with the books and records of the Corporation and (ii) accurate and complete in all material respects and present fairly the financial position of the Corporation as of the respective dates thereof and the results of operations of the Corporation for the periods covered thereby. 2.5 ABSENCE OF CHANGES. Since the Statement Date: (a) there has not been any adverse change in the Companys' business, condition, assets, liabilities, operations, financial performance or prospects, and, to the best of the knowledge of the Companies, no event has occurred that will, or could reasonably be expected to, have a Material Adverse Effect on the Companies; (b) there has not been any material loss, damage or destruction to, or any material interruption in the use of, any of the Companys' assets (whether or not covered by insurance); (c) the Companies have not declared, accrued, set aside or paid any dividend or made any other distribution in respect of any shares of capital stock or partnership interest, and have not repurchased, redeemed or otherwise reacquired any shares of capital stock, partnership interest or other securities; (d) there has been no amendment to the Companys' Charter or bylaws or partnership agreement, and neither Company has effected or been a party to any Acquisition Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction; (e) neither Company has made any capital expenditure which, when added to all other capital expenditures made on behalf of the Companies since the Statement Date, exceeds $25,000; (f) neither Company has (i) entered into or permitted any of the assets owned or used by it to become bound by any Contract that is or would constitute a 6 Material Contract (as defined in Section 2.10(a)), or (ii) amended or prematurely terminated, or waived any material right or remedy under, any such Contract; (g) except in the ordinary course of business and consistent with the past practices, neither Company has (i) acquired, leased or licensed any right or other asset from any other Person, (ii) sold or otherwise disposed of, or leased or licensed, any right or other asset to any other Person, or (iii) waived or relinquished any right; (h) neither Company has written off as uncollectible, or established any extraordinary reserve with respect to, any account receivable or other indebtedness which is material in amount; (i) neither the Company has made any pledge of any of its assets or otherwise permitted any of its assets to become subject to any Encumbrance, except for pledges of immaterial assets made in the ordinary course of business and consistent with the past practices; (j) neither Company has (i) lent money to any Person (other than pursuant to routine travel advances made to employees in the ordinary course of business), or (ii) incurred or guaranteed any indebtedness for borrowed money other than in the ordinary course of business, consistent with past practice; (k) neither Company has (i) established or adopted any Employee Benefit Plan, (ii) paid any bonus or made any profit-sharing or similar payment to, or increased the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees, or (iii) hired any new employee; (l) neither Company has changed any of its methods of accounting or accounting practices in any respect; (m) neither Company has made any Tax election; (n) neither Company has commenced or settled any Legal Proceeding; (o) neither Company has entered into any material transaction or taken any other material action outside the ordinary course of business or inconsistent with its past practices; and (p) neither Company has agreed or committed to take any of the actions referred to in clauses (c) through (o) above. 2.6 TITLE TO ASSETS. (a) Each Company owns, and has good, valid and marketable title to, all of the Purchased Assets, free and clear of any lien or encumbrance, except where any 7 such defect or encumbrance would not have a Material Adverse Effect on the Purchaser's ownership or enjoyment of the Purchased Assets. (b) Part 2.6 of the Disclosure Schedule identifies all assets that are material to the business of each Company and that are being leased or licensed to the Company. (c) Each Company has complete and unrestricted power and the unqualified right to sell, assign, transfer and deliver to Purchaser, and upon consummation of the transactions contemplated by this Agreement, Purchaser will acquire, good, valid and marketable title to, the Purchased Assets, free and clear of all mortgages, pledges, liens, security interests, conditional sales agreements, encumbrances or charges of any kind. The Bill of Sale and the deeds, endorsements, assignments and other instruments to be executed and delivered to Purchaser by the Companies at the Closing will be valid and binding obligations of the Companies and the Selling Partners, enforceable in accordance with their terms, and will effectively vest in Purchaser good, valid and marketable title to all the Purchased Assets. 2.7 BANK ACCOUNTS; RECEIVABLES. (a) Part 2.7(a) of the Disclosure Schedule provides accurate information with respect to each account maintained by or for the benefit of the Companies at any bank or other financial institution. (b) Part 2.7(b) of the Disclosure Schedule provides an accurate and complete breakdown and aging of all accounts receivable, notes receivable and other receivables of the Companies as of the Statement Date. All existing accounts receivable of the Companies (including those accounts receivable reflected on the respective Interim Balance Sheet that have not yet been collected and those accounts receivable that have arisen since the Statement Date and have not yet been collected) (i) represent valid obligations of customers of the Companies arising from bona fide transactions entered into in the ordinary course of business, (ii) are current and will be collected in full when due, without any counterclaim or set off (net of an allowance for doubtful accounts not to exceed $25,000 in the aggregate). 2.8 EQUIPMENT; LEASEHOLD. (a) All material items of equipment and other tangible assets owned by or leased to the Companies are adequate for the uses to which they are being put, are in good condition and repair (ordinary wear and tear excepted) and are adequate for the conduct of the Companys' business in the manner in which such business is currently being conducted. (b) Neither Company owns any real property or any interest in real property, except for the leasehold interests identified in Part 2.10 of the Disclosure Schedule. 8 2.9 PROPRIETARY ASSETS. (a) Part 2.9(a)(i) of the Disclosure Schedule sets forth, with respect to each Company's Proprietary Asset registered with any Governmental Body or for which an application has been filed with any Governmental Body, (i) a brief description of such Proprietary Asset, and (ii) the names of the jurisdictions covered by the applicable registration or application. Part 2.9(a)(ii) of the Disclosure Schedule identifies and provides a brief description of all unregistered trademarks, service marks and copyrighted materials owned by each Company. Part 2.9(a)(iii) of the Disclosure Schedule identifies and provides a brief description of each Proprietary Asset licensed to each Company by any Person (except for any Proprietary Asset that is licensed to a Company under any third party software license generally available to the public at a cost of less than $10,000), and identifies the license agreement under which such Proprietary Asset is being licensed to the Company. Each Company has good, valid and marketable title to all of the Proprietary Assets, other than those identified in Part 2.9(a)(iii) of the Disclosure Schedule, free and clear of all liens and other Encumbrances, and has a valid right to use all Proprietary Assets identified in Part 2.9(a)(iii) of the Disclosure Schedule. Neither Company is obligated to make any payment to any Person (other than the other Company) for the use of any Company Proprietary Asset. Neither Company has developed jointly with any other Person any Proprietary Asset with respect to which such other Person has any rights, except for limited and non-exclusive licenses given to customers in the ordinary course of business. (b) Each Company has taken all measures and precautions necessary to protect and maintain the confidentiality and secrecy of all Proprietary Assets (except Proprietary Assets whose value would be unimpaired by public disclosure) and otherwise to maintain and protect the value of all Proprietary Assets. Neither Company has (other than pursuant to license agreements or nondisclosure agreements identified in Part 2.10 of the Disclosure Schedule) disclosed or delivered to any Person, or permitted the disclosure or delivery to any Person of, (i) the source code, or any portion or aspect of the source code, of any Proprietary Asset, or (ii) the object code, or any portion or aspect of the object code, of any Proprietary Asset. (c) To the best of the Partners' knowledge, the manufacture, use, sale or other disposition of the Company's products will not infringe the patents of any other Person. None of the Company Proprietary Assets is infringing, or at any time has infringed, on any other Intellectual Property rights of any other Person. Neither Company has at any time received any notice or other written communication of any actual or alleged infringement of any Intellectual Property Rights of any other Person by any of the Proprietary Assets. The Company has not misappropriated any trade secrets of any other Person. To the best of the Partners' knowledge, no other Person is infringing, misappropriating or making any unlawful use of, and no Proprietary Asset owned or used by any other Person infringes or conflicts with, any Proprietary Asset. 9 (d) (i) Each Proprietary Asset conforms in all material respects with any specification, documentation, performance standard, representation or statement made or provided with respect thereto by or on behalf of the Company; and (ii) there has not been any claim by any customer or other Person alleging that any Proprietary Asset (including each version thereof that has ever been licensed or otherwise made available by the Company to any Person) does not conform in all material respects with any specification, documentation, performance standard, representation or statement made or provided by or on behalf of the Company, and, to the best of the knowledge of the Company, there is no basis for any such claim. (e) The Proprietary Assets constitute all the Proprietary Assets necessary to enable the Companies to conduct its business in the manner in which such business has been and is being conducted. (i) The Companies have not licensed any of the Proprietary Assets to any Person on an exclusive basis, and (ii) the Companies have not entered into any covenant not to compete or Contract limiting its ability to exploit fully any of its Proprietary Assets or to transact business in any market or geographical area or with any Person. (f) (i) All current and former employees of the Companies have executed and delivered to the Companies an agreement (containing no exceptions to or exclusions from the scope of its coverage) that is substantially identical to the form of Confidential Information and Invention Assignment Agreement previously delivered to Purchaser, and (ii) all current and former consultants and independent contractors to the Companies have executed and delivered to the Companies an agreement (containing no exceptions to or exclusions from the scope of its coverage) that is substantially identical to the form of Consultant Confidential Information and Invention Assignment Agreement previously delivered to Purchaser. 2.10 CONTRACTS. (a) Part 2.10 of the Disclosure Schedule identifies: (i) each Company Contract relating to the employment of, or the performance of services by, any employee, consultant or independent contractor; (ii) each Company Contract relating to the acquisition, transfer, use, development, sharing or license of any technology or any Proprietary Asset; (iii) each Company Contract imposing any restriction on either Company's right or ability (A) to compete with any other Person, (B) to acquire any product or other asset or any services from any other Person, to sell any product or other asset to or perform any services for any other Person or to transact business or deal in any other manner with any other Person, or (C) develop or distribute any technology; (iv) each Company Contract creating or involving any agency relationship, distribution arrangement or franchise relationship; 10 (v) each Company Contract relating to the acquisition, issuance or transfer of any securities; (vi) each Company Contract relating to the creation of any Encumbrance with respect to any asset of the Company; (vii) each Company Contract involving or incorporating any guaranty, any pledge, any performance or completion bond, any indemnity or any surety arrangement; (viii) each Company Contract creating or relating to any partnership or joint venture or any sharing of revenues, profits, losses, costs or liabilities; (ix) each Company Contract relating to the purchase or sale of any product or other asset by or to, or the performance of any services by or for, any Related Party (as defined in Section 2.18); (x) each Company Contract constituting or relating to a Government Contract or Government Bid; (xi) any other Company Contract that was entered into outside the ordinary course of business or was inconsistent with the Company's past practices; (xii) any other Company Contract that has a term of more than 60 days and that may not be terminated by the Company (without penalty) within 60 days after the delivery of a termination notice by the Company; and (xiii) any other Company Contract that contemplates or involves (A) the payment or delivery of cash or other consideration in an amount or having a value in excess of $25,000 in the aggregate, or (B) the performance of services having a value in excess of $25,000 in the aggregate. (Contracts in the respective categories described in clauses "(i)" through "(xiii)" above are referred to in this Agreement as "Material Contracts.") (b) The Companies have delivered to Purchaser accurate and complete copies of all written Materials Contracts, including all amendments thereto. Part 2.10 of the Disclosure Schedule provides an accurate description of the terms of each Material Contract that is not in written form. Each Material Contract is valid and in full force and effect, and, to the best of the knowledge of the Companies, is enforceable by the Companies in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. (c) Except as set forth in Part 2.10 of the Disclosure Schedule: 11 (i) neither Company has violated or breached, or committed any default under, any Material Contract, and, to the best of the knowledge of the Companies, no other Person has violated or breached, or committed any default under, any Material Contract; (ii) no event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, (A) result in a violation or breach of any of the provisions of any Material Contract, (B) give any Person the right to declare a default or exercise any remedy under any Material Contract, (C) give any Person the right to accelerate the maturity or performance of any Material Contract, or (D) give any Person the right to cancel, terminate or modify any Material Contract; (iii) within the two years before the Closing, neither Company has received any notice or other communication regarding any actual or possible violation or breach of, or default under, any Material Contract; and (iv) neither Company has waived any of its material rights under any Material Contract. (d) No Person is renegotiating, or has a right pursuant to the terms of any Material Contract to renegotiate, any amount paid or payable to either Company under any Material Contract or any other material term or provision of any Material Contract. (e) The Contracts identified in Part 2.10 of the Disclosure Schedule collectively constitute all of the Contracts necessary to enable the Companies to conduct their business in the manner in which its business is currently being conducted. 2.11 LIABILITIES. Neither Company has any accrued, contingent or other liabilities of any nature, either matured or unmatured (whether or not required to be reflected in financial statements in accordance with generally accepted accounting principles, and whether due or to become due), except for: (a) liabilities identified as such in the "liabilities" column of the respective Interim Balance Sheet; (b) accounts payable, accrued salaries or other liabilities that have been incurred by the Company since the Statement Date in the ordinary course of business and consistent with the Company's past practices; (c) liabilities under the Material Contracts identified in Part 2.10 of the Disclosure Schedule, to the extent the nature and magnitude of such liabilities can be specifically ascertained by reference to the text of such Material Contracts; and (d) the liabilities identified in Part 2.11 of the Disclosure Schedule. 2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. Each Company is, and has at all times since inception been, in compliance with all applicable Legal Requirements, except where the failure to comply with such Legal Requirements has not had and will not have a Material Adverse Effect on the Company. Since inception, neither Company has 12 received any notice or other communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any Legal Requirement. 2.13 GOVERNMENTAL AUTHORIZATIONS. Part 2.13 of the Disclosure Schedule identifies each material Governmental Authorization held by each Company, and the Companies have delivered to Purchaser accurate and complete copies of all Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule. The Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule are valid and in full force and effect, and collectively constitute all Governmental Authorizations necessary to enable the Companies to conduct its business in the manner in which its business is currently being conducted. The Companies are, and at all times since inception have been, in substantial compliance with the terms and requirements of the respective Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule. Since inception, neither Company has received any notice or other communication from any Governmental Body regarding (a) any actual or possible violation of or failure to comply with any term or requirement of any Governmental Authorization, or (b) any actual or possible revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization. 2.14 TAX MATTERS. (a) All Tax Returns required to be filed by or on behalf of either Company with any Governmental Body with respect to any taxable period ending on or before the Closing Date (the "Company Returns") (i) have been or will be filed on or before the applicable due date (including any extensions of such due date), and (ii) have been, or will be when filed, accurately and completely prepared in all material respects in compliance with all applicable Legal Requirements. All amounts shown on the Company Returns to be due on or before the Closing Date have been or will be paid on or before the Closing Date. The Companies have delivered to Purchaser accurate and complete copies of all Company Returns for fiscal years from 1994. (b) The Company and Partnership Financial Statements fully accrue all actual and contingent liabilities for Taxes with respect to all periods through the dates thereof, except for any Taxes due for the tax period ending September 30, 1999. The Companies will establish, in the ordinary course of business and consistent with its past practices, reserves adequate for the payment of all Taxes for the period from the Statement Date through the Closing Date, and the Companies will disclose the dollar amount of such reserves to Purchaser on or prior to the Closing Date. (c) No Company Return relating to income Taxes has ever been examined or audited by any Governmental Body. There have been no examinations or audits of any Company Return. The Companies have delivered to Purchaser accurate and complete copies of all audit reports and similar documents (to which the Companies has access) relating to the Company Returns. No extension or waiver of the limitation period 13 applicable to any of the Company Returns has been granted (by the Companies or any other Person), and no such extension or waiver has been requested from the Companies. (d) No claim or Proceeding is pending or has been threatened against or with respect to the Companies in respect of any Tax. There are no unsatisfied liabilities for Taxes (including liabilities for interest, additions to tax and penalties thereon and related expenses) with respect to any notice of deficiency or similar document received by the Companies with respect to any Tax (other than liabilities for Taxes asserted under any such notice of deficiency or similar document which are being contested in good faith by the Companies and with respect to which adequate reserves for payment have been established). There are no liens for Taxes upon any of the assets of the Companies except liens for current Taxes yet due and payable. The Companies have not entered into or become bound by any agreement or consent pursuant to Section 341(f) of the Code. The Companies have not been, and the Companies will not be, required to include any adjustment in taxable income for any tax period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions or events occurring, or accounting methods employed, prior to the Closing. (e) There is no agreement, plan, arrangement or other Contract covering any employee or independent contractor or former employee or independent contractor of the Companies that, considered individually or considered collectively with any other such Contracts, will, or could reasonably be expected to, give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 280G or Section 162 of the Code. The Companies are not, and have never been, a party to or bound by any tax indemnity agreement, tax sharing agreement, tax allocation agreement or similar Contract. 2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS. (a) Part 2.15(a) of the Disclosure Schedule identifies each salary, bonus, deferred compensation, incentive compensation, stock purchase, severance pay, termination pay, hospitalization, medical, life or other insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plan, program or agreement (collectively, the "Plans") sponsored, maintained, contributed to or required to be contributed to by the Companies for the benefit of any employee of the Companies ("Employee"), except for Plans which would not require the Companies to make payments or provide benefits having a value in excess of $10,000 in the aggregate. (b) The Companies do not maintain, sponsor or contribute to, and, to the best of the knowledge of the Companies, have not at any time in the past maintained, sponsored or contributed to, any employee pension or welfare benefit plan (as defined in Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not excluded from coverage under specific Titles or Subtitles of ERISA) for the benefit of Employees or former Employees (a "Pension Plan"). 14 (c) Part 2.15(k) of the Disclosure Schedule contains a list of all salaried employees of the Companies as of the date of this Agreement, and correctly reflects, in all material respects, their salaries, any other compensation payable to them (including compensation payable pursuant to bonus, deferred compensation or commission arrangements), their dates of employment and their positions. The Companies are not a party to any collective bargaining contract or other Contract with a labor union involving any of its Employees. All of the Companys' employees are "at will" employees. (d) Part 2.15(l) of the Disclosure Schedule identifies each Employee who is not fully available to perform work because of disability or other leave and sets forth the basis of such leave and the anticipated date of return to full service. (e) The Companies are in compliance in all material respects with all applicable Legal Requirements and Contracts relating to employment, employment practices, wages, bonuses and terms and conditions of employment, including employee compensation matters. (f) The Companies have no reason to believe that the consummation of the Acquisition or any of the other transactions contemplated by this Agreement will have a Material Adverse Effect on the Company's labor relations. To the Companys' knowledge, none of the Companys' employees intends to terminate his or her employment with the Companies. 2.16 ENVIRONMENTAL MATTERS. The Companies are in compliance in all respects with all applicable Environmental Laws. 2.17 INSURANCE. Part 2.17 of the Disclosure Schedule identifies all insurance policies maintained by, at the expense of or for the benefit of the Companies. No claims have ever been made thereunder Each of the insurance policies identified in Part 2.17 of the Disclosure Schedule is in full force and effect. Since inception, neither Company has received any notice or other communication regarding any actual or possible (a) cancellation or invalidation of any insurance policy, (b) refusal of any coverage or rejection of any claim under any insurance policy, or (c) material adjustment in the amount of the premiums payable with respect to any insurance policy 2.18 RELATED PARTY TRANSACTIONS. (a) No Related Party has any direct or indirect interest in any material asset used in the business of the Companies; (b) no Related Party is indebted to the Companies; (c) no Related Party has entered into, or has had any direct or indirect financial interest in any Material Contract or other business dealing involving the Companies; 15 (d) no Related Party is competing with the Companies; and (e) no Related Party has any claim or right against the Companies (other than rights to receive compensation for services performed as an employee). (For purposes of the Section 2.18 each of the following shall be deemed to be a "Related Party": (i) each of the Partners; (ii) each individual who is a director or officer of the Corporation; (iii) each member of the immediate family of each of the individuals referred to in clauses "(i)" and "(ii)" above; and (iv) any trust or other Entity (other than the Partnership or the Corporation) in which any one of the individuals referred to in clauses "(i)", "(ii)" and "(iii)" above holds (or in which more than one of such individuals collectively hold), beneficially or otherwise, a controlling voting, proprietary or equity interest. 2.19 LEGAL PROCEEDINGS; ORDERS. (a) There is no pending Legal Proceeding, and (to the best of the knowledge of the Companies) no Person has threatened to commence any Legal Proceeding: (i) that involves the Companies or any of the Purchased Assets; or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Acquisition or any of the other transactions contemplated by this Agreement. To the best of the knowledge of the Companies, no event has occurred, and no claim, dispute or other condition or circumstance exists, that will, or that could reasonably be expected to, give rise to or serve as a basis for the commencement of any such Legal Proceeding. (b) There is no order, writ, injunction, judgment or decree to which the Companies, or any of the Purchased Assets, is subject. None of the Partners is subject to any order, writ, injunction, judgment or decree that relates to the Company's business or to any of the assets owned or used by the Companies. To the best of the knowledge of the Company, no officer or other employee of the Company is subject to any order, writ, injunction, judgment or decree that prohibits such officer or other employee from engaging in or continuing any conduct, activity or practice relating to the Company's business. 2.20 AUTHORITY; BINDING NATURE OF AGREEMENT. The Companies have the absolute and unrestricted right, power and authority to enter into and to perform its obligations under this Agreement; and the execution, delivery and performance by the Companies of this Agreement have been duly authorized by all necessary action on the part of the Companies and their board of directors or partners. This Agreement constitutes the legal, valid and binding obligation of the Companies, enforceable against them in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. 16 2.21 NON-CONTRAVENTION; CONSENTS. Neither (1) the execution, delivery or performance of this Agreement or any other agreement to which Companies are or will be a party that are required to be executed pursuant to this Agreement ("Company Ancillary Agreement"), nor (2) the consummation of the Acquisition or any of the other transactions contemplated by this Agreement, will directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with or result in a violation of (i) any of the provisions of either Company's Charter or bylaws or partnership agreement then in effect, or (ii) any resolution adopted by the Company's shareholders, or partners or the Company's board of directors or any committee of the Company's board of directors then in effect; (b) contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the transactions contemplated by this Agreement or to exercise any remedy or obtain any relief under, any Legal Requirement or any order, writ, injunction, judgment or decree to which either Company, or any of the assets owned or used by the Companies, is subject; (c) contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by either Company or that otherwise relates to either Company's business or to any of the assets owned or used by either Company if such action would have a Material Adverse Effect; (d) contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Material Contract, or give any Person the right to (i) declare a default or exercise any remedy under any such Material Contract, (ii) accelerate the maturity or performance of any such Material Contract, or (iii) cancel, terminate or modify any such Material Contract if such action would have a Material Adverse Effect; or (e) result in the imposition or creation of any lien or other Encumbrance upon or with respect to any asset owned or used by either Company (except for minor liens that will not, in any case or in the aggregate, materially detract from the value of the assets subject thereto or materially impair the operations of the Companies). The Companies are not and will not be required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with (x) the execution, delivery or performance of this Agreement or any Company Ancillary Agreement, or (y) the consummation of the Acquisition or any of the other transactions contemplated by this Agreement. 2.22 FULL DISCLOSURE. This Agreement (including the Disclosure Schedule) does not, and the Closing Certificate will not, (i) contain any representation, warranty or 17 information that is false or misleading with respect to any material fact, or (ii) omit to state any material fact necessary in order to make the representations, warranties and information contained and to be contained herein and therein (in light of the circumstances under which such representations, warranties and information were or will be made or provided) not false or misleading. 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER. Parent and Purchaser jointly and severally represent and warrant to the Company and the Partners as follows: 3.1 AUTHORITY; BINDING NATURE OF AGREEMENT. Parent and Purchaser have the absolute and unrestricted right, power and authority to perform their obligations under this Agreement; and the execution, delivery and performance by Parent and Purchaser of this Agreement have been duly authorized by all necessary action on the part of Parent and Purchaser and their respective boards of directors. No vote of Parent's shareholders is needed to approve the Acquisition. This Agreement constitutes the legal, valid and binding obligation of Parent and Purchaser, enforceable against each of them in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. 3.2 ORGANIZATION AND STANDING. Each of the Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite corporate power and authority to own, operate and lease its properties and carry on its business as now conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to so qualify would have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results in operations of Parent or Purchaser. 3.3 AUTHORITY, APPROVAL AND ENFORCEABILITY. (a) The execution and delivery by each of Parent and Purchaser, as the case may be, of this Agreement does not, and the performance and consummation of the transactions contemplated by this Agreement will not, result in or give rise to (with or without the giving of notice or the lapse of time, or both) any conflict with, breach or violation of, or default, termination, forfeiture or acceleration of obligations under, any terms or provisions of its (i) Certificate of Incorporation or Bylaws then in effect, as the case may be, (ii) to the best of Parent's knowledge, any statute, rule, regulation or any judicial, governmental, regulatory or administrative decree, order or judgment applicable to them, or (iii) any material agreement, lease or other instrument to which its is a party or to which it or any of its assets may be bound and which has been filed as an exhibit to any of the registration statements or reports filed with the SEC by Parent. 18 (b) No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental entity is required by or with respect to Parent or Purchaser in connection with the execution and delivery of this Agreement or the consummation by Parent or Purchaser of the transactions contemplated hereby or thereby. (c) This Agreement is a legal, valid and binding obligation of Parent and/or Purchaser, enforceable against them in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and subject to general equitable principles. 3.4 COMPLIANCE WITH OTHER INSTRUMENTS. Neither Parent nor Purchaser is in violation of any term of its Certificate of Incorporation or Bylaws, or in any material respect of any agreement which has been filed as an exhibit to any registration statements or reports filed with the SEC by Parent, and to the best of its knowledge, is not in violation of any order, statute, rule or regulation applicable to it. To the best of Parent's knowledge, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in any violation of any material statute, law, rule, regulation, judgment, order, decree or ordinance applicable to Parent or Purchaser or their respective properties or assets. The execution and delivery of this Agreement and consummation of the transactions contemplated hereby will not conflict with or result in any breach or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit, under (i) any provision of the Certificate of Incorporation or Bylaws of Parent or Purchaser or (ii) any material agreement, contract, note, mortgage, indenture, lease, instrument, permit, concession, franchise or license to which Parent or Purchaser is a party or by which Parent or Purchaser or their respective properties or assets may be bound or affected and which has been or will be filed as an exhibit to any registration statement or report filed with the SEC by Parent. 3.5 PARENT STOCK OPTION PLAN. Parent's Key Employee Incentive Plan (1992), under which certain Employees who accept employment with Parent or Purchaser may be issued stock options, has been duly authorized and adopted by all necessary action on the part of Parent's board of directors and Partners and the securities of Parent reserved for issuance thereunder have been duly registered or qualified for issuance in accordance with all applicable federal and state securities laws (or available exemptions therefrom) and will be issued in compliance with all applicable federal and state securities laws (or available exemption therefrom). 4. CERTAIN COVENANTS OF THE COMPANY AND PARENT 4.1 ACCESS AND INVESTIGATION. During the period from the date of this Agreement through the Closing Date (the "Pre-Closing Period"), the Company shall, and shall cause its Representatives to: (a) provide Purchaser and Purchaser's Representatives with reasonable access to the Company's Representatives, personnel and assets and to all 19 existing books, records, Tax Returns, work papers and other documents and information relating to the Company; and (b) provide Purchaser and Purchaser's Representatives with copies of such existing books, records, Tax Returns, work papers and other documents and information relating to the Company, and with such additional financial, operating and other data and information regarding the Company, as Purchaser may reasonably request. 4.2 OPERATION OF THE COMPANY'S BUSINESS. Unless permitted by Purchaser, during the Pre-Closing Period: (a) each Company shall conduct its business and operations in the ordinary course and in substantially the same manner as such business and operations have been conducted prior to the date of this Agreement; (b) each Company shall use reasonable efforts to preserve intact its current business organization, keep available the services of its current officers and employees and maintain its relations and good will with all suppliers, customers, landlords, creditors, employees and other Persons having business relationships with the Company; (c) each Company shall keep in full force all insurance policies identified in Part 2.17 of the Disclosure Schedule or procure substantial similar policies; (d) each Company shall cause its officers to report regularly (but in no event less frequently than weekly) to Purchaser concerning the status of the Company's business; (e) neither Company shall declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of capital stock or partnership interest, and shall not repurchase, redeem or otherwise reacquire any shares of capital stock, partnership interest or other securities; (f) neither Company shall sell, issue or authorize the issuance of (i) any capital stock, partnership interest or other security, (ii) any option or right to acquire any capital stock, partnership interest or other security, or (iii) any instrument convertible into or exchangeable for any capital stock, partnership interest or other security; (g) neither Company shall amend the Company's Certificate of Incorporation or bylaws or partnership agreement, or become a party to any Acquisition Transaction; (h) neither Company shall form any subsidiary or acquire any equity interest or other interest in any other Entity; (i) neither Company shall make any capital expenditure, except for capital expenditures that, when added to all other capital expenditures made on behalf of 20 the Companies during the Pre-Closing Period, do not on average exceed $20,000 per month; (j) neither Company shall (i) enter into, or permit any of the material assets owned or used by it to become bound by, any Encumbrance, or (ii) amend or prematurely terminate, or waive any material right or remedy under, any Material Contract; (k) except in the ordinary course of its business, neither Company shall: (1) (i) acquire, lease or license any right or other asset from any other Person (except as otherwise required under this Agreement), (ii) sell or otherwise dispose of, or lease or license, any right or other asset to any other Person, or (iii) waive or relinquish any right, except for assets acquired, leased, licensed or disposed of by the Company pursuant to Contracts that are not Material Contracts or (2) enter into any transaction material to the business or the Purchased Assets; (l) neither Company shall (i) lend money to any Person (except that the Companies may make routine travel advances to employees in the ordinary course of business) or (ii) incur or guarantee any indebtedness for borrowed money; (m) neither Company shall (i) establish, adopt or amend any Employee Benefit Plan, (ii) pay any bonus or make any profit-sharing payment, cash incentive payment or similar payment to, or increase the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees, or (iii) hire any new employee whose aggregate annual compensation is expected to exceed $50,000; (n) neither Company shall change any of its methods of accounting or accounting practices in any material respect; (o) neither Company shall make any Tax election; (p) neither Company shall commence or settle any material Legal Proceeding; (q) neither Company shall agree or commit to take any of the actions described in clauses "(e)" through "(p)" above. 4.3 NOTIFICATION. During the Pre-Closing Period, the Companies shall promptly notify Purchaser in writing of: (a) the discovery by the Companies of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes an inaccuracy in or a breach of any representation or warranty made by the Companies or the Partners in this Agreement; 21 (b) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that would cause or constitute an inaccuracy in or a breach of any representation or warranty made by the Companies or the Partners in this Agreement if such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition, fact or circumstance; (c) any breach of any covenant or obligation of the Companies or the Partners; (d) any event, condition, fact or circumstance that would make the timely satisfaction of any of the conditions set forth in Section 5 or Section 6 impossible or unlikely; and (e) any material change in the business, financial condition, properties or prospects of the Companies or the Partners. 4.4 FILINGS AND CONSENTS. As promptly as practicable after the execution of this Agreement, each party to this Agreement (a) shall make all filings (if any) and give all notices (if any) required to be made and given by such party in connection with the Acquisition and the other transactions contemplated by this Agreement, (b) shall use all commercially reasonable efforts to obtain all Consents (if any) required to be obtained (pursuant to any applicable Legal Requirement or Contract, or otherwise) by such party in connection with the Acquisition and the other transactions contemplated by this Agreement, (c) in the case of the Company, use commercially reasonable efforts to otherwise satisfy the conditions specified in Section 6 of this Agreement, and (d) in the case of the Parent and Purchaser, use commercially reasonable efforts to otherwise satisfy the conditions specified in Section 5 of this Agreement. Each party shall (upon request) promptly deliver to Purchaser the other a copy of each such filing made, each such notice given and each such Consent obtained during the Pre-Closing Period. 4.5 PROPRIETARY INFORMATION AGREEMENTS. At or prior to the Closing, each of the Employees shall execute and deliver to the Company and Purchaser a Proprietary Information Agreement in the Company's standard form. 4.6 PUBLIC ANNOUNCEMENTS. During the Pre-Closing period, (a) neither party shall issue any press release or make any public statement regarding this Acquisition or the Agreement, or any of the other transactions contemplated by this Agreement without the prior written consent of the other. 4.7 GRANT OF OPTIONS. As soon as reasonably practicable after the effective time of the Acquisition, anticipated to be no earlier than January 30, 2000, Parent shall, subject to approval of its board of directors, grant options to purchase an aggregate of 100,000 shares of common stock of Parent under Parent's Key Employee Incentive Plan (1992) to those employees of the Company that accept employment with Parent or Purchaser. 22 5. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND PURCHASER The obligations of Parent and Purchaser to effect the Acquisition and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction, at or prior to the Closing, of each of the following conditions: 5.1 ACCURACY OF REPRESENTATIONS. Each of the representations and warranties made by the Company in this Agreement and in each of the other agreements and instruments delivered to Parent in connection with the transactions contemplated by this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the Closing Date as if made on the Closing Date. 5.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that the Company is required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all respects. 5.3 SHAREHOLDER APPROVAL. The principal terms of the Acquisition shall have been duly approved by the unanimous vote of the shares of Corporation capital stock entitled to vote with respect thereto and all partners of the Partnership. 5.4 CONSENTS. All Consents required to be obtained in connection with the Acquisition and the other transactions contemplated by this Agreement (including the Consents identified in Part 2.21 of the Disclosure Schedule) shall have been obtained and shall be in full force and effect. 5.5 AGREEMENTS AND DOCUMENTS. Purchaser shall have received the following agreements and documents, each of which shall be in full force and effect: (a) any bills of sale, endorsements and assignments in form acceptable to Purchaser transferring title to the Purchased Assets to Purchaser; (b) such other documents evidencing the transfer of the Purchased Assets to Purchaser as are reasonably requested by Purchaser; (c) evidence that any notices or filings required to have been given to or made in connection with the transactions contemplated by this Agreement have been given and made and that all Consents required to have been obtained in connection with such transactions have been obtained; and (d) such other documents as Purchaser may request in good faith for the purpose of (i) evidencing the accuracy of any representation or warranty made by Companies or the Partners, (ii) evidencing the compliance by Companies or the Partners with, or the performance by Companies or the Partners of, any covenant or obligation set forth in this Agreement, (iii) evidencing the satisfaction of any condition set forth in this 23 Section 7, or (iv) otherwise facilitating the consummation or performance of any of the transactions contemplated by this Agreement. (e) Proprietary Information Agreements in the form attached hereto as Exhibit I-1, executed by the Employees; (f) Noncompetition Agreement in the form attached hereto as Exhibit I-2, executed by each of Michael Whittingham, Mark Bain and Thomas Burke (collectively, the "Partners"); (g) a legal opinion of Baker & McKenzie dated as of the Closing Date, in the form of Exhibit J; and (h) a certificate executed by the Company stating that the conditions set forth in this Section 5 have been duly satisfied in all material respects (the "Closing Certificate") 5.6 NO RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Acquisition shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the Acquisition that makes consummation of the Acquisition illegal. No action shall have been taken, and no statute, rule, regulation or order shall have been enacted, promulgated or issued or deemed applicable to the Acquisition by any governmental entity which would (i) make the consummation of the Acquisition illegal; (ii) prohibit Purchaser's, Parent's or the Company's ownership or operation of all or a material portion of the business or assets of Purchaser, Parent or the Company, or compel Purchaser, Parent or the Company to dispose of or hold separate all or a material portion of the business or assets of the Company, Purchaser or Parent as a result of the Acquisition or (iii) render Parent, Purchaser or the Company unable to consummate the Acquisition, except for any waiting provisions. 5.7 NO LEGAL PROCEEDINGS. No Person shall have commenced or threatened to commence any Legal Proceeding challenging or seeking the recovery of a material amount of damages in connection with the Acquisition or seeking to prohibit or limit the exercise by Purchaser or Parent of any material right pertaining to its ownership of Purchased Assets. 5.8 DUE DILIGENCE. Purchaser and Parent shall have completed business, technical, legal and financial due diligence on the Company and its products and the results of such due diligence shall be acceptable to Parent and Purchaser. 5.9 INTELLECTUAL PROPERTY ASSIGNMENTS. All current and former employees, consultants and independent contractors of the Company identified by Purchaser prior to the Closing Date (including those involved in the creation or development of intellectual property) to assign to Purchaser all rights to intellectual property related to the 24 Company's business if such intellectual property rights were not previously assigned to the Company to Purchaser's satisfaction. 5.10 EMPLOYEES. (a) Each of the Partners shall have agreed to become a full-time employee of the Purchaser or Parent. (b) The number of persons employed by the Company at the Closing Date shall not exceed 10. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANIES The obligations of the Companies to sell and transfer the Purchased Assets and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction, at or prior to the Closing, of the following conditions: 6.1 ACCURACY OF REPRESENTATIONS. Each of the representations and warranties made by Parent and Purchaser in this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the Closing Date as if made on the Closing Date. 6.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that Parent and Purchaser are required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all respects. 6.3 NO RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Acquisition shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the Acquisition that makes consummation of the Acquisition illegal. 7. TERMINATION 7.1 TERMINATION EVENTS. (a) This Agreement may be terminated prior to the Closing: (1) by Parent or Purchaser if: (a) Parent or Purchaser reasonably determines that the timely satisfaction of any condition set forth in Section 5 has become impossible (other than as a result of any failure on the part of Parent or Purchaser to comply with or perform any covenant or obligation of Parent or Purchaser set forth in this Agreement); or (b) the Closing has not taken place on or before December 31, 1999 (other than as a result of any failure on the part of Parent or Purchaser 25 to comply with or perform any covenant or obligation of Parent or Purchaser set forth in this Agreement); or (c) any of the Partners ceases to be employed full-time by the Companies. (2) by either of the Companies if: (a) the Company reasonably determines that the timely satisfaction of any condition set forth in Section 6 has become impossible (other than as a result of any failure on the part of the Company to comply with or perform any covenant or obligation set forth in this Agreement or in any other agreement or instrument delivered to Parent or Purchaser), or (b) the Closing has not taken place on or before December 31, 1999 (other than as a result of the failure on the part of the Company or any of the Partners or Shareholders to comply with or perform any covenant or obligation set forth in this Agreement). (b) This Agreement may be terminated by the mutual consent of Parent, Purchaser and the Company and the Partners. 7.2 TERMINATION PROCEDURES. If Parent or Purchaser wishes to terminate this Agreement pursuant to Section 7.1(a), Parent or Purchaser shall deliver to the Company a written notice stating that Parent or Purchaser is terminating this Agreement and setting forth a brief description of the basis on which Parent or Purchaser is terminating this Agreement. If the Company wishes to terminate this Agreement pursuant to Section 7.1(b), the Company shall deliver to Parent and Purchaser a written notice stating that the Company is terminating this Agreement and setting forth a brief description of the basis on which the Company is terminating this Agreement. 7.3 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to Section 7.1, all representations and warranties of the parties hereto shall expire and all further obligations of the parties under this Agreement shall terminate; provided, however, that: (a) none of the Parties shall be relieved of any obligation or liability arising from any prior breach by such party of any provision of this Agreement; (b) the parties shall, in all events, remain bound by and continue to be subject to the provisions set forth in Section 9.6; and (c) the parties shall, in all events, remain bound by and continue to be subject to Section 4.7. 8. INDEMNIFICATION, ETC. 8.1 SURVIVAL OF REPRESENTATIONS, ETC. (a) The representations and warranties made by the Company (including the representations and warranties set forth in Section 2 and the representation 26 and warranties set forth in the Closing Certificate) (as modified by the Disclosure Schedule) shall survive the Closing for a period of two years from the execution of this Agreement, except a representation or warranty which shall prove to be untrue due to the fraud of either Company or any Partner, in which case it shall survive until the expiration of the applicable statute of limitations with respect to the subject matter thereof. All representations and warranties made by Parent and Purchaser shall terminate and expire as of the Closing Date, but any liability of Parent or Purchaser with respect to any breach of such representations and warranties shall survive the Closing for a period of two years from the execution of this Agreement. (b) The representations, warranties, covenants and obligations of the Company and the Partners, and the rights and remedies that may be exercised by the Indemnitees, shall not be limited or otherwise affected by or as a result of any investigation made by any of the Indemnitees or any of their Representatives. (c) For purposes of this Agreement, each statement or other item of information set forth in the Disclosure Schedule shall be deemed to limit the corresponding representation and warranty made by the Company in this Agreement. 8.2 NOTICE OF BREACH AND OPPORTUNITY TO CURE. If Purchaser or Parent reasonably determines that any representation, warranty, covenant or obligation of the Company, the Partnership or the Partners has been or will be breached, Purchaser and Parent shall (a) give the Agent specified in Section 9.1 written notice of breach; (b) request from the Company or the Partnership remedial action to cure such breach; and (c) use commercially reasonable efforts to assist the Company or the Partnership, at their sole expense, to cure any such breach, provided that the failure to do so shall not limit Company's or the Partners obligation under Section 8.3. 8.3 INDEMNIFICATION BY COMPANY AND PARTNERS. (a) The Company and the Partners, jointly and severally, shall hold harmless and indemnify each of the Indemnitees from and against, and shall compensate and reimburse each of the Indemnitees for, any monetary Damages actually incurred by any of the Indemnitees (regardless of whether or not such Damages relate to any third-party claim) as the result of: (i) any inaccuracy in or breach of any representation or warranty set forth in Section 2; or (ii) any breach of any covenant or obligation of the Company or the Partners set forth herein (including the covenants set forth in Section 4). (b) The Company and the Partners acknowledge and agree that, if the Purchaser incurs any Damages specified in Section 8.2(a), above, then (without limiting any of the rights of the Purchaser as an Indemnitee) Parent shall also be deemed, by virtue of its ownership of the stock of the Purchaser, to have incurred such Damages. 8.4 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or commencement by any Person of any claim or Legal Proceeding (whether against the Purchaser, against Parent or against any other Person) with respect to which the Company 27 or the Partners may become obligated to hold harmless, indemnify, compensate or reimburse any Indemnitee pursuant to this Section 8, Parent shall have the right, at its election, to proceed with the defense of such claim or Legal Proceeding on its own. If Parent so proceeds with the defense of any such claim or Legal Proceeding: (a) all reasonable expenses relating to the defense of such claim or Legal Proceeding shall be borne and paid exclusively by the Parent; (b) the Company and each Partner shall make available to Parent any documents and materials in its or his possession or control that may be necessary to the defense of such claim or Legal Proceeding; and (c) Parent shall have the right to settle, adjust or compromise such claim or Legal Proceeding with the consent of the Agent (as defined in Section 9.1); provided, however, that such consent shall not be unreasonably withheld. Parent shall give the Agent prompt notice of the commencement of any such Legal Proceeding against Parent or the Purchaser; provided, however, that any failure on the part of Parent to so notify the Agent shall not limit any of the obligations of the Partners under this Section 8 (except to the extent such failure materially prejudices the defense of such Legal Proceeding). 8.5 OFFSET AGAINST UNPAID AMOUNTS. IWithout limiting such other rights as Parent and Purchaser may have, if, prior to the time that any payment of the purchase price is to be delivered, (a) Parent or Purchaser has notified the Agent specified in Section 9.1 of a breach of any representation, warranty, covenant or obligation of Company or the Partners contained in this Agreement, and (b) neither the Company nor the Partners have cured the breach, Parent or Purchaser in its sole discretion may, by further written notice to the Agent, deduct from the amount of such payment otherwise deliverable an amount equal to the Damages actually incurred as a result of such breach. If upon receipt of such notice, the Agent disagrees with the Parent's or the Purchaser's notice of breach, Parent and Purchaser shall pay the amount otherwise deliverable to the Company or the Partnership irrevocably into an escrow account, to be released upon receipt of joint instructions from all parties or of a judicial or arbitral award. 8.6 TREATMENT AS ADJUSTMENT OF PURCHASE PRICE. Any final indemnity payment made by a party hereunder shall be treated as an adjustment of the purchase price. 8.7 EXERCISE OF REMEDIES BY INDEMNITEES OTHER THAN PARENT OR PURCHASER. No Indemnitee (other than Parent or Purchaser or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement unless Parent or Purchaser (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy. 28 8.8 LIMITATIONS. Notwithstanding any other provision in this Agreement, the Parent, the Purchaser and all other Indemnitees hereby acknowledge and agree that: (a) the total aggregate liability of the Company, the Partnership and the Partners under all provision of this Agreement other than Section 8.9 shall not exceed the amount actually received by them from the Parent or the Purchaser as consideration for the Purchased Assets; provided that (1) the amount actually received shall not include the value of the stock options granted to the Partners or to other employees or the shares acquired upon exercise of such stock options; and (2) this limitation shall not affect the offset rights of the Parent and the Purchaser under Section 8.5; and (b) the consideration payable by the Parent and the Purchaser for the Purchased Assets was determined solely on the basis of expected future revenues and earnings from the business of the Company and the Partnership and not on the value of any particular Asset or past financial results. (c) any damage claim for breach of any representation, warranty, covenant or obligation shall be time-barred, unless the Agent (or the Companies or the Partners) have been notified of such breach within one year from the date on which the Parent or the Purchaser acquired actual knowledge of such breach. 8.9 INDEMNIFICATION FOR LIABILITIES NOT ASSUMED LIABILITIES. Notwithstanding any other provision in this Agreement, the Companies and the Partners, jointly and severally, shall defend, hold harmless and indemnify each of the Indemnitees from and against, any Liability of either Company or the Partners asserted against any Indemnitee, other than the Assumed Liabilities. For the avoidance of doubt, the obligation of the Companies and the Partners under this Agreement shall not be limited by the provisions of Section 8.1-8.8, or otherwise limited in time or amount; provided only that any claim for indemnification shall be time-barred, unless the Agent (or the Companies or the Partners) have been notified of such claim within one year from the date on which the Parent or the Purchaser acquired actual knowledge of such claim. 29 9. MISCELLANEOUS PROVISIONS 9.1 AGENT. By their approval of this Agreement at a Partners Meeting or by written consent, the Partners will thereby irrevocably appoint Thomas Burke as their agent for purposes of Section 8 (the "Agent"), and Mr. Burke hereby accepts his appointment as the Agent for purposes of Section 8. Parent shall be entitled to deal exclusively with the Agent on all matters relating to Section 8, and shall be entitled to rely conclusively (without further evidence of any kind whatsoever) on any document executed or purported to be executed on behalf of any Partner by the Agent, and on any other action taken or purported to be taken on behalf of any Partner by the Agent, as fully binding upon such Partner. If the Agent shall die, become disabled or otherwise be unable to fulfill his responsibilities as agent of the Partners, then the Partners shall, within ten days after such death or disability, appoint a successor agent and, promptly thereafter, shall notify Parent of the identity of such successor. Any such successor shall become the "Agent" for purposes of Section 8 and this Section 9.1. If for any reason there is no Agent at any time, all references herein to the Agent shall be deemed to refer to the Partners. 9.2 FURTHER ASSURANCES. Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out or evidencing any of the transactions contemplated by this Agreement. 9.3 FEES AND EXPENSES. (a) Company and the Partners shall bear and pay all fees, costs and expenses (including all legal fees and expenses payable to Company's and Partner's counsel) that have been incurred or that are in the future incurred by Company or the Partners in connection with: (i) the negotiation, preparation and review of any letter of intent or similar document relating to the purchase of the Purchased Assets; (ii) the investigation and review conducted by Parent, Purchaser and their representatives with respect to the business of Company (and the furnishing of information to Parent, Purchaser and their representatives in connection with such investigation and review); (iii) the negotiation, preparation and review of this Agreement (including the Schedules), all other transactional agreements and all bills of sale, assignments, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the Purchased Assets; (iv) the preparation and submission of any filing or notice required to be made or given in connection with the Purchased Assets, and the obtaining of any consent required to be obtained in connection with the Purchased Assets; and 30 (v) the consummation and performance of this Agreement and the other agreements required to be executed hereunder. (b) Subject to the provisions of Section 8 (including the indemnification and other obligations of Company and the Partners thereunder), Purchaser shall bear and pay all fees, costs and expenses (including all legal fees and expenses payable to Purchasers or Parent's counsel) that have been incurred or that are in the future incurred by or on behalf of Purchaser and Parent in connection with: (i) the negotiation, preparation and review of any letter of intent or similar document relating to the Purchased Assets; (ii) the investigation and review conducted by Parent and Purchaser and its representatives with respect to the business of Company; (iii)the negotiation, preparation and review of this Agreement, all other transactional agreements and all bills of sale, assignments, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the Purchased Assets; and (iv) the consummation and performance of this Agreement and the other agreements required to be executed hereunder. 9.4 ATTORNEYS' FEES. If any action or proceeding relating to this Agreement or the enforcement of any provision of this Agreement is brought against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled). 9.5 NOTICES. All notices, demands, requests or other communications that may be or are required to be given, served or sent by any party pursuant to this Agreement will be in writing (and shall be deemed to have been duly given upon receipt), will reference this Agreement and shall be mailed by first class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by courier, express delivery, hand delivery or facsimile transmission, addressed to the address set forth below. Each party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice that is mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt or the affidavit of messenger or courier being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation 31 if to Parent: Media 100 Inc. 290 Donald Lynch Blvd. Marlboro, MA 01752-4748 Attention: President Facsimile: 508-303-4620 with a copy to: Lucash Gesmer Updegrove LLP 40 Broad Street Boston, Massachusetts 02109 Attention: Peter M. Moldave Facsimile: 617-350-6878 if to Purchaser Winchester Acquisition Corp 290 Donald Lynch Blvd. Marlboro, MA 01752-4748 Attention: President Facsimile: 508-303-4620 with a copy to: Lucash Gesmer Updegrove LLP 40 Broad Street Boston, Massachusetts 02109 Attention: Peter M. Moldave Facsimile: 617-350-6878 if to the Company: Wired, Inc. 1040-155 Grant Avenue, Building 155 Mountain View, CA 94040 Attention: Thomas Burke Facsimile: 831-420-0192 with a copy to: Baker & McKenzie 2 Embarcadero Center, 24th Floor San Francisco, CA 94111 Attention: Klaus H. Burmeister Facsimile: 415-576-3099 9.6 CONFIDENTIALITY. Without limiting the generality of anything contained in Section 4.9, on and at all times after the Closing Date, each Partner shall keep confidential, and shall not use or disclose to any other Person, any non-public document or other non-public information in such Partner's possession that relates to the business of the Company, Purchaser or Parent. 9.7 TIME OF THE ESSENCE. Time is of the essence of this Agreement. 32 9.8 HEADINGS. The headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9.9 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. 9.10 GOVERNING LAW. Unless otherwise indicted to the contrary, this Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the Commonwealth of Massachusetts (without giving effect to principles of conflicts of laws). 9.11 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon: the Company and its successors and assigns (if any); the Partners and their respective personal representatives, executors, administrators, estates, heirs, successors and assigns (if any); Parent and its successors and assigns (if any); and Purchaser and its successors and assigns (if any). This Agreement shall inure to the benefit of: the Company; the Partnership; the Partners, Parent; Purchaser; the other Indemnitees (subject to Section 8.8); and the respective successors and assigns (if any) of the foregoing. Parent and Purchaser may freely assign any or all of their rights under this Agreement (including its indemnification rights under Section 8), in whole or in part, to any Person controlling, controlled by or under common control with Parent, with written notice to Agent within ten days of such assignment. 9.12 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and remedies of the parties hereto shall be cumulative (and not alternative). The parties to this Agreement agree that, in the event of any breach or threatened breach by any party to this Agreement of any covenant, obligation or other provision set forth in this Agreement for the benefit of any other party to this Agreement, such other party shall be entitled (in addition to any other remedy that may be available to it) to (a) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (b) an injunction restraining such breach or threatened breach. 9.13 WAIVER. (a) No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. (b) No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless 33 the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. 9.14 AMENDMENTS. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of all of the parties hereto. 9.15 SEVERABILITY. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law. 9.16 PARTIES IN INTEREST. Except for the provisions of Sections 1.5 and 8, none of the provisions of this Agreement is intended to provide any rights or remedies to any Person other than the parties hereto and their respective successors and assigns (if any). 9.17 ENTIRE AGREEMENT. This Agreement, the exhibits hereto and the other agreements referred to herein set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof. 9.18 CONSTRUCTION (a) For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include the masculine and feminine genders. (b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. (c) As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." (d) Except as otherwise indicated, all references in this Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement and Exhibits to this Agreement. 34 The parties hereto have caused this Agreement to be executed and delivered as of the date first set above. MEDIA 100 INC., a Delaware corporation By:____________________________ Name, Title Winchester Acquisition Corp., a Delaware corporation By:____________________________ Name, Title WIRED INCORPORATED, a California corporation By:____________________________ Thomas Burke, President WIRED G.P, a California general partnership By:____________________________ ________________, Principal PARTNERS: _______________________________ Michael Wittingham _______________________________ Mark Bain _______________________________ Thomas Burke EXHIBIT A -- PAYMENT FOR PURCHASED ASSETS FIXED PAYMENTS
- ---------------------------------- ---------------------------------------- ------------------------------------- PAYEE DATE AND CONDITION AMOUNT - ---------------------------------- ---------------------------------------- ------------------------------------- Company At the later of Closing or $250,000 January 3, 2000 - ---------------------------------- ---------------------------------------- ------------------------------------- Partnership At the later of Closing or $1,250,000 January 3, 2000 - ---------------------------------- ---------------------------------------- ------------------------------------- Partnership First anniversary of Closing $1,500,000 - ---------------------------------- ---------------------------------------- -------------------------------------
EARN-OUT PAYMENTS FORMULA In addition to the foregoing payments, the Purchaser shall make Earn-Out Payments to the Partnership in accordance with the following formula for each Relevant Period, equal to the Target Payment for the Relevant Period multiplied by the sum of (a) 60% multiplied by the ratio of Product Net Sales for the Relevant Period divided by Target Net Sales plus (b) 40% multiplied by the ratio of Product Operating Income for the Relevant Period divided by Target Operating Income; PROVIDED, that in order for any Earn-Out Payment to be made for a Relevant Period, Product Net Sales must equal or exceed 60% of Target Net Sales and Product Operating Income must equal or exceed 60% of Target Operating Income. ALLOCATION The amount of any earn-out payment shall be allocated among the Partners as follows:
- --------------------------------------- ---------------------------------------- RECIPIENT % OF ANY PAYMENT - --------------------------------------- ---------------------------------------- Mark Bain 35 - --------------------------------------- ---------------------------------------- Michael Wittingham 35 - --------------------------------------- ---------------------------------------- Thomas Burke 30 - --------------------------------------- ----------------------------------------
DEFINITIONS.
- ---------------------------- -------------------------- -------------------------- -------------------------- Relevant Period Target Payment Target Net Sales Target Operating Income - ---------------------------- -------------------------- -------------------------- -------------------------- 12 month period commencing $2,500,000 $7,700,000 $1,771,000 the first full month - ---------------------------- -------------------------- -------------------------- --------------------------
36
- ---------------------------- -------------------------- -------------------------- -------------------------- following the Closing - ---------------------------- -------------------------- -------------------------- -------------------------- 12 month period commencing $2,800,000 $11,000,000 $2,530,000 one year following the first full month following the Closing - ---------------------------- -------------------------- -------------------------- --------------------------
"Product" means products sold (or formerly sold prior to acquisition of the Company) by the Company. "Product Business Unit" means the business unit of the Parent responsible for the development and sales of the Product, which will initially be the Purchaser but which may changed by the Parent in accordance with its requirements. "Product Net Sales" means gross sales to resellers, distributors, OEMs, or customers of Product by the Company, minus discounts and returns. "Product Gross Margin" means Product Net Sales minus direct material costs, direct labor costs, and direct manufacturing overhead. "Product Operating Income" means Product Gross Margin minus direct engineering expenses, direct sales and marketing expenses, and 1% of COGS (as an overhead expense allocation). The overhead expense allocation will cover services for accounting, credit and collections, human resources and information technology. PREPARATION OF FINANCIAL STATEMENTS Within 90 days of the end of each Relevant Period, Parent shall provide the Agent with a report setting forth the calculation of the Earn-Out Payment, with the components comprising "Product Net Sales", "Product Gross Margin" and "Product Operating Income" determined in accordance with generally accepted accounting principles consistent with the Parent's financial statements, and shall make the appropriate payment to the former shareholders of the Company for such Relevant Period as so shown as being owed in such report. In the event that the Agent disputes any information contained in such report or the calculation of any Earn-Out Payment, an independent certified public accountant not otherwise engaged by Parent or Purchaser will review the disputed report and make a recommendation regarding changes, if any, to the report which recommendation shall be binding on all parties. ADJUSTMENTS AND PRO-FORMA FINANCIAL RESULTS If before the expiration of the Earn-out Period, Parent or Purchaser: 37 1. sells substantially all of the business comprised of the Purchased Assets to an unaffiliated third party; or 2. withdraws any revenue or income-producing Product from the market (other than as a result of demonstrable lack of sales or profitability, or technical or other defects in the Product); or 3. terminates any significant pre-Closing distributor or OEM of the Company (other than for cause, including breach of the applicable distribution agreement by the distributor or OEM); or 4. acquires any MPEG business which competes with the business of the Companies as conducted on the date of this Agreement, unless such acquisition is consented to by the Agent, such consent not to be unreasonably withheld or 5. acquires any DVD authoring business which acquisition would adversely affect the business relationship with Astarte or Sonic, unless such acquisition is consented to by the Agent, such consent not to be unreasonably withheld: then: (a) the Product Net Sales for the Relevant Period(s) shall be deemed to be the highest of (1) the actual Product Net Sales; (2) the total Target Net Sales, or (3) the sum of the Product Net Sales for the undisturbed distribution channel plus the Target Net Sales specified in the Business Plan for the disturbed channel multiplied with a quotient, the numerator of which is the Product Net Sales for the undisturbed distribution channel and the denominator of which is the Target Net Sales for the undisturbed distribution channel; and (b) the Product Net Operating Income for the Relevant Period(s) shall be deemed to be the highest of (1) the actual Product Net Operating Income; (2) the total Target Net Operating Income, or (3) the sum of the Product Net Operating Income for the undisturbed distribution channel plus the Target Operating Income specified in the Business Plan for the disturbed channel multiplied with a quotient, the numerator of which is the Product Net Operating Income for the undisturbed distribution channel and the denominator of which is the Target Net Operating Income for the undisturbed distribution channel. 38 EXHIBIT B -- CERTAIN DEFINITIONS For purposes of the Agreement (including this Exhibit B): ACQUISITION PROPOSAL. "Acquisition Proposal" means any proposal, plan, agreement, understanding or arrangement contemplating (i) any merger, consolidation, reorganization, recapitalization or similar transaction involving the Companies or any of their affiliates, (ii) any transfer or issuance of any capital stock or other securities of the Companies or any of their affiliates, (iii) any transfer of any material asset of the Companies or any of their affiliates, or (iv) any transaction that may be inconsistent with or that may have a material adverse effect upon any of the transactions contemplated by this Agreement. AGREEMENT. "Agreement" shall mean the Asset Purchase Agreement to which this Exhibit B is attached (including the Disclosure Schedule), as it may be amended from time to time. ASSUMED CONTRACTS. "Assumed Contracts" shall mean those contracts listed on Exhibit F to the Agreement. ASSUMED LIABILITIES. "Assumed Liabilities" shall mean the obligations of Companies under the Assumed Contracts, but only to the extent such obligations (i) arise after the Closing Date, (ii) do not arise from or relate to any breach by the Companies of any provision of any of such contracts, (iii) do not arise from or relate to any event, circumstance or condition occurring or existing on or prior to the Closing Date that, with notice or lapse of time, would constitute or result in a breach of any of such contracts, and (iv) are ascertainable in nature solely by reference to the express terms of such contracts; PROVIDED, HOWEVER, that notwithstanding the foregoing, and notwithstanding anything to the contrary contained in the Agreement, the "Specified Contractual Liabilities" shall not include, and Parent shall not be required to assume or to perform or discharge: (a) any Liability of the Partners or any other Person or Entity, except for the Companies; (b) any Liability of the Companies arising out of or relating to the execution, delivery or performance of this Agreement and the other agreements required to be executed hereunder; (c) any Liability of Companies arising from or relating to any action taken by Companies, or any failure on the part of Companies to take any action, at any time prior to, on or after the Closing Date; (d) any Liability of Companies for the payment of any tax, except as provided in Section 1.4 of the Agreement; 39 (e) any Liability of either Company to the Partners, the other Company or any other related party; (f) any Liability of Companies to any employee, former employee, or third party contractor under any agreement, oral or written, including but not limited to any Employee Benefit Plan or for severance pay, except as disclosed to the Parent or the Purchaser; (g) any Liability under any Contract, if Companies shall not have obtained, prior to the Closing Date, any consent required to be obtained from any person with respect to the assignment or delegation to Parent of any rights or obligations under such Contract; (h) any Liability that is inconsistent with or constitutes an inaccuracy in, or that arises or exists by virtue of any breach of, (i) any representation or warranty made by the Partners or Companies in this Agreement or any of the agreements required to be executed under this Agreement, or (ii) any covenant or obligation of the Partners or Companies contained in this Agreement or any of the agreements required to be executed under this Agreement; (i) any Liability that arises from or is related to the Excluded Assets set forth in Exhibit E of the Agreement; (j) any Liability that arises from or is related to the transaction costs referred to in Section 9.3(a) of the Agreement; or (k) any other Liability of Companies or of the Partners that is not referred to specifically in "Assumed Liabilities." CHARTER. "Charter" means the Articles of Organization of the Company. CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. COMPANY CONTRACT. "Company Contract" shall mean any Contract: (a) to which the Companies is a party; (b) by which the Companies or any of their assets is or may become bound or under which the Companies have, or may become subject to, any obligation; or (c) under which the Companies has or may acquire any right or interest. COMPANY PROPRIETARY ASSET. "Company Proprietary Asset" shall mean any Proprietary Asset owned by or licensed to the Companies or otherwise used by the Companies. CONSENT. "Consent" shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization). 40 CONTRACT. "Contract" shall mean any written, oral or other agreement, contract, subcontract, lease, understanding, instrument, note, warranty, insurance policy, benefit plan or legally binding commitment or undertaking of any nature. CORPORATION ASSETS. "Corporation Assets" means those Purchased Assets not owned by the Partnership. DAMAGES. "Damages" shall include any loss, damage, injury, decline in value, liability, claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost (including costs of investigation) or expense of any nature. DISCLOSURE SCHEDULE. "Disclosure Schedule" shall mean the schedule (dated as of the date of the Agreement) delivered to Parent on behalf of the Companies. EMPLOYEE BENEFIT Plan. "Employee Benefit Plan" shall have the meaning specified in Section 3(3) of ERISA. ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim, infringement, interference, option, right of first refusal, preemptive right, community property interest or restriction of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset). ENTITY. "Entity" shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity. ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, ENVIRONMENTAL LAW. "Environmental Law" means any federal, state, local or foreign Legal Requirement relating to pollution or protection of human health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including any law or regulation relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern. EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 41 EXCLUDED ASSETS. "Excluded Assets" shall mean the assets identified on Exhibit E (to the extent owned by Companies on the date of execution and delivery of this Agreement). GOVERNMENT BID. "Government Bid" shall mean any quotation, bid or proposal submitted to any Governmental Body or any proposed prime contractor or higher-tier subcontractor of any Governmental Body. GOVERNMENT CONTRACT. "Government Contract" shall mean any prime contract, subcontract, letter contract, purchase order or delivery order executed or submitted to or on behalf of any Governmental Body or any prime contractor or higher-tier subcontractor, or under which any Governmental Body or any such prime contractor or subcontractor otherwise has or may acquire any right or interest. GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean any: (a) permit, license, certificate, franchise, permission, clearance, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body. GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or Entity and any court or other tribunal). INDEMNITEES. "Indemnitees" shall mean the following Persons: (a) Parent; (b) Parent's current and future affiliates (including the Purchaser); (c) the respective Representatives of the Persons referred to in clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of the Persons referred to in clauses "(a)", "(b)" and "(c)" above; provided, however, that the shareholders shall not be deemed to be "Indemnitees." INTELLECTUAL PROPERTY. "Intellectual Property" shall mean any intellectual, proprietary, and industrial property rights, including but not limited to (i) all trademarks (whether registered or unregistered), trademark applications, tradenames, fictitious business names, service marks, and corporate name, (ii) all copyrights (whether registered or unregistered), copyright applications, moral rights and design rights, (iii) all patentable ideas, invention disclosures, patents, and patent applications, (iv) all source code, inventions, discoveries, technology, know-how and trade secrets, (v) all computer programs, content, and other computer software, (vi) all licenses related to the foregoing or otherwise necessary to utilize or exploit the Purchased Assets without future royalty or similar obligations, except as provided herein, and (vii) all drawings, schematics, records, 42 licenses, and confidential or proprietary information related to any of the foregoing (collectively, "Intellectual Property"). LEGAL PROCEEDING. "Legal Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel. LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body. LIABILITY. "Liability" shall mean any debt, obligation, duty or liability of any nature (including any unknown, undisclosed, unmatured, unaccrued, unasserted, contingent, indirect, conditional, implied, vicarious, derivative, joint, several or secondary liability), regardless of whether such debt, obligation, duty or liability would be required to be disclosed on a balance sheet prepared in accordance with generally accepted accounting principles and regardless of whether such debt, obligation, duty or liability is immediately due and payable. MATERIAL ADVERSE EFFECT. A violation or other matter will be deemed to have a "Material Adverse Effect" on the Companies if such violation or other matter would have a material adverse effect on the Companys' business, condition, assets, liabilities, operations, financial performance or prospects, or on the ownership of enjoyment by the Purchaser of the Purchased Assets. MATERIALS OF ENVIRONMENTAL CONCERN. "Materials of Environmental Concern" include chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products and any other substance that is now or hereafter regulated by any Environmental Law or that is otherwise a danger to health, reproduction or the environment. PARTNERSHIP ASSETS. "Partnership Assets" means those Purchased Assets not owned by the Corporation. PERSON. "Person" shall mean any individual, Entity or Governmental Body. PROPRIETARY ASSET. "Proprietary Asset" shall mean any: (a) patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, franchise, 43 system, computer software, computer program, invention, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right or intangible asset; or (b) right to use or exploit any of the foregoing. PURCHASED ASSETS. "Purchased Assets" shall have the meaning set forth in Exhibit E to this Agreement. REPRESENTATIVES. "Representatives" shall mean officers, directors, employees, agents, attorneys, accountants, advisors and representatives. SEC. "SEC" shall mean the United States Securities and Exchange Commission. SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as amended. TAX. "Tax" shall mean any tax (including any income tax, franchise tax, capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), imposed, assessed or collected by or under the authority of any Governmental Body. TAX RETURN. "Tax Return" shall mean any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax. 44 EXHIBIT C -- PURCHASED ASSETS "Purchased Assets" shall mean and include all of the properties, rights, interest and other tangible and intangible assets of Companies (wherever located and whether or not required to be reflected on a balance sheet prepared in accordance with generally accepted accounting principles), and those properties, rights, interest and other tangible and intangible assets of the Selling Partners (wherever located and whether or not required to be reflected on a balance sheet prepared in accordance with generally accepted accounting principles) which are used in the conduct of the business of the Companies (including without limitation those assets listed on Exhibit D), except for those assets listed on Exhibit E (the "Excluded Assets") and shall include, without limitation, the following: (a) tangible personal property (such as computers, equipment, inventories, manufactured and purchased parts, goods in progress and finished goods); (b) all fixed assets, leaseholds, and improvements; (c) all intangible assets (rights (but not duties or obligations) under contracts, customer lists, supplier lists, trade secrets, software, procedures and any other items required by Parent to continue Company's operations); (d) all right, title and interest in and to the Wired software application and all property and rights to develop, sell and market the Wired software application; (e) all Intellectual Property of the Companies (and Partners to the extent there is any relation of such property to the business or properties of Company); (f) all cash, cash equivalents, bank accounts and other receivables; (g) all investments or securities held by Company; (h) all books, records, files and data of Company, including accounting, financial, customer and engineering records and reports; (i) all claims and causes of action of Company against other Persons (regardless of whether or not such claims and causes of action have been asserted by Company), and all rights of indemnity, warranty rights, rights of contribution, rights to refunds, rights of reimbursement and other rights of recovery possessed by Company (regardless of whether such rights are currently exercisable); (j) all advertising and promotional materials of Company; (k) all goodwill of Company; and (l) all prepaid assets, including software licenses and maintenance fees. 45 EXHIBIT D -- LIST OF SELLING PARTNER ASSETS 46 EXHIBIT E -- LIST OF EXCLUDED ASSETS 47 EXHIBIT F -- LIST OF ASSUMED CONTRACTS 48 EXHIBIT G -- FORM OF BILL OF SALE BILL OF SALE BILL OF SALE dated as of December , 1999, by [Wired Incorporated, a California corporation][Wired GP, a California general Partnership] ("Seller"), to Winchester Acquisition Corp. (the "Company"). W I T N E S S E T H : WHEREAS, Seller and Company are parties to the Asset Purchase Agreement (this "Agreement") dated as of December , 1999 providing for, among other things, the transfer and sale to Company of all assets of Seller (the "Transferred Assets"), all as more fully described in the Agreement, for consideration in the amount and upon the terms and subject to the conditions provided in the Agreement; and NOW, THEREFORE, in consideration of the premises and of other valuable consideration to Seller tendered by Company, at or before the execution and delivery hereof, the receipt and sufficiency of which by Seller is hereby acknowledged, Seller by this Bill of Sale does convey, grant, bargain, sell, transfer, set over, assign, alien, remise, release, deliver and confirm unto Company, its successors and assigns forever, all of Seller's right, title and interest in the Transferred Assets. The assets so conveyed, granted, bargained, sold, transferred, set over, assigned, alienated, remised, released, delivered and confirmed hereby, are, without limiting the generality of the foregoing, more particularly described as follows (a) all rights and interests of Seller in, to and under all contracts, commitments, agreements, options and other arrangements of every kind and description including, without limitation, all supply contracts, purchase contracts, service contracts, employment contracts and retirement plans; (b) if and to the extent that the same have not been transferred effectively by separate instruments of assignment, all rights and interests of Seller in and to all motor vehicles or other separately titled personal property; (c) if and to the extent that the same have not been transferred effectively by separate instruments of assignment, all rights and interests of Seller in, to and under all domestic or foreign patents, patent applications, trademarks, trademark registrations and applications therefor, all domestic or foreign trade names, labels and other trade rights; (d) all books, records and other data relating to Seller's assets, business and operations; (e) all intangible assets of Seller presently used in its business, 49 including customer lists, trade secrets and similar information generally described as "know-how" with respect to the patents and patent applications aforesaid; (f) all research, engineering, marketing and other data relating to any assets, businesses or operations of Seller and each subsidiary of Seller; (g) all rights, claims, and causes of action of Seller arising after the date hereof against any officer, former officer, employee, former employee or other person arising out of the disclosure or use, or threatened disclosure or threatened use, of any proprietary information relating to the assets being sold to Seller or its business, including, without limitation, any invention, process, method, formula treatment, discovery or improvement or application thereof, or other know-how, or compilation of information, list of customers or suppliers, document or record with respect thereto or contained therein; and (h) all other property in which Seller has any interest whatsoever, real, personal or mixed, whether tangible or intangible, of every kind and description and wherever situated, including without limitation, contingent and unknown interests, claims, rights and properties, whether or not specifically mentioned or described herein and whatever may be the nature or location of said assets, properties or business. Capitalized terms not otherwise defined herein have the meanings assigned such terms in the Agreement. TO HAVE AND TO HOLD all of the foregoing business, contracts, rights, privileges, properties, and assets unto Company, its successors and assigns to its and their own use forever. 1. POWER OF ATTORNEY WITH RESPECT TO TRANSFERRED ASSETS. Seller hereby constitutes and appoints Company, its successors and assigns, Seller's true and lawful attorney and attorneys, with full power of substitution, in Seller's name and stead, but on behalf and for the benefit of Company, its successors and assigns, to demand and receive any and all of the Transferred Assets, and to give receipts and releases for and in respect of the same, and any part thereof, and from time to time to institute and prosecute in Seller's name, or otherwise, for the benefit of Company, its successors and assigns, any and all proceedings at law, in equity or otherwise, which Company, its successors or assigns, may deem proper for the collection or reduction to possession of any of the Transferred Assets or for the collection and enforcement of any claim or right of any kind hereby sold, conveyed, transferred and assigned, or intended so to be, and to do all acts and things in relating to the Transferred Assets which Company, its successors or assigns shall deem desirable, Seller hereby declaring that the foregoing powers are coupled with an interest and are and shall be irrevocable by Seller or by its dissolution or in any manner or for any reason whatsoever. 50 2. EFFECT OF POSSIBLE BREACH. Notwithstanding any of the provisions of the foregoing, this instrument shall not constitute an assignment to Company of any claim (including but not limited to claims for refunds of taxes), contract, license, lease, commitment, sales order or purchase order if an attempted assignment of the same without the consent of the other party thereto would constitute a breach thereof or in any way impair the rights of Seller thereunder; provided this provisions shall not relieve Seller of any obligations under the Agreement or under Section 3 below. 3. FURTHER ASSURANCES. Seller hereby covenants that, from time to time after the delivery of this instrument, at Company's request and without further consideration, Seller will do, execute, acknowledge, and deliver, or will cause to be done, executed, acknowledged and delivered, all and every such further acts, deeds, conveyances, transfers, assignments, powers of attorney and assurances as reasonably may be required more effectively to convey, transfer to and vest in Company, and to put Company in possession of, any of the Transferred Assets. 4. NO THIRD PARTY RIGHTS. SUCCESSORS. Nothing in this instrument, express or implied, is intended or shall be construed to confer upon, or give to, any person, firm or corporation other than Company and its successors and assigns, any remedy or claim under or by reason of this instrument or any terms, covenants or condition hereof, and all the terms, covenants and conditions, promises and agreements in this instrument contained shall be for the sole and exclusive benefit of Company and its successors and assigns. IN WITNESS WHEREOF, Seller and Company have duly executed this instrument as of the day and year first above written. [WIRED INCORPORATED][WIRED GP] By --------------------------------- Name: Title: WINCHESTER ACQUISITION CORP. By --------------------------------- Name: Title: 51 EXHIBIT H -- FORM OF INSTRUMENT OF ASSUMPTION OF LIABILITIES INSTRUMENT OF ASSUMPTION OF LIABILITIES Instrument of Assumption of Liabilities made as of ____________, by Winchester Acquisition Corp., a Delaware corporation ("Purchaser"), in favor of [Wired Incorporated, a California corporation][Wired GP, a California general Partnership] (the "Company") Purchaser and Company are parties to an Asset Purchase Agreement (this "Agreement") dated as of December , 1999 providing for, among other things, the transfer and sale to Purchaser of all assets of Company, all as more fully described in the Agreement, for consideration in the amount and upon the terms and subject to the conditions provided in the Agreement. Pursuant to the Agreement, and in partial consideration of the sale, pursuant to the Agreement, by the Company to Purchaser of all of the Company's properties, assets, rights, goodwill and business as a going concern, Purchaser, pursuant to Section 1 of the Agreement, hereby assumes the following Assumed Liabilities (as such term is defined in the Agreement): [List of liabilities] The assumption by Purchaser of the foregoing liabilities and obligations of the Company shall not be construed to defeat, impair or limit in any way any rights or remedies of Purchaser to contest or dispute the validity or amount thereof, provided that Purchaser will indemnify and hold harmless the Company from any liability which Purchaser causes to be contested or disputed. Except as specifically set forth in this Instrument of Assumption of Liabilities, Purchaser shall not assume nor agree to pay, perform or discharge, and Company shall solely retain and be responsible for paying and discharging, all liabilities or obligations of Company, whether disclosed, undisclosed, direct, indirect, absolute, contingent, secured, unsecured, accrued or otherwise, including without limitation any obligation of the Company to pay to the shareholders of the Company any dividend or other distribution in respect of each share of common stock of the Company. For the consideration aforesaid, Purchaser, for itself and its successors and assigns, has covenanted, and by this Instrument of Assumption of Liabilities does covenant, with the Company, its successors and assigns, that Purchaser and its successors and assigns, will do, execute and deliver, or will cause to be done, executed and delivered, all such further acts and instruments which the Company may reasonably request in order to more fully effectuate the assumption of liabilities provided for in this Instrument. 52 IN WITNESS WHEREOF, this Instrument of Assumption of Liabilities has been duly executed and delivered by the duly authorized officers of Purchaser. WINCHESTER ACQUISITION CORP. By --------------------------------- Name: Title: 53 EXHIBIT I-1 -- FORM OF PROPRIETARY RIGHTS AGREEMENT 54 EXHIBIT I-2 -- FORM OF NON-COMPETITION AGREEMENT 55 EXHIBIT J -- FORM OF OPINION LETTER 56 EX-10.12 3 EXHIBIT 10.12 Exhibit 10.12 AGREEMENT AND PLAN OF MERGER BY AND AMONG MEDIA 100 INC., DERRINGER ACQUISITION CORP. and DIGITAL ORIGIN, INC. Dated as of December 28, 1999 TABLE OF CONTENTS ARTICLE I THE MERGER............................................2 SECTION 1.1 THE MERGER...............................................................2 SECTION 1.2 CONSUMMATION OF THE MERGER...............................................2 SECTION 1.3 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION...................2 SECTION 1.4 BY-LAWS OF THE SURVIVING CORPORATION.....................................2 SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION......................2 SECTION 1.6 CLOSING..................................................................3 ARTICLE II CONVERSION AND EXCHANGE OF SECURITIES.....................................3 SECTION 2.1 CONVERSION OF CAPITAL STOCK..............................................3 SECTION 2.2 EXCHANGE OF CERTIFICATES.................................................4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY 8 SECTION 3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.............................8 SECTION 3.2 ARTICLES OF INCORPORATION AND BY-LAWS....................................9 SECTION 3.3 CAPITALIZATION...........................................................9 SECTION 3.4 AUTHORITY RELATIVE TO THIS AGREEMENT....................................10 SECTION 3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS..............................11 SECTION 3.6 SEC FILINGS; FINANCIAL STATEMENTS.......................................12 SECTION 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS....................................12 SECTION 3.8 NO UNDISCLOSED LIABILITIES..............................................13 SECTION 3.9 ABSENCE OF LITIGATION...................................................13 SECTION 3.10 AGREEMENTS, CONTRACTS AND COMMITMENTS...................................13 SECTION 3.11 COMPLIANCE; PERMITS.....................................................14 SECTION 3.12 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS...............................................14 SECTION 3.13 LABOR MATTERS...........................................................16 SECTION 3.14 PROPERTIES; ENCUMBRANCES................................................17 SECTION 3.15 TAXES...................................................................17 SECTION 3.16 ENVIRONMENTAL MATTERS...................................................19 SECTION 3.17 INTELLECTUAL PROPERTY...................................................20 SECTION 3.18 INSURANCE...............................................................21 SECTION 3.19 RESTRICTIONS ON BUSINESS ACTIVITIES.....................................21 SECTION 3.20 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS......................22 SECTION 3.21 INTERESTED PARTY TRANSACTIONS...........................................22 SECTION 3.22 CHANGE IN CONTROL PAYMENTS..............................................23 SECTION 3.23 YEAR 2000 COMPLIANCE....................................................23
i SECTION 3.24 POOLING; TAX MATTERS....................................................24 SECTION 3.25 NO EXISTING DISCUSSIONS.................................................24 SECTION 3.26 OPINION OF FINANCIAL ADVISOR............................................25 SECTION 3.27 BROKERS.................................................................25 SECTION 3.28 AFFILIATES..............................................................25 SECTION 3.29 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS.......................25 SECTION 3.30 ABSENCE OF CERTAIN PAYMENTS.............................................25 SECTION 3.31 FULL DISCLOSURE.........................................................25 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB 26 SECTION 4.1 ORGANIZATION AND QUALIFICATION..........................................26 SECTION 4.2 CERTIFICATE OF INCORPORATION AND BY-LAWS................................27 SECTION 4.3 CAPITALIZATION..........................................................27 SECTION 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT....................................28 SECTION 4.5 NO CONFLICT, REQUIRED FILINGS AND CONSENTS..............................29 SECTION 4.6 SEC FILINGS; FINANCIAL STATEMENTS.......................................29 SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS....................................30 SECTION 4.8 NO UNDISCLOSED LIABILITIES..............................................30 SECTION 4.9 COMPLIANCE..............................................................31 SECTION 4.10 ABSENCE OF LITIGATION...................................................31 SECTION 4.11 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS...............................................31 SECTION 4.12 LABOR MATTERS...........................................................33 SECTION 4.13 PROPERTIES; ENCUMBRANCES................................................33 SECTION 4.14 TAXES...................................................................34 SECTION 4.15 ENVIRONMENTAL MATTERS...................................................35 SECTION 4.16 INTELLECTUAL PROPERTY...................................................35 SECTION 4.17 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS......................37 SECTION 4.18 YEAR 2000 COMPLIANCE....................................................37 SECTION 4.19 BROKERS.................................................................38 SECTION 4.20 OWNERSHIP OF MERGER SUB; NO PRIOR ACTIVITIES............................38 SECTION 4.21 POOLING; TAX MATTERS....................................................39 SECTION 4.22 AFFILIATES..............................................................39 ARTICLE V CONDUCT OF BUSINESS.........................................39 SECTION 5.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER...................39 SECTION 5.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER........................41 SECTION 5.3 ADVICE OF CHANGES.......................................................42 SECTION 5.4 COOPERATION.............................................................42
ii ARTICLE VI ADDITIONAL AGREEMENTS.........................................42 SECTION 6.1 ACCESS TO INFORMATION; CONFIDENTIALITY..................................42 SECTION 6.2 NO SOLICITATION.........................................................43 SECTION 6.3 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT......................46 SECTION 6.4 SHAREHOLDERS' AND STOCKHOLDERS' MEETINGS................................46 SECTION 6.5 LEGAL CONDITIONS TO MERGER..............................................47 SECTION 6.6 AGREEMENTS WITH RESPECT TO AFFILIATES...................................48 SECTION 6.7 TAX-FREE REORGANIZATION.................................................48 SECTION 6.8 POOLING ACCOUNTING......................................................48 SECTION 6.9 LETTERS OF ACCOUNTANTS..................................................49 SECTION 6.10 PUBLIC ANNOUNCEMENTS....................................................49 SECTION 6.11 LISTING OF PARENT SHARES................................................49 SECTION 6.12 OPTIONS.................................................................49 SECTION 6.13 CONSENTS................................................................50 SECTION 6.14 INDEMNIFICATION AND INSURANCE...........................................50 SECTION 6.15 ADDITIONAL AGREEMENTS; BEST EFFORTS.....................................51 ARTICLE VII CONDITIONS TO THE MERGER......................................51 SECTION 7.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER.............51 SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB..........................................................53 SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY......................54 ARTICLE VIII TERMINATION...........................................54 SECTION 8.1 TERMINATION.............................................................54 SECTION 8.2 EFFECT OF TERMINATION...................................................56 SECTION 8.3 FEES AND EXPENSES.......................................................56 ARTICLE IX GENERAL PROVISIONS..........................................57 SECTION 9.1 NONSURVIVAL OF REPRESENTATIONS; WARRANTIES AND AGREEMENTS..........................................................57 SECTION 9.2 NOTICES.................................................................57 SECTION 9.3 CERTAIN DEFINITIONS.....................................................58 SECTION 9.4 AMENDMENT...............................................................59 SECTION 9.5 EXTENSION; WAIVER.......................................................59 SECTION 9.6 HEADINGS................................................................60 SECTION 9.7 SEVERABILITY............................................................60 SECTION 9.8 ENTIRE AGREEMENT, NO THIRD PARTY BENEFICIARIES..........................60 SECTION 9.9 ASSIGNMENT..............................................................60 SECTION 9.10 INTERPRETATION..........................................................60 SECTION 9.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE...................60
iii SECTION 9.12 GOVERNING LAW...........................................................61 SECTION 9.13 COUNTERPARTS............................................................61
iv LIST OF EXHIBITS Exhibit A Merger Agreement Exhibit B Form of Company Affiliate Agreement Exhibit C Form of Parent Affiliate Agreement v AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of December 28, 1999 (this "Agreement"), by and among Media 100 Inc., a Delaware corporation ("Parent"), Derringer Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and Digital Origin, Inc., a California corporation (the "Company"). WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have each determined that it is advisable and in the best interests of their respective stockholders or shareholders that Parent acquire the Company pursuant to the terms and conditions of this Agreement, and, in furtherance of such acquisition, such Boards of Directors have approved the merger of Merger Sub with and into the Company (the "Merger") in accordance with the terms of this Agreement and the applicable provisions of the California General Corporation Law (the "CGCL") and the Delaware General Corporation Law (the "DGCL"); WHEREAS, for United States 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"), and that this Agreement shall be, and is hereby, adopted as a plan of reorganization for purposes of Section 368(a) of the Code; and WHEREAS, for accounting purposes, it is intended that the Merger shall be accounted for as a pooling of interests; NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties hereto agree as follows: ARTICLE I THE MERGER SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with sections 1100 et seq. of the CGCL, Merger Sub shall be merged with and into the Company at the Effective Time of the Merger. Following the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation") and shall succeed to and assume all the rights, properties, liabilities and obligations of Merger Sub in accordance with the CGCL and DGCL. SECTION 1.2 CONSUMMATION OF THE MERGER. Upon the terms and subject to the conditions set forth in this Agreement and the Agreement of Merger between Merger Sub and the Company together with the related officers' certificates required by section 1103 of the CGCL, in the form attached to this Agreement as EXHIBIT A (the "Merger Agreement"), the parties hereto shall file the Merger Agreement with the Secretary of State of the State of California, whereupon Merger Sub shall be merged with and into the Company pursuant to sections 1100 et seq. of the CGCL. The parties hereto shall make all other filings, recordings or publications required by the CGCL and DGCL in connection with the Merger. The Merger shall become effective at the time specified in the Merger Agreement (the "Effective Time"). SECTION 1.3 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION. At and after the Effective Time, the Articles of Incorporation attached as ANNEX I to the Merger Agreement, shall be the Articles of Incorporation of the Surviving Corpora tion, until amended in accordance with the CGCL. SECTION 1.4 BY-LAWS OF THE SURVIVING CORPORATION. At and after the Effective Time, the By-laws of the Company, as in effect immediately prior to the Effective Time, shall be the By-laws of the Surviving Corporation, until amended in accordance with the CGCL. SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. (a) The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation and shall hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Articles of Incorporation or By-laws of the Surviving Corporation or as otherwise provided by law. In furtherance thereof, the Company shall secure, at the Effective Time, such resignations of its incumbent directors as are necessary to enable the designees of Parent to be elected or appointed to the Board of Directors of the Company. 2 (b) The officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation and shall hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Articles of Incorporation or By-laws of the Surviving Corporation or as otherwise provided by law. SECTION 1.6 CLOSING. Subject to satisfaction of the conditions set forth in this Agreement, the closing of the Merger (the "Closing") shall take place at 10:00 a.m., E.S.T., at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, One Beacon Street, Boston, Massachusetts on a date to be specified by Parent and the Company which shall be no later than the second business day after satisfaction or waiver of each of the conditions set forth in Article VII or on such other date and at such other time and place as Parent and the Company shall agree. The date on which the Closing shall occur is referred to herein as the "Closing Date." ARTICLE II CONVERSION AND EXCHANGE 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 the common stock, no par value, of the Company (the "Company Common Stock") or capital stock of Merger Sub: (a) COMPANY COMMON STOCK. Subject to this Article II, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive 0.5347, (the "Exchange Ratio") of a share of common stock, par value $.01 per share, of Parent (the "Parent Common Stock"), payable upon the surrender of the certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates") that are to be converted, pursuant to this Section 2.1(a), into the right to receive shares of Parent Common Stock. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled 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 (i) dissenters' rights, if any, as described in Section 2.1.(c), or (ii) the right to receive the shares of Parent Common Stock pursuant to this Section 2.1(a), any dividends or other distributions payable pursuant to Section 2.2(c) and any cash in lieu of fractional shares payable pursuant to Section 2.2(d), all to be issued or paid in consideration therefor upon the surrender of such Certificates in accordance with Section 2.2(b), without interest (collectively, the "Merger Consideration"). Notwithstanding the foregoing, the Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, reclassification, stock dividend, reorganization, recapitalization or other like change with respect to Parent Common Stock or Company Common Stock occurring after the date hereof and prior to the Effective Time. 3 (b) COMPANY WARRANTS. The (i) warrant to purchase up to 60,000 shares of Company Common Stock at $10.00 per share dated September 13, 1996 issued by the Company to IBM Credit Corporation, (ii) warrant to purchase up to 5,000 shares of Company Common Stock at $10.00 per share dated October 13, 1996 issued by the Company to Mitsubishi Electronics America, Inc., and (iii) warrant to purchase up to 50,000 shares of Company Common Stock at $1.50 per share dated November 23, 1998 issued by the Company to Post Digital Software, Inc. (collectively, the "Company Warrants"), in each case to the extent issued and outstanding immediately prior to the Effective Time, shall be converted into the right to purchase Parent Common Stock in accordance with their respective terms. (c) APPRAISAL RIGHTS. Holders of all shares of the outstanding capital stock of the Company for which dissenters' rights, if any, shall have been perfected under section 1300 et seq. of the CGCL (the "Dissenting Shares") shall have those rights, but only those rights, of holders of "dissenting shares" under section 1300 et seq. of the CGCL. The Company shall give Parent prompt notice of any demand, purported demand or other communication received by the Company with respect to any Dissenting Shares or shares claimed to be Dissenting Shares and Parent shall have the right to participate in all negotiations and proceedings with respect to such shares. (d) CAPITAL STOCK OF MERGER SUB. Each common share, par value $.01 per share, of Merger Sub ("Merger Sub Common Shares") issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable common share, par value $.01 per share, of the Surviving Corporation. (e) STOCK OPTIONS. Options to purchase shares of Company Common Stock (i) granted under (x) the Company's 1994 Directors' Stock Option Plan, the Company's 1990 Directors' Stock Option Plan, the Company's 1995 Stock Option Plan, the 1988 SuperMac Option Plan or the Company's 1986 Stock Option Plan (collectively, the "Company Stock Option Plans"), or (y) the Company's 1999 Employee Stock Purchase Plan (the "Company ESPP") or (ii) granted to James Given, Charles Berger, Mark Housley, Brady Bruce, Mary Bobel, Cary Capece, Tom Fristoe, Henry Morgan and Michael Glass (the "Other Company Options") shall be treated in the manner set forth in Section 6.12. SECTION 2.2 EXCHANGE OF CERTIFICATES. (a) EXCHANGE AGENT. Prior to the Closing Date, Parent shall designate a bank or trust company to act as Exchange Agent hereunder (the "Exchange Agent"). As soon as practicable after the Effective Time, Parent shall deposit with or for the account of the Exchange Agent stock certificates representing the number of shares of Parent Common Stock issuable pursuant to Section 2.1(a) in exchange for outstanding shares of Company Common Stock, which shares of Parent Common Stock shall be deemed to have been issued at the Effective Time. 4 (b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time, Parent will instruct the Exchange Agent to mail to each holder of record of a Certificate or Certificates (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may specify that are not inconsistent with the terms of this Agreement) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor (i) certificates evidencing that number of whole shares of Parent Common Stock which such holder has the right to receive in accordance with Section 2.1(a) in respect of the shares of Company Common Stock formerly evidenced by such Certificate, (ii) any dividends or other distributions to which such holder is entitled pursuant to Section 2.2(c) and (iii) any cash in lieu of any fractional shares of Parent Common Stock to which such holder is entitled pursuant to Section 2.2(d), after giving effect to any tax withholdings, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of shares of Company Common Stock which is not registered in the transfer records of the Company as of the Effective Time, a certificate representing the proper number of shares of Parent Common Stock may be issued to a transferee if the Certificate evidencing such Company Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer pursuant to this Section 2.2(b) and by evidence that any applicable stock transfer taxes have been paid. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of Company Common Stock will be deemed from and after the Effective Time, for all corporate purposes, to represent only (i) the right to exercise dissenters rights, if any, as described in Section 2.1(c), or (ii) the right to receive upon surrender the Merger Consideration. (c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED PARENT SHARES. No dividends or other distributions with respect to shares of Parent Common Stock for which the record date is after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock they are entitled to receive until the holder of such Certificate surrenders such Certificate. Following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock. Promptly following the date which is six months after the Effective Time, the Exchange Agent shall deliver to Parent all cash, certificates and other documents in its possession relating to the transactions described in this Agreement, and any holders of Company 5 Common Stock who have not theretofore complied with this Article II shall look thereafter only to Parent for the shares of Parent Common Stock, any dividends or distributions thereon, and any cash in lieu of fractional shares thereof to which they are entitled pursuant to this Article II. (d) NO FRACTIONAL SHARES. (i) No certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of Cer- tificates pursuant to this Article II; no dividend, stock split or other change in the capital structure of Parent shall relate to any fractional security; and such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder. (ii) As promptly as practicable following the Effective Time, the Ex- change Agent will determine the excess of (A) the number of whole shares of Parent Common Stock delivered to the Exchange Agent by Parent pursuant to Section 2.2(a) over (B) the aggregate number of whole shares of Parent Common Stock to be distributed to holders of Company Common Stock pursuant to Section 2.2(b) (such excess being herein called the "Excess Shares"). Following the Effective Time, the Exchange Agent will, on behalf of former shareholders of the Company, sell the Excess Shares at then-prevailing prices on the Nasdaq National Market (the "NASDAQ"). (iii) The Exchange Agent will use reasonable efforts to complete the sale of the Excess Shares as promptly following the Effective Time as, in the Exchange Agent's sole judgment, is practicable consistent with obtaining the best execution of such sales in light of prevailing market conditions. Until the net proceeds of such sale or sales have been distributed to the holders of Company Common Stock, the Exchange Agent will hold such proceeds in trust (the "Common Shares Trust"). Parent shall be entitled to any interest earned on such proceeds until such proceeds have been distributed to the former holders of Company Common Stock. The Surviving Corporation will pay all commissions, transfer taxes and other out-of-pocket transaction costs, including the expenses and compensation of the Exchange Agent incurred in connection with such sale of the Excess Shares. The Exchange Agent will determine the portion of the Common Shares Trust to which each former holder of Company Common Stock is entitled, if any, by multiplying the amount of the aggregate net proceeds comprising the Common Shares Trust by a fraction, the numerator of which is the amount of the fractional share interest to which such former holder of Company Common Stock is entitled (after taking into account all shares of Company Common Stock held at the Effective Time by such holder) and the denominator of which is the aggregate amount of fractional share interests to which all holders of Company Common Stock are entitled. For purposes of this Section 2.2(d), shares of Company Common Stock of any former holder represented by two or more 6 Certificates shall be aggregated and in no event shall any holder be paid an amount of cash in respect of more than one share of Parent Common Stock. (iv) As soon as practicable after the determination of the amount of cash, if any, to be paid to the former holders of Company Common Stock with respect to any fractional share interests, the Exchange Agent will hold such cash amounts for the benefit of, and pay such cash amounts to, such former holders of Company Common Stock subject to and in accordance with the terms of Section 2.2(b). (e) NO LIABILITY. Neither Parent, Merger Sub nor the Company shall be liable to any holder of Company Common Stock or Parent Common Stock, as the case may be, for such shares (or dividends or distributions with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law following the passage of time specified therein. (f) WITHHOLDING RIGHTS. Parent or the Exchange Agent shall be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to any holder of Company Common Stock such amounts as Parent or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Parent Common Stock in respect of which such deduction and withholding was made by Parent or the Exchange Agent. (g) CLOSING OF SHARE TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers on the stock transfer books of the Company or the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to such time. If, after such time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article II. (h) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof the Merger Consideration as provided in this Article II; PROVIDED, HOWEVER, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver an agreement of indemnification in form satisfactory to Parent, or a bond in such sum as Parent may direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. 7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Merger Sub that the statements contained in this Article III are true and correct, except as set forth in the Company Disclosure Schedule, dated as of the date hereof, prepared by the Company and delivered to Parent in connection herewith (the "Company Disclosure Schedule"). The Company Disclosure Schedule is arranged in sections corresponding to the numbered and lettered sections contained in this Article III and shall qualify only the corresponding Section in this Article III. SECTION 3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. The Company and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority necessary to own, lease and operate the properties it purports to own, lease or operate and to carry on its business as it is now being conducted or presently proposed to be conducted. The Company and each of its Subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that could not be expected to have a Company Material Adverse Effect. A true, complete and correct list of all of the Company's Subsidiaries, together with the jurisdiction of incorporation of each Subsidiary, the authorized capitalization of each Subsidiary, and the percentage of each Subsidiary's outstanding capital stock owned by the Company or another Subsidiary, is set forth in Section 3.1 of the Company Disclosure Schedule. The Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity, excluding securities in any publicly traded company held for investment by the Company and comprising less than one percent of the outstanding stock of such company. As used in this Agreement, the word "Subsidiary" means, with respect to any 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 are held by such party or any Subsidiary of such party that do not have a majority of the voting interest in such partnership), (ii) such party or any Subsidiary of such party owns in excess of a majority of the outstanding equity or voting securities or (iii) at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly appointed or controlled by such party or by any one or more of its Subsidiaries. The term "Company Material Adverse Effect" means any change, effect or circumstance that, individually or when taken together with all other changes, effects or circumstances that have occurred or reasonably could be expected to occur prior to the date of determination of the 8 occurrence of the Company Material Adverse Effect, (i) is materially adverse to the business, prospects, assets (including intangible assets), condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole or (ii) could materially delay or prevent the consummation of the transactions contemplated hereby. Changes in economic or market conditions affecting the software industry generally, changes in the Company's stock price, failure to meet the Company's revenue projections for the second quarter of fiscal year 2000 (except as set forth below) or any loss of a supplier, customer or employee resulting from the Merger or its announcement to the extent so resulting will be deemed not to constitute a Company Material Adverse Effect; revenue of 25% or more below the amount set forth in Section 3.1 of the Company Disclosure Schedule for the second quarter of fiscal year 2000 will be deemed to constitute a Company Material Adverse Effect. SECTION 3.2 ARTICLES OF INCORPORATION AND BY-LAWS. The Company has heretofore furnished to Parent a true, complete and correct copy of its Articles of Incorporation, as amended to date (the "Company Charter"), and By-Laws, as amended to date (the "Company By-Laws"), and the charter and by-laws (or equiva- lent organizational documents), as amended to date, of each of its Subsidiaries (the "Subsidiary Documents"). Such Company Charter, Company By-Laws and Subsid- iary Documents are in full force and effect. Neither the Company nor any of its Subsidiaries is in violation of any of the provisions of the Company Charter, Company By-Laws or Subsidiary Documents, as the case may be. SECTION 3.3 CAPITALIZATION. (a) The authorized capital stock of the Company consists of 100,000,000 shares of Company Common Stock, and 2,000,000 shares of preferred stock, no par value per share (the "Company Preferred Stock"). As of December 13, 1999: (i) 5,611,048 shares of Company Common Stock are issued and outstanding, 836,250 shares of Company Common Stock are reserved for issuance upon exercise of options granted pursuant to the Company Stock Option Plans, 122,568 (as of commencement of the current purchase period ending on February 29, 2000) shares of Company Common Stock are reserved for issuance upon exercise of options granted under the Company ESPP, 415,785 shares of Company Common Stock are reserved for issuance upon exercise of the Other Company Options, 115,000 shares of Company Common Stock are reserved for issuance upon exercise of the Company Warrants, and no shares of Company Common Stock are issued and held in the treasury of the Company; and (ii) no shares of Company Preferred Stock are issued and outstanding. All outstanding shares of Company Common Stock are, and all shares of Company Common Stock subject to issuance as specified above, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be, duly authorized, validly issued, fully paid and nonassessable and not subject to or issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the CGCL, the Company Charter or the Company By-Laws 9 or any agreement to which the Company is a party or is otherwise bound. No material change in such capitalization has occurred since December 13, 1999. All of the outstanding shares of capital stock of each of the Company's Subsidiaries are duly authorized, validly issued, fully paid and nonassessable, and all such shares are owned by the Company free and clear of all security interests, liens, claims, pledges, agreements, limitations in voting rights, charges or other encumbrances of any nature whatsoever (collectively, "Liens"). There are no accrued and unpaid dividends with respect to any outstanding shares of capital stock of the Company or any of its Subsidiaries. (b) Except as described in Section 3.3(a) of this Agreement, there are no equity securities of any class of the Company or any of its Subsidiaries or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Except as described in Section 3.3(a) of this Agreement, there are no options, warrants, calls, rights, commitments or agreements of any character to which the Company or any of its Subsidiaries is a party, or by which the Company or any of its Subsidiaries is bound, obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of the Company or any of its Subsidiaries or obligating the Company or any of its Subsidiaries to grant, extend or accelerate the vesting of or enter into any such option, warrant, call, right, commitment or agreement. There are no voting trusts, proxies or other similar agreements or understandings with respect to the shares of capital stock of the Company or any of its Subsidiaries. There are no obligations, contingent or otherwise, of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity. SECTION 3.4 AUTHORITY RELATIVE TO THIS AGREEMENT. Subject only to the approval of the Company's shareholders described below, the Company has all necessary corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it (the "Company Merger Documents") at the Closing and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of the Company Merger Documents and the consummation of the transactions contemplated by the Company Merger Documents have been duly and validly authorized by all necessary corporate action on the part of the Company, subject only to the approval of this Agreement and the Merger by the Company's shareholders (the "Company Voting Proposal") under the CGCL and the Company Charter by the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Company Common Stock. This Agreement has been duly and validly executed and delivered by the Company and constitutes, and when executed and delivered by the Company each of the other Company Merger Documents will constitute, assuming the due authorization, execution and delivery by Parent and Merger Sub, as applicable, the legal, valid and binding obligation of 10 the Company, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights and by general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law). The Board of Directors of the Company has determined that it is advisable and in the best interests of the Company's shareholders for the Company to enter into a business combination with Parent upon the terms and subject to the conditions of this Agreement, and has recommended that the Company's shareholders approve the Company Voting Proposal. SECTION 3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of the Company Merger Documents does not, and the performance of the Company Merger Documents by the Company will not, (i) conflict with or violate the Company Charter or Company By-Laws, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any of its Subsidiaries or by which its or any of their respective properties is bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default), or impair the Company's or any of its Subsidiaries' rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of the Company or any of its Subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or its or any of their respective properties is bound or affected; other than such conflicts, breaches, defaults, impairments or other effects under (iii) of this Section 3.5(a) that have not had and could not reasonably be expected to have a Company Material Adverse Effect. (b) The execution and delivery of this Agreement or any instrument required hereby to be executed and delivered by the Company at the Closing does not, and the performance of this Agreement by the Company or its Subsidiaries will not, require any consent, approval, authorization or permit of, or filing with or notification to, any court, administrative or regulatory agency or commission or other governmental authority or instrumentality (whether domestic or foreign, a "Governmental Entity"), except (i) the filing of the pre-merger notification report under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing of a Registration Statement on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") in accordance with the Securities Act of 1933, as amended (the "Securities Act"), and the filing of the Proxy Statement/Prospectus with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iii) such consents, approvals, 11 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 (iv) the filing and recordation of the Merger Agreement or other documents as required by the CGCL. SECTION 3.6 SEC FILINGS; FINANCIAL STATEMENTS. (a) The Company has timely filed all forms, reports, schedules, state ments and other documents, including any exhibits thereto, required to be filed by the Company with the SEC, since September 30, 1998 (collectively, the "Company SEC Reports"). The Company SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a 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 Company SEC Reports or necessary in order to make the statements in such Company SEC Reports, in light of the circumstances under which they were made, not misleading. None of the Company's Subsidiaries are required to file any forms, reports, schedules, statements or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes), contained in the Company SEC Reports, including any Company SEC Reports filed after the date of this Agreement until the Closing, complied, as of its respective date, in all material respects with all applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, was prepared in accordance with generally accepted accounting principles ("GAAP") (except as may be indicated in the notes thereto) applied on a consistent basis throughout the periods involved and fairly presented the consolidated financial position of the Company and its Subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The audited balance sheet of the Company as of September 30, 1999 is referred to herein as the "Company Balance Sheet." SECTION 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the Company Balance Sheet, the Company has conducted its business in the ordinary course consistent with past practice and, since such date, there has not occurred: (i) any change, development, event or other circumstance, situation or state of affairs that has had or could reasonably be expected to have a Company Material Adverse Effect; (ii) any amendments to or changes in the Company Charter or Company By-Laws; (iii) any damage to, destruction or loss of any asset of the Company or any of its Subsidiaries (whether or not covered by insurance) that could reasonably be expected to have a Company Material Adverse Effect; (iv) any change by the Company in its accounting methods, principles or practices; (v) any revaluation by 12 the Company of any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice; (vi) any sale of a material amount of assets (tangible or intangible) of the Company; or (vii) any other action or event that would have required the consent of Parent pursuant to Section 5.1 had such action or event occurred after the date of this Agreement. SECTION 3.8 NO UNDISCLOSED LIABILITIES. Except as disclosed in the Company SEC Reports, neither the Company nor any of its Subsidiaries has any liabilities (absolute, accrued, contingent or otherwise), except liabilities (a) adequately reflected in the Company Balance Sheet, (b) incurred in the ordinary course of business consistent with past practice and not required under GAAP to be reflected in the Company Balance Sheet, (c) incurred since the date of the Company Balance Sheet in the ordinary course of business consistent with past practice or (d) incurred in connection with this Agreement. SECTION 3.9 ABSENCE OF LITIGATION. There are no claims, actions, suits, proceedings or investigations (i) pending against the Company or any of its Subsidiaries or any properties or assets of the Company or of any of its Subsidiaries or (ii) to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or assets of the Company or of any of its Subsidiaries, in each case, which claims, actions, suits, proceedings or investigations could reasonably be expected to have a Company Material Adverse Effect. SECTION 3.10 AGREEMENTS, CONTRACTS AND COMMITMENTS. (a) Section 3.10(a) of the Company Disclosure Schedule sets forth a list of (i) all agreements, contracts or other instruments containing non-competition or similar restrictive provisions with respect to the Company or any of its Subsidiaries and (ii) all agreements, contracts or other instruments which, as of the date hereof, the Company is required to file as "material contracts" with the SEC pursuant to the requirements of the Exchange Act. (b) (i) Neither the Company nor any of its Subsidiaries has breached (without cure), is in default under, or has received written notice of any breach of or default under, any agreements, contracts or other instruments required to be disclosed in Section 3.10(a) of the Company Disclosure Schedule (each, a "Material Contract"), (ii) to the Company's knowledge, no other party to any Material Contract has breached or is in default of any of its obligations thereunder, (iii) each Material Contract is in full force and effect and (iv) each Material Contract is a legal, valid and binding obligation of the Company or its Subsidiary and, to the knowledge of the Company or any of its Subsidiaries, each of the other parties thereto, enforceable in accordance with its terms, except that the enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or 13 hereafter in effect relating to creditors' rights generally and (B) general principles of equity. SECTION 3.11 COMPLIANCE; PERMITS. (a) Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of (and has not received any notices of violation with respect to), any (i) law, rule or regulation, or (ii) order, judgment or decree applicable to the Company or any of its Subsidiaries or by which its or any of their respective properties is bound or affected, and the Company is not aware of any such conflict, default or violation thereunder (other than any conflicts, defaults or violations under (i) of this Section 3.11(a) that have not had and could not reasonably be expected to have a Company Material Adverse Effect). (b) The Company and its Subsidiaries hold all permits, licenses, ease ments, variances, exemptions, consents, certificates, authorizations, registrations, orders and other approvals from any arbitrator, court, nation, government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial regulatory or administrative functions of, or pertaining to, government that are material to the operation of the business of the Company and its Subsidiaries taken as a whole as it is now being conducted (collectively, the "Company Permits"). The Company Permits are in full force and effect, have not been violated and no suspension, revocation or cancellation thereof has been threatened and there is no action, proceeding or investigation pending or threatened regarding suspension, revocation or cancellation of any Company Permit. SECTION 3.12 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS. (a) Section 3.12(a) of the Company Disclosure Schedule contains a true and complete list of (i) each deferred compensation and each bonus or other incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; (ii) each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")); (iii) each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); (iv) each employment, termination or severance agreement; and (v) each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by the Company or by any trade or business, whether or not incorporated (an "ERISA Affiliate"), that together with the Company would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA, or to which the Company or an ERISA Affiliate is party, whether written or oral, for the benefit of any employee or former employee of the Company or any of its Subsidiaries (collectively, the "Company Plans"). No Company Plan is subject to Section 302 or Title IV of ERISA or Section 14 412 of the Code. Neither the Company, any of its Subsidiaries nor any ERISA Affiliate has any commitment or formal plan, whether legally binding or not, to create any additional employee benefit plan or modify or change any existing Company Plan that would affect any employee or former employee of the Company or any of its Subsidiaries. (b) With respect to each Company Plan, the Company has heretofore delivered or made available to Parent true and complete copies of each of the following documents: (i) a copy of the Company Plan and any amendments thereto (or if the Company Plan is not a written Company Plan, a description thereof); (ii) a copy of the two most recent annual reports and actuarial reports, if required under ERISA, and the most recent report prepared with respect thereto in accordance with Statement of Financial Accounting Standards No. 87; (iii) a copy of the most recent Summary Company Plan Description required under ERISA with respect thereto; (iv) if the Company Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement and the latest financial statements thereof; and (v) the most recent determination letter received from the IRS with respect to each Company Plan intended to qualify under Section 401 of the Code. (c) No liability under Title IV or Section 302 of ERISA has been incurred by the Company or any ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to the Company or any ERISA Affiliate of incurring any such liability, other than liability for premiums due to the Pension Benefit Guaranty Corporation (which premiums have been paid when due). (d) All contributions required to be made with respect to any Company Plan on or prior to the Effective Time have been timely made or are reflected on the Company Balance Sheet. (e) Neither the Company nor any of its Subsidiaries, any Company Plan, any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction in connection with which the Company or any of its Subsidiaries, any Company Plan, any such trust, or any trustee or administrator thereof, or any party dealing with any Company Plan or any such trust could be subject to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976 of the Code. (f) Each Company Plan has been operated and administered in all material respects in accordance with its terms and applicable law, including but not limited to ERISA and the Code. There are no pending, threatened or anticipated claims by or on behalf of any Company Plan, by any employee or beneficiary covered under any such Company Plan, or otherwise involving any such Company Plan (other than routine claims for benefits). 15 (g) Each Company Plan intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified and the trusts maintained thereunder are exempt from taxation under Section 501(a) of the Code. Each Company Plan intended to satisfy the requirements of Section 501(c)(9) has satisfied such requirements. (h) No Company Plan provides medical, surgical, hospitalization, death or similar benefits (whether or not insured) for employees or former employees of the Company or any of its Subsidiaries for periods extending beyond their retirement or other termination of service, other than (i) coverage mandated by applicable law, (ii) death benefits under any "pension plan," or (iii) benefits the full cost of which is borne by the current or former employee (or his beneficiary). No condition exists that would prevent the Company or any of its Subsidiaries from amending or terminating any Company Plan providing health or medical benefits in respect of any active or former employee of the Company or any of its Subsidiaries. (i) No amounts payable under the Company Plans have failed, or as a result of the transactions contemplated hereby will fail, to be deductible for federal income tax purposes by virtue of Sections 162(m) or 280G of the Code. (j) The consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee or officer of the Company or any ERISA Affiliate to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer. SECTION 3.13 LABOR MATTERS. (a) There are no controversies pending or, to the knowledge of the Company or any of its Subsidiaries, threatened, between the Company or any of its Subsidiaries and any of their respective employees, consultants or independent contractors; (b) neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company or its Subsidiaries, nor does the Company or any of its Subsidiaries know of any activities or proceedings of any labor union to organize any such employees; and (c) neither the Company nor any of its Subsidiaries has any knowledge of any labor disputes, strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of, or consultants or independent contractors to, the Company or any of its Subsidiaries. SECTION 3.14 PROPERTIES; ENCUMBRANCES. The Company and each of its Subsidiaries have good, valid and marketable title to, or a valid leasehold interest in, all the tangible properties and assets which it purports to own or lease (real, personal and mixed), including, without limitation, all the properties and assets reflected in the Company Balance Sheet (except for personal property sold since the date of the Company Balance Sheet in the ordinary course of business consistent with past practice). All properties and assets reflected in the Company Balance Sheet are free 16 and clear of all Liens, except for Liens reflected on the Company Balance Sheet and Liens for current taxes not yet due and other Liens that do not materially detract from the value or impair the use of the property or assets subject thereto. SECTION 3.15 TAXES. (a) The Company and each of its Subsidiaries have timely filed with the appropriate taxing authorities all Tax Returns required to be filed by them (giving effect to valid extensions) and all such Tax Returns are true, correct and complete in all material respects. Each group of corporations with which the Company or any of its Subsidiaries has filed (or was required to file) consolidated, combined, unitary or similar Tax Returns (an "Affiliated Group") has timely filed all income and other material Tax Returns that it was required to file (giving effect to valid extensions) with respect to any period in which the Company or any of its Subsidiaries was a member of such Affiliated Group (each such Tax Return, an "Affiliated Return") and all such Affiliated Returns are true, correct and complete in all material respects. All material Taxes due and owing by the Company and its Subsidiaries have been timely paid or adequately reserved for. There are no Tax Liens on any assets of the Company or any Subsidiary thereof other than liens relating to current Taxes not yet due and payable. Neither the Company, any of its Subsidiaries nor any member of any Affiliated Group has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax. No power of attorney has been granted with respect to any matter relating to Taxes of the Company or any of its Subsidiaries which is currently in force. (b) Neither the Company nor any of its Subsidiaries is, or has been, a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (c) The Company and each of its Subsidiaries have complied in all material respects with all applicable laws, rules and regulations relating to Taxes required to be withheld or collected, including, without limitation, Taxes required to be withheld pursuant to Sections 1441 and 1442 of the Code and Taxes required to be withheld from employee wages. The Company has delivered to Parent true, correct and complete copies of all (i) income and other material Tax Returns filed by the Company and each of its Subsidiaries and (ii) Affiliated Returns, in each case since the date of September 28, 1996. None of the Company, any of its Subsidiaries or any member of any Affiliated Group has received any notice of any audit examination, deficiency, refund litigation, proposed adjustment or matter in controversy with respect to any Taxes or Tax Return of the Company, any of its Subsidiaries or any Affiliated Group, and no audits or other administrative proceedings or court proceedings with respect to any Taxes or Tax Return of the Company, any of its Subsidiaries or any Affiliated Group are in progress. No taxing authority has asserted that the Company, any of its Subsidiaries or any Affiliated Group was 17 required to file any Tax Return that was not filed. Neither the Company nor any of its Subsidiaries is a "consenting corporation" within the meaning of Section 341(f) of the Code or has agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries is a party to or bound by any Tax indemnity, sharing, allocation, or similar contract or arrangement. Neither the Company nor any of its Subsidiaries is or has ever been a member of a group of corporations with which it has filed (or been required to file) consolidated, combined, unitary or similar Tax Returns, other than a group of which only the Company and its Subsidiaries are or were members. Neither the Company nor any of its Subsidiaries has agreed to, or is required to, make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. (d) The statute of limitations for the assessment of Taxes has expired for all Tax Returns of the Company and its Subsidiaries and any Affiliated Group, or those Tax Returns have been audited and closed by the appropriate taxing authorities. The Company has delivered to Parent true, correct and complete copies of each of (i) all audit reports, letter rulings, technical advice memoranda and similar documents issued by a taxing authority relating to Taxes of, or with respect to, the Company or any of its Subsidiaries and (ii) any closing agreements entered into by the Company or any of its Subsidiaries with any taxing authority. (e) For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes, fees, levies, duties, tariffs, imposts and governmental impositions or charges of any kind in the nature of (or similar to) taxes, payable to any federal, state, local or foreign taxing authority, including without limitation (i) income, franchise, profits, gross receipts, AD VALOREM, net worth, value added, sales, use, service, real or personal property, special assessments, capital stock, license, payroll, withholding, employment, social security, workers' compensation, unemployment compensation, utility, severance, production, excise, stamp, occupation, premium, windfall profits, transfer and gains taxes and (ii) interest, penalties, additional taxes and additions to tax imposed with respect thereto; and "Tax Returns" shall mean returns, reports, declarations, schedules, certificates, information statements and other similar documents with respect to Taxes (including any supporting information) required to be filed with the IRS or any other taxing authority, domestic or foreign, including, without limitation, consolidated, combined or unitary tax returns, claims for refund, amended returns, or declarations of estimated Tax. SECTION 3.16 ENVIRONMENTAL MATTERS. (a) The Company and its Subsidiaries are in full compliance with all applicable Environmental Laws; neither the Company nor any of its Subsidiaries has received any communication whether from a Governmental Entity, citizens group, employee or otherwise, that alleges that the Company or any of its Subsidiaries are 18 not in such full compliance; and, to the Company's best knowledge, there are no circumstances that may prevent, interfere with, such full compliance in the future. (b) There is no Environmental Claim pending or threatened against the Company or any of its Subsidiaries or, to the Company's knowledge, against any person or entity whose liability for any Environmental Claim the Company or any of its Subsidiaries have or may have retained or assumed either contractually or by operation of law. (c) There are no past or present actions, activities, circumstances, conditions, events or incidents, including the Release, emission, discharge or disposal of any Hazardous Materials, that could form the basis of any Environmental Claim against the Company or any of its Subsidiaries or, to the Company's knowledge, against any person or entity whose liability for any Environmental Claim the Company or any of its Subsidiaries have or may have retained or assumed either contractually or by operation of law. (d) The Company and its Subsidiaries have delivered or otherwise made available for inspection to Parent true, complete and correct copies and results of any audits, reports, studies, analyses, tests or monitoring possessed or initiated by the Company or its Subsidiaries pertaining to Hazardous Materials in, on, beneath or adjacent to any property currently or formerly owned, operated or leased by the Company or its Subsidiaries or regarding the Company's or its Subsidiaries' compliance with applicable Environmental Laws. (e) "Environmental Claim" means any claim, action, cause of action, investigation or notice by any person or entity alleging potential liability arising out of, based on or resulting from (i) the presence, or release into the environment, of any Hazardous Material at any location, whether or not owned by the Company or any of its Subsidiaries or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. (f) "Environmental Laws" means all federal, state, local and foreign laws and regulations relating to pollution or protection of human health or the environment, including without limitation laws and regulations relating to emissions, discharges, releases or threatened releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials and all laws and regulations with regard to record keeping, notification, disclosure and reporting requirements respecting Hazardous Materials. (g) "Hazardous Materials" means chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products, all substances defined as Hazardous Substances, Hazardous Wastes, Oils, Pollutants or Contaminants in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. 19 ss. 300.5, or defined as such by, or otherwise regulated under, any Environmental Law. (h) "Release" means any release, spill, emission, discharge, leaking, pumping, injection, deposit, disposal, dispersal, leaching or migration into the indoor or outdoor environment (including, without limitation, ambient air, surface water, groundwater and surface or subsurface strata) or into or out of any property, including the movement of Hazardous Materials through or in the air, soil, surface water, groundwater or property. SECTION 3.17 INTELLECTUAL PROPERTY. (a) The Company or its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable rights to use (free and clear of all liens and encumbrances), all trademarks, service marks, trade names, copyrights, Internet domain names, mask works, including any registrations or applications for registration thereof, patents and patent applications, and trade secrets, including technology, know-how, processes, schematics, computer software programs or applications, and all other tangible or intangible proprietary information or material, that is used in the business of the Company and its Subsidiaries as currently conducted (the "Company Intellectual Property Rights"). Set forth in Section 3.17(a) of the Company Disclosure Schedule is a list of all Company-owned patents and patent applications, registered and unregistered trademarks and service marks, and copyright and mask work registrations. (b) Either the Company or one of its Subsidiaries is the sole and exclusive owner of all right, title and interest in and to (free and clear of any Liens), or is the exclusive or non-exclusive licensee of, the Company Intellectual Property Rights, and, in the case of Company Intellectual Property Rights owned by the Company or any of its Subsidiaries, has sole and exclusive rights (and is not contractually obligated to pay any compensation to any third party in respect thereof) to the use thereof and the material covered thereby. No claims have been asserted or, to the Company's knowledge, are threatened by any person (i) to the effect that the manufacture, sale, licensing or use of any of the products or services of the Company or any of its Subsidiaries as now manufactured, sold or licensed or used or proposed for manufacture, use, sale or licensing by the Company or any of its Subsidiaries infringes any intellectual property rights of any third party, (ii) against the use by the Company or any of its Subsidiaries of any trademarks, service marks, trade names, trade secrets, copyrights, patents, technology or know-how used in the business of the Company and its Subsidiaries as currently conducted or as presently proposed to be conducted, or (iii) challenging the ownership or use by the Company or any of its Subsidiaries or the validity of any of the Company Intellectual Property Rights. All patents and trademark, service mark, copyright and mask work registrations held by the Company and its Subsidiaries and used in the business of the Company or its Subsidiaries as currently conducted or as presently proposed to be conducted are valid, subsisting, in full force and effect, and have not lapsed, expired or been 20 cancelled or abandoned. To the knowledge of the Company, there is no unauthorized use, infringement or misappropriation of any of the Company Intellectual Property Rights by any third party, including any employee or former employee of the Company or any of its Subsidiaries. No Company Intellectual Property Right or product or service of the Company or any of its Subsidiaries is subject to any outstanding decree, order, judgment or stipulation restricting in any manner the use, sale or licensing thereof by the Company or any of its Subsidiaries. No current or former partner, director, officer or employee of the Company or any of its Subsidiaries will, after giving effect to the transactions contemplated hereby, own or retain any rights in or to any of the Company Intellectual Property. Neither the Company nor any of its Subsidiaries has entered into any agreement under which the Company or its Subsidiaries is restricted from using or licensing any Company Intellectual Property Right in any manner anywhere in the world, or selling or otherwise distributing any of its products or services. (c) Neither the Company nor any Subsidiary is, or as a result of the execution or delivery of this Agreement or the performance of its obligations hereunder will be in violation of any license, sublicense, agreement or instrument to which the Company or such Subsidiary is a party or otherwise bound, nor will the consummation of the transactions contemplated hereby result in any material loss or impairment of the Company or any Subsidiary's ownership of or right to use any of the Company Intellectual Property, nor require the consent of any Governmental Entity or third party with respect to any of the Company Intellectual Property. SECTION 3.18 INSURANCE. To the Company's best knowledge, after reasonable inquiry, all fire and casualty, general liability, business interruption, product liability, sprinkler and water damage insurance policies and other forms of insurance maintained by the Company or any of its Subsidiaries are with reputable insurance carriers, provide adequate coverage for all normal risks incident to the business of the Company and its Subsidiaries and their respective properties and assets and are in character and amount and with such deductibles and retained amounts as generally carried by persons engaged in similar businesses and subject to the same or similar perils or hazards. SECTION 3.19 RESTRICTIONS ON BUSINESS ACTIVITIES. Except for this Agreement, there is no agreement, judgement, injunction, order or decree binding upon the Company or any of its Subsidiaries which has or could be expected to have the effect of prohibiting or impairing any business practice of the Company or any of its Subsidiaries, acquisition of property by the Company or any of its Subsidiaries or the conduct of business by the Company or any of its Subsidiaries as currently conducted or as proposed to be conducted by the Company. SECTION 3.20 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The information supplied by the Company for inclusion in the Registration Statement shall not at the time the Registration Statement is declared effective by the SEC 21 contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The information supplied by the Company for inclusion or incorporation by reference in the proxy statement/prospectus (as amended or supplemented, the "Proxy Statement/Prospectus") to be sent to the shareholders of the Company in connection with the meeting of the shareholders of the Company to consider the Company Voting Proposal (the "Company Shareholders Meeting"), and stockholders of Parent in connection with the meeting of the stockholders of Parent to consider the issuance of the Parent Common Stock in the Merger (the "Parent Stockholders Meeting"), shall not, on the date the Proxy Statement/Prospectus (or any amendment thereof or supplement thereto) is first mailed to shareholders of the Company and stockholders of Parent or at the time of the Company Shareholders Meeting and the time of the Parent Stockholders Meeting contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statements made therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company Shareholders Meeting and the Parent Stockholders Meeting which has become false or misleading. If at any time prior to the later of the Company Shareholders Meeting and the Parent Stockholders Meeting any event relating to the Company or any of its respective affiliates, officers or directors should be discovered by the Company which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy State ment/Prospectus, the Company shall promptly inform Parent. The Proxy State ment/Prospectus shall comply in all material respects as to form and substance with the requirements of the Securities Act, the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Merger Sub which is contained in the Registration Statement or the Proxy Statement/Prospectus. SECTION 3.21 INTERESTED PARTY TRANSACTIONS. Since the date of the Company's proxy statement dated January 19, 1999, no event has occurred that would be required to be reported as a Certain Relationship or Related Transaction, pursuant to Item 404 of Regulation S-K promulgated by the SEC. SECTION 3.22 CHANGE IN CONTROL PAYMENTS. Neither the Company nor any of its Subsidiaries have any agreements, other than as previously disclosed in Section 3.12 of the Company Disclosure Schedule, to which they are parties, or to which they are subject, pursuant to which payments may be required upon, or may become payable directly or indirectly as a result of, a change of control of the Company. SECTION 3.23 YEAR 2000 COMPLIANCE. 22 (a) All of (i) the internal systems used in the business or operations of the Company and its Subsidiaries, including without limitation computer hardware systems, software, applications, firmware, equipment containing embedded microchips and other embedded systems and (ii) the software, hardware, firmware and other technology that constitute part of the products and services manufactured, marketed, licensed or sold by the Company or any of its Subsidiaries to third parties are Year 2000 Compliant. (b) To the Company's knowledge, all third-party systems used in connec- tion with the business, products, services or operations of the Company or any of its Subsidiaries, including without limitation any system belonging to any of the Company's or its Subsidiaries' vendors, co-venturers, service providers or customers are Year 2000 Compliant. The Company and its Subsidiaries have received satisfactory written assurances and warranties from all of their respective vendors, co-venturers, service providers and customers that are material to the ongoing operation of the business of the Company and its Subsidiaries that past and future products, software, equipment, components or systems provided by such parties are (or in the case of future products, will be) Year 2000 Compliant. (c) The Company has conducted "year 2000" audits with respect to (i) each of the internal systems used in the business, products, services and operations of the Company and its Subsidiaries, including without limitation computer hardware systems, software, applications, firmware, equipment containing embedded microchips and other embedded systems and (ii) all of the software, applications, hardware, firmware and other technology which constitute part of the products and services manufactured, marketed, performed or sold by the Company or any of its Subsidiaries or licensed by the Company or any of its Subsidiaries to third parties. The Company has obtained "year 2000" certifications with respect to all material third-party systems used in connection with the business or operations of the Company and its Subsidiaries, including without limitation systems belonging to the vendors, co-venturers, service providers and customers of the Company of any or its Subsidiaries. The Company has made available to Parent true, complete and correct copies of all "year 2000" audits, certifications, reports and other similar documents that have been prepared or performed by or on behalf of the Company or any third party with respect to the systems, business, operations, products or services of the Company or any of its Subsidiaries. (d) Neither the Company nor any of its Subsidiaries has provided any representation, warranty or guarantee for any product sold or licensed, or service provided, by the Company or its Subsidiaries to the effect that such product or service (i) complies with or accounts for the fact of the year change from December 31, 1999 to January 1, 2000, (ii) will not be adversely affected with respect to functionality, interoperability, connectivity, performance, reliability or volume capacity (including without limitation the processing storage, recall and reporting of data) by the passage of any date, including without limitation the year change from December 31, 1999 to January 1, 2000 or (iii) is otherwise Year 2000 Compliant. 23 (e) For purposes of this Agreement, "Year 2000 Compliant" means that the applicable system, product, service or item: (i) will accurately receive, record, store, provide, recognize, recall and process all date and time data from, during, into and between the years 1999, 2000 and 2001, and all years pertinent thereafter; (ii) will accurately perform all date-dependent calculations and operations (including without limitation, mathematical operations, sorting, comparing and reporting) from, during, into and between the years 1999, 2000 and 2001, and all pertinent years thereafter; and (iii) will not malfunction, cease to function or provide invalid or incorrect results as a result of (A) the change of years from 1999 to 2000 or from 2000 to 2001, (B) date data, including date data which represents or references different centuries, different dates during 1999, 2000 and 2001, or more than one century or (C) the occurrence of any particular date; in each case without human intervention, provided, in each case, that all software, applications, hardware and other systems used in conjunction with such system or item that are not owned or licensed by the Company or its Subsidiaries correctly exchange date data with or provide data to such system or item. SECTION 3.24 POOLING; TAX MATTERS. Neither the Company nor any of its affiliates has taken or agreed to take any action or failed to take any action, or has any reason to believe that any conditions exist, that would prevent (a) Parent from accounting for the business combination to be effected by the Merger as a pooling of interests or (b) the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code. SECTION 3.25 NO EXISTING DISCUSSIONS. As of the date hereof, the Company is not engaged, directly or indirectly, in any discussions or negotiations with any other party with respect to an Acquisition Proposal (as defined in Section 6.2(b)) or any other substantially similar proposal. SECTION 3.26 OPINION OF FINANCIAL ADVISOR. The financial advisor of the Company, First Security Van Kasper, has delivered to the Company an opinion dated the date of this Agreement to the effect that as of the date of this Agreement, the Merger Consideration is fair, from a financial point of view, to the shareholders of the Company. The Company has provided a complete and correct copy of such opinion to Parent. SECTION 3.27 BROKERS. No broker, finder or investment banker (other than First Security Van Kasper, whose brokerage, finder's or other fee will be paid by the Company) is entitled to any brokerage, finder's or other fee or commission in 24 connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or any of its Subsidiaries. The Company has heretofore furnished to Parent a complete and correct copy of all agreements between the Company and First Security Van Kasper pursuant to which such firm would be entitled to any payment relating to the transactions contemplated hereunder. SECTION 3.28 AFFILIATES. Section 3.28 of the Company Disclosure Schedule contains a true, complete and correct list of all persons who, as of the date hereof, to the best knowledge of the Company, may be deemed to be affiliates of the Company excluding all its Subsidiaries but including all directors and executive officers of the Company. SECTION 3.29 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each current and former employee and officer of the Company has executed an Agreement Regarding Confidential Information and Inventions, or an Employee Proprietary Information Agreement or similar such agreement, in substantially the form previously provided or made available to Parent. The Company is not aware that any of the current or former employees of the Company is in violation thereof. SECTION 3.30 ABSENCE OF CERTAIN PAYMENTS. Neither the Company, nor, to the Company's knowledge, any of its affiliates or any of their respective officers, directors, employees or agents or other people acting on behalf of any of them have: (i) engaged in any activity prohibited by the United States Foreign Corrupt Practices Act of 1977 or any other similar law, regulation, decree, directive or order of any Governmental Entity and (ii) without limiting the generality of the preceding clause (i), used any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to government officials or others. Neither the Company, nor, to the Company's knowledge, any of its affiliates or any of their respective directors, officers, employees or agents of other persons acting on behalf of any of them, has accepted or received any unlawful contributions, payments, gifts or expenditures. SECTION 3.31 FULL DISCLOSURE. To the Company's best knowledge, after reasonable inquiry, no representation or warranty by the Company in this Agreement and no statement contained in any schedule or certificate furnished or to be furnished by the Company to Parent, or any of its representatives pursuant to the provisions hereof taken as a whole, contains as of the date hereof any untrue statement of material fact or omits to state any material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES 25 OF PARENT AND MERGER SUB Parent and Merger Sub represent and warrant to the Company that the statements contained in this Article IV are true and correct, except as set forth in the Parent Disclosure Schedule, dated as of the date hereof, prepared by Parent and delivered to the Company in connection herewith (the "Parent Disclosure Schedule"). The Parent Disclosure Schedule is arranged in sections corresponding to the numbered and lettered sections contained in this Article IV and shall qualify only the corresponding Section in this Article IV. SECTION 4.1 ORGANIZATION AND QUALIFICATION. Parent and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its respective incorporation and has the requisite corporate power and authority necessary to own, lease and operate the properties it purports to own, lease or operate and to carry on its business as it is now being conducted or presently proposed to be conducted. Parent and each of its Subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that could not reasonably be expected to have a Parent Material Adverse Effect. A true, complete and correct list of all of Parent's Subsidiaries, together with the jurisdiction of incorporation of each Subsidiary, the authorized capitalization of each Subsidiary, and the percentage of each Subsidiary's outstanding capital stock owned by Parent or another Subsidiary, is set forth in Section 4.1 of the Parent Disclosure Schedule. Parent does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity, excluding securities in any publicly traded company held for investment by Parent and comprising less than one percent of the outstanding stock of such company. The term "Parent Material Adverse Effect" means any change, effect or circumstance that, individually or when taken together with all other such similar or related changes, effects or circumstances that have occurred or could reasonably be expected to occur prior to the date of determination of the occurrence of the Parent Material Adverse Effect, (i) is materially adverse to the business, prospects, assets (including intangible assets), condition (financial or otherwise) or results of operations of Parent and its Subsidiaries taken as a whole or (ii) could materially delay or prevent the consummation of the transactions contemplated hereby. Changes in economic or market conditions affecting the computer peripherals or computer software industries generally, changes in Parent's stock price, failure to meet Parent's revenue projections for the first quarter of fiscal year 2000 (except as set forth below) or any loss of a supplier, customer or employee resulting from the Merger or its announcement to the extent so resulting will be deemed not to constitute a Parent Material Adverse Effect; revenue for the first quarter of fiscal year 2000 of 25% or more below the amount set forth in Section 4.1 26 of the Parent Disclosure Schedule will be deemed to constitute a Parent Material Adverse Effect. SECTION 4.2 CERTIFICATE OF INCORPORATION AND BY-LAWS. Parent has heretofore furnished to the Company a true, complete and correct copy of its Certifi cate of Incorporation, as amended to date (the "Parent Charter"), and By-Laws, as amended to date (the "Parent By-Laws"). Such Parent Charter and Parent By-Laws are in full force and effect. Parent is not in violation of any of the provisions of the Parent Charter or Parent By-Laws. SECTION 4.3 CAPITALIZATION. (a) The authorized capital stock of Parent consists of 25,000,000 shares of Parent Common Stock, and 1,000,000 shares of preferred stock, par value $.01 per share (the "Parent Preferred Stock"). As of November 30, 1999: (i) 8,485,714 shares of Parent Common Stock are issued and outstanding, 1,826,309 shares of Parent Common Stock are reserved for issuance upon exercise of options granted pursuant to Parent's 1982 Key Employee Incentive Plan, 1986 Employee Stock Purchase Plan and 1992 Key Employee Incentive Plan; and no shares of Parent Common Stock are issued and held in the treasury of Parent; and (ii) no shares of Parent Preferred Stock are issued and outstanding. All outstanding shares of Parent Common Stock are, and all shares of Parent Common Stock subject to issuance as specified above, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be, duly authorized, validly issued, fully paid and nonassessable and not subject to or issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the DGCL, Parent Charter or Parent By-Laws or any agreement to which Parent is a party or is otherwise bound. No material change in such capitalization has occurred since November 30, 1999. All of the outstanding shares of capital stock of each of Parent's Subsidiaries are duly authorized, validly issued, fully paid and nonassessable, and all such shares are owned by Parent free and clear of all Liens. There are no accrued and unpaid dividends with respect to any outstand- ing shares of capital stock of Parent or any of its Subsidiaries. (b) Except as described in Section 4.3(a) of this Agreement, there are no equity securities of any class of Parent or any of its Subsidiaries or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Except as described in Section 4.3(a) of this Agreement, there are no options, warrants, calls, rights, commitments or agreements of any character to which Parent or any of its Subsidiaries is a party, or by which Parent or any of its Subsidiaries is bound, obligating Parent or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of Parent or any of its Subsidiaries or obligating Parent or any of its Subsidiaries to grant, extend or accelerate the vesting of or enter into any such option, warrant, call, right, commitment or agreement. To Parent's knowledge, there are no voting 27 trusts, proxies or other similar agreements or understandings with respect to the shares of capital stock of Parent or any of its Subsidiaries There are no obligations, contingent or otherwise, of Parent or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of Parent or any of its Subsidiaries or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity. (c) All of the shares of Parent Common Stock to be issued in the Merger will be, when issued in accordance with this Agreement, duly authorized, validly issued, fully paid and nonassessable. (d) The authorized capital stock of Merger Sub consists of 100 Merger Sub Common Shares, all of which are issued and outstanding and fully paid and nonassessable. SECTION 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT. Subject only to the approval of Parent's stockholders described below, each of Parent and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it (the "Parent Merger Documents") at the Closing and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of the Parent Merger Documents and the consummation of the transactions contemplated by the Parent Merger Documents have been duly and validly authorized by all necessary corporate action on the part of Parent and Merger Sub, subject only to the approval of the holders of Parent Common Stock of the issuance of the Parent Common Stock in the Merger at a meeting where a quorum is present by a majority of the votes properly cast (the "Parent Voting Proposal"). This Agreement has been duly and validly executed and delivered by Parent and Merger Sub and constitutes, and when executed and delivered by Parent and Merger Sub, as applicable, each of the other Parent Merger Documents will constitute, assuming the due authorization, execution and delivery by the Company, the legal and binding obligation of each of Parent and Merger Sub, as applicable, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights and by general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law). The Board of Directors of Parent has determined that it is advisable and in the best interests of Parent's stockholders for Parent to issue the shares to the Company's shareholders on the terms and subject to the conditions of this Agreement, and has recommended that Parent's stockholders approve the Parent Voting Proposal. SECTION 4.5 NO CONFLICT, REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of the Parent Merger Documents by Parent and Merger Sub do not, and the performance of this Agreement by Parent and Merger Sub will not, (i) conflict with or violate the Parent Charter, the Parent ByLaws, the Certificate of Incorporation of Merger Sub or the By- 28 Laws of Merger Sub, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent or Merger Sub by which its or their respective properties are bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default), or impair Parent's or any of its Subsidiaries' rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of Parent or any of its Subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any of its Subsidiaries is a party or by which Parent or any of its Subsidiaries or its or any of their respective properties is bound or affected; other than such conflicts, breaches, defaults, impairments or other effects under (iii) of this Section 4.5(a) that have not had and could not reasonably be expected to have a Parent Material Adverse Effect. (b) The execution and delivery of this Agreement or any instrument required hereby to be executed and delivered by Parent and Merger Sub does not, and the performance of this Agreement by Parent and Merger Sub will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) the filing of the pre-merger notification report under the HSR Act, (ii) the filing of the Registration Statement with the SEC in accordance with the Securities Act, and the filing of the Proxy Statement/Prospectus with the SEC under the Exchange Act, (iii) 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 (iv) the filing and recordation of the Merger Agreement or other documents as required by the CGCL and the DGCL. SECTION 4.6 SEC FILINGS; FINANCIAL STATEMENTS. (a) Parent has timely filed all forms, reports, schedules, statements and other documents required to be filed by Parent with the SEC since November 30, 1998 (collectively, the "Parent SEC Reports"). The Parent SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a 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 Parent SEC Reports or necessary in order to make the statements in such Parent SEC Reports, in light of the circumstances under which they were made, not misleading. None of Parent's Subsidiaries are required to file any forms, reports, schedules, statements or other documents with the SEC. 29 (b) Each of the consolidated financial statements (including, in each case, any related notes), contained in the Parent SEC Reports, including any Parent SEC Reports filed after the date of this Agreement until the Closing, complied, as of its respective date, in all material respects with all applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, was prepared in accordance with GAAP applied on a consistent basis throughout the periods involved and fairly presented the consolidated financial position of Parent and its Subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the unaudited balance sheet of Parent as of November 30, 1999 (the "Parent Balance Sheet"), a copy of which has been previously supplied to the Company by Parent, and except as disclosed in the Parent SEC Reports, Parent has conducted its business in the ordinary course consistent with past practice and, since such date, there has not occurred: (i) any change, development, event or other circumstance, situation or state of affairs that has had or could reasonably be expected to have a Parent Material Adverse Effect; (ii) any amendments to or changes in the Parent Charter or Parent By-Laws; (iii) any damage to, destruction or loss of any asset of Parent or any of its Subsidiaries (whether or not covered by insurance) that could reasonably be expected to have a Parent Material Adverse Effect; (iv) any change by Parent in its accounting methods, principles or practices; (v) any revaluation by Parent of any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice; or (vi) any sale of a material amount of assets (tangible or intangible) of Parent other than in the ordinary course of business and consistent with past practice. SECTION 4.8 NO UNDISCLOSED LIABILITIES. Except as disclosed in the Parent SEC Reports or in the Parent Balance Sheet, to Parent's knowledge, neither Parent nor any of its Subsidiaries has any liabilities (absolute, accrued, contingent or otherwise), except liabilities (a) adequately reflected in the Parent Balance Sheet, (b) incurred in the ordinary course of business consistent with past practice and not required under GAAP to be reflected in the Parent Balance Sheet, (c) incurred since the date of the Parent Balance Sheet in the ordinary course of business consistent with past practice or (d) incurred in connection with this Agreement. SECTION 4.9 COMPLIANCE. To Parent's knowledge, neither Parent nor any of its Subsidiaries is in conflict with, or in default or violation of (and has not received any notices of violation with respect to), any (i) law, rule or regulation, or (ii) order, judgment or decree applicable to Parent or any of its Subsidiaries or by which its or any of their respective properties is bound or affected, and Parent is not aware of any such conflict, default or violation thereunder (other than any conflicts, 30 defaults or violations under (i) of this Section 4.9 that have not had and could not reasonably be expected to have a Parent Material Adverse Effect). SECTION 4.10 ABSENCE OF LITIGATION. Except as disclosed in the Parent SEC Reports, there are no claims, actions, suits, proceedings or investigations (i) pending against Parent or any of its Subsidiaries or any properties or assets of Parent or of any of its Subsidiaries or (ii) to the knowledge of Parent, threatened against Parent or any of its Subsidiaries, or any properties or assets of Parent or of any of its Subsidiaries, in each case, which claims, actions, suits, proceedings or investigations could reasonably be expected to have a Parent Material Adverse Effect. SECTION 4.11 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS. (a) Section 4.11(a) of the Parent Disclosure Schedule contains a true and complete list of (i) each deferred compensation and each bonus or other incentive compensation, stock purchase, stock option and other equity compensation plan, pro gram, agreement or arrangement; (ii) each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of ERISA); (iii) each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); (iv) each employment, termination or severance agreement; and (v) each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by Parent or by any trade or business, whether or not incorporated (a "Parent ERISA Affiliate"), that together with Parent would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA, or to which Parent or a Parent ERISA Affiliate is party, whether written or oral, for the benefit of any employee or former employee of Parent or any of its Subsidiaries (collectively, the "Parent Plans"). No Parent Plan is subject to Section 302 or Title IV of ERISA or Section 412 of the Code. Neither Parent, any of its Subsidiaries nor any Parent ERISA Affiliate has any commitment or formal plan, whether legally binding or not, to create any additional employee benefit plan or modify or change any existing Parent Plan that would affect any employee or former employee of Parent or any of its Subsidiaries. (b) With respect to each Parent Plan, Parent has heretofore delivered or made available to the Company true and complete copies of each of the following documents: (i) a copy of the Parent Plan and any amendments thereto (or if the Parent Plan is not a written Parent Plan, a description thereof); (ii) a copy of the two most recent annual reports and actuarial reports, if required under ERISA, and the most recent report prepared with respect thereto in accordance with Statement of Financial Accounting Standards No. 87; (iii) a copy of the most recent Summary Parent Plan Description required under ERISA with respect thereto; (iv) if the Parent Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement and the latest financial statements thereof; and (v) the 31 most recent determination letter received from the IRS with respect to each Parent Plan intended to qualify under Section 401 of the Code. (c) No liability under Title IV or Section 302 of ERISA has been incurred by Parent or any Parent ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to Parent or any Parent ERISA Affiliate of Parent incurring any such liability, other than liability for premiums due to the Pension Benefit Guaranty Corporation (which premiums have been paid when due). (d) All contributions required to be made with respect to any Parent Plan on or prior to the Effective Time have been timely made or are reflected on the Parent Balance Sheet. (e) Neither Parent nor any of its Subsidiaries, any Parent Plan, any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction in connection with which Parent or any of its Subsidiaries, any Parent Plan, any such trust, or any trustee or administrator thereof, or any party dealing with any Parent Plan or any such trust could be subject to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976 of the Code. (f) Each Parent Plan has been operated and administered in all material respects in accordance with its terms and applicable law, including but not limited to ERISA and the Code. There are no pending, threatened or anticipated claims by or on behalf of any Parent Plan, by any employee or beneficiary covered under any such Parent Plan, or otherwise involving any such Parent Plan (other than routine claims for benefits). (g) Each Parent Plan intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified and the trusts maintained thereunder are exempt from taxation under Section 501(a) of the Code. Each Parent Plan intended to satisfy the requirements of Section 501(c)(9) has satisfied such requirements. (h) No Parent Plan provides medical, surgical, hospitalization, death or similar benefits (whether or not insured) for employees or former employees of Parent or any of its Subsidiaries for periods extending beyond their retirement or other termination of service, other than (i) coverage mandated by applicable law, (ii) death benefits under any "pension plan," or (iii) benefits the full cost of which is borne by the current or former employee (or his beneficiary). No condition exists that would prevent Parent or any of its Subsidiaries from amending or terminating any Parent Plan providing health or medical benefits in respect of any active or former employee of Parent or any of its Subsidiaries. (i) No amounts payable under the Parent Plans have failed, or as a result of the transactions contemplated hereby will fail, to be deductible for federal income tax purposes by virtue of Sections 162(m) or 280G of the Code. 32 (j) The consummation of the transactions contemplated by this Agree- ment will not, either alone or in combination with another event, (i) entitle any current or former employee or officer of Parent or any Parent ERISA Affiliate to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer. SECTION 4.12 LABOR MATTERS. (a) There are no controversies pending or, to the knowledge of Parent or any of its Subsidiaries, threatened, between Parent or any of its Subsidiaries and any of their respective employees, consultants or inde pendent contractors; (b) neither Parent nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by Parent or its Subsidiaries, nor does Parent or any of its Subsidiaries know of any activities or proceedings of any labor union to organize any such employees; and (c) neither Parent nor any of its Subsidiaries has any knowledge of any labor disputes, strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of, or consultants or independent contractors to, Parent or any of its Subsidiaries. SECTION 4.13 PROPERTIES; ENCUMBRANCES. Parent and each of its Subsid iaries have good, valid and marketable title to, or a valid leasehold interest in, all the tangible properties and assets which it purports to own or lease (real, personal and mixed), including, without limitation, all the properties and assets reflected in the Parent Balance Sheet (except for personal property sold since the date of the Parent Balance Sheet in the ordinary course of business consistent with past practice). All properties and assets reflected in the Parent Balance Sheet are free and clear of all Liens, except for Liens reflected on the Parent Balance Sheet and Liens for current taxes not yet due and other Liens that do not materially detract from the value or impair the use of the property or assets subject thereto. SECTION 4.14 TAXES. (a) Parent and each of its Subsidiaries have timely filed with the appro priate taxing authorities all Tax Returns required to be filed by them (giving effect to valid extensions) and all such Tax Returns are true, correct and complete in all material respects. Each group of corporations with which Parent or any of its Subsidiaries has filed (or was required to file) consolidated, combined, unitary or similar Tax Returns (an "Parent Affiliated Group") has timely filed all income and other material Tax Returns that it was required to file (giving effect to valid exten sions) with respect to any period in which Parent or any of its Subsidiaries was a member of such Parent Affiliated Group (each such Tax Return, a "Parent Affiliated Return") and all such Parent Affiliated Returns are true, correct and complete in all material respects. All material Taxes due and owing by Parent and its Subsidiaries have been timely paid or adequately reserved for. There are no Tax Liens on any 33 assets of Parent or any Subsidiary thereof other than liens relating to current Taxes not yet due and payable. Neither Parent, any of its Subsidiaries nor any member of any Affiliated Group has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax. No power of attorney has been granted with respect to any matter relating to Taxes of Parent or any of its Subsidiaries which is currently in force. (b) Neither Parent nor any of its Subsidiaries is, or has been, a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (c) Parent and each of its Subsidiaries have complied in all material respects with all applicable laws, rules and regulations relating to Taxes required to be withheld or collected, including, without limitation, Taxes required to be withheld pursuant to Sections 1441 and 1442 of the Code and Taxes required to be withheld from employee wages. None of Parent, any of its Subsidiaries or any member of any Parent Affiliated Group has received any notice of any audit examination, deficiency, refund litigation, proposed adjustment or matter in controversy with respect to any Taxes or Tax Return of Parent, any of its Subsidiaries or any Parent Affiliated Group, and no audits or other administrative proceedings or court proceedings with respect to any Taxes or Tax Return of Parent, any of its Subsidiaries or any Parent Affiliated Group are in progress. No taxing authority has asserted that Parent, any of its Subsidiaries or any Parent Affiliated Group was required to file any Tax Return that was not filed. Neither Parent nor any of its Subsidiaries is a "consenting corporation" within the meaning of Section 341(f) of the Code or has agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by Parent or any of its Subsidiaries. Neither Parent nor any of its Subsidiaries is a party to or bound by any Tax indemnity, sharing, allocation, or similar contract or arrangement. Neither Parent nor any of its Subsidiaries is or has ever been a member of a group of corporations with which it has filed (or been required to file) consolidated, combined, unitary or similar Tax Returns, other than a group of which only Parent and its Subsidiaries are or were members. Neither Parent nor any of its Subsidiaries has agreed to, or is required to, make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. (d) The statute of limitations for the assessment of Taxes has expired for all Tax Returns of Parent and its Subsidiaries and any Parent Affiliated Group, or those Tax Returns have been audited and closed by the appropriate taxing authorities. SECTION 4.15 ENVIRONMENTAL MATTERS. (a) Parent and its Subsidiaries are in full compliance with all applicable Environmental Laws; neither Parent nor any of its Subsidiaries has received any communication whether from a Governmental Entity, citizens group, employee or otherwise, that alleges that Parent or any of its Subsidiaries are not in such full 34 compliance; and, to Parent's best knowledge, there are no circumstances that may prevent, interfere with, such full compliance in the future. (b) There is no Environmental Claim pending or threatened against Parent or any of its Subsidiaries or, to Parent's knowledge, against any person or entity whose liability for any Environmental Claim Parent or any of its Subsidiaries have or may have retained or assumed either contractually or by operation of law. (c) There are no past or present actions, activities, circumstances, conditions, events or incidents, including the Release, emission, discharge or disposal of any Hazardous Materials, that could form the basis of any Environmental Claim against Parent or any of its Subsidiaries or, to Parent's knowledge, against any person or entity whose liability for any Environmental Claim Parent or any of its Subsidiaries have or may have retained or assumed either contractually or by operation of law. (d) Parent and its Subsidiaries have delivered or otherwise made available for inspection to Parent true, complete and correct copies and results of any audits, reports, studies, analyses, tests or monitoring possessed or initiated by Parent or its Subsidiaries pertaining to Hazardous Materials in, on, beneath or adjacent to any property currently or formerly owned, operated or leased by Parent or its Subsidiaries or regarding Parent's or its Subsidiaries' compliance with applicable Environmental Laws. SECTION 4.16 INTELLECTUAL PROPERTY. (a) To Parent's knowledge, Parent or its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable rights to use (free and clear of all liens and encumbrances), all trademarks, service marks, trade names, copyrights, Internet domain names, mask works, including any registrations or applications for registration thereof, patents and patent applications, and trade secrets, including technology, know-how, processes, schematics, computer software programs or applications, and all other tangible or intangible proprietary information or material, that is used in the business of Parent and its Subsidiaries as currently conducted (the "Parent Intellectual Property Rights"). (b) To Parent's knowledge, either Parent or one of its Subsidiaries is the sole and exclusive owner of all right, title and interest in and to (free and clear of any Liens), or is the exclusive or non-exclusive licensee of, the Parent Intellectual Property Rights, and, in the case of Parent Intellectual Property Rights owned by Parent or any of its Subsidiaries, has sole and exclusive rights (and is not contractually obligated to pay any compensation to any third party in respect thereof) to the use thereof and the material covered thereby. No claims have been asserted or, to Parent's knowledge, are threatened by any person (i) to the effect that the manufacture, sale, licensing or use of any of the products or services of Parent or any of its 35 Subsidiaries as now manufactured, sold or licensed or used or proposed for manufacture, use, sale or licensing by Parent or any of its Subsidiaries infringes any intellectual property rights of any third party, (ii) against the use by Parent or any of its Subsidiaries of any trademarks, service marks, trade names, trade secrets, copyrights, patents, technology or know-how used in the business of Parent and its Subsidiaries as currently conducted or as presently proposed to be conducted, or (iii) challenging the ownership or use by Parent or any of its Subsidiaries or the validity of any of the Parent Intellectual Property Rights. To Parent's knowledge, all patents and trademark, service mark, copyright and mask work registrations held by Parent and its Subsidiaries and used in the business of Parent or its Subsidiaries as currently conducted or as presently proposed to be conducted are valid, subsisting, in full force and effect, and have not lapsed, expired or been canceled or abandoned. To Parent's knowledge, there is no unauthorized use, infringement or misappropriation of any of the Parent Intellectual Property Rights by any third party, including any employee or former employee of Parent or any of its Subsidiaries. To Parent's knowledge, no Parent Intellectual Property Right or product or service of Parent or any of its Subsidiaries is subject to any outstanding decree, order, judgment or stipulation restricting in any manner the use, sale or licensing thereof by Parent or any of its Subsidiaries. To Parent's knowledge, no current or former partner, director, officer or employee of Parent or any of its Subsidiaries will, after giving effect to the transactions contemplated hereby, own or retain any rights in or to any of the Parent Intellectual Property. To Parent's knowledge, neither Parent nor any of its Subsidiaries has entered into any agreement under which Parent or its Subsidiaries is restricted from using or licensing any Parent Intellectual Property Right in any manner anywhere in the world, or selling or otherwise distributing any of its products or services. (c) To Parent's knowledge, neither Parent nor any Subsidiary is, or as a result of the execution or delivery of this Agreement or the performance of its obligations hereunder will be in violation of any license, sublicense, agreement or instrument to which Parent or such Subsidiary is a party or otherwise bound, nor will the consummation of the transactions contemplated hereby result in any material loss or impairment of Parent or any Subsidiary's ownership of or right to use any of the Parent Intellectual Property, nor require the consent of any Governmental Entity or third party with respect to any of the Parent Intellectual Property. SECTION 4.17 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The information supplied by Parent for inclusion in the Registration Statement shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The information supplied by Parent for inclusion or incorporation by reference in the Proxy Statement/Prospectus to be sent to the stockholders of Parent and the shareholders of the Company in connection with the Parent Stockholders Meeting and the Company Shareholders Meeting, shall not, on the date the Proxy Statement/Prospectus (or any 36 amendment thereof or supplement thereto) is first mailed to stockholders of Parent or shareholders of the Company or at the time of the Parent Stockholders Meeting or the Company Shareholders Meeting, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statements made therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Parent Stockholders Meeting or the Company Shareholders Meeting which has become false or misleading. If at any time prior to the Parent Stockholders Meeting or the Company Shareholders Meeting any event relating to Parent or any of its respective affiliates, officers or directors should be discovered by Parent which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/Prospectus, Parent shall promptly inform the Company. The Registration Statement shall comply in all material respects as to form and substance with the requirements of the Securities Act, the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, Parent makes no representation or warranty with respect to any information supplied by the Company which is contained in any of the foregoing documents. SECTION 4.18 YEAR 2000 COMPLIANCE. (a) All of (i) the internal systems used in the business or operations of Parent and its Subsidiaries, including without limitation computer hardware systems, software, applications, firmware, equipment containing embedded microchips and other embedded systems and (ii) the software, hardware, firmware and other technology that constitute part of the products and services manufactured, marketed, licensed or sold by Parent or any of its Subsidiaries to third parties are Year 2000 Compliant. (b) To Parent's knowledge, all third-party systems used in connection with the business, products, services or operations of Parent or any of its Subsidiaries, including without limitation any system belonging to any of Parent's or its Subsidiaries' vendors, co-venturers, service providers or customers are Year 2000 Compliant. Parent and its Subsidiaries have received satisfactory written assurances and warranties from all of their respective vendors, co-venturers, service providers and customers that are material to the ongoing operation of the business of Parent and its Subsidiaries that past and future products, software, equipment, components or systems provided by such parties are (or in the case of future products, will be) Year 2000 Compliant. (c) Parent has conducted "year 2000" audits with respect to (i) each of the internal systems used in the business, products, services and operations of Parent and its Subsidiaries, including without limitation computer hardware systems, software, applications, firmware, equipment containing embedded microchips and other embedded systems and (ii) all of the software, applications, hardware, firmware and 37 other technology which constitute part of the products and services manufactured, marketed, performed or sold by Parent or any of its Subsidiaries or licensed by Parent or any of its Subsidiaries to third parties. Parent has obtained "year 2000" certifications with respect to all material third-party systems used in connection with the business or operations of Parent and its Subsidiaries, including without limitation systems belonging to the vendors, co-venturers, service providers and customers of Parent of any or its Subsidiaries. Parent has made available to the Company true, complete and correct copies of all "year 2000" audits, certifications, reports and other similar documents that have been prepared or performed by or on behalf of Parent or any third party with respect to the systems, business, operations, products or services of Parent or any of its Subsidiaries. (d) Neither Parent nor any of its Subsidiaries has provided any representation, warranty or guarantee for any product sold or licensed, or service provided, by Parent or its Subsidiaries to the effect that such product or service (i) complies with or accounts for the fact of the year change from December 31, 1999 to January 1, 2000, (ii) will not be adversely affected with respect to functionality, interoperability, connectivity, performance, reliability or volume capacity (including without limitation the processing storage, recall and reporting of data) by the passage of any date, including without limitation the year change from December 31, 1999 to January 1, 2000 or (iii) is otherwise Year 2000 Compliant. SECTION 4.19 BROKERS. No broker, finder or investment banker (other than U.S. Bancorp Piper Jaffray Inc. whose brokerage, finder's or other fee will be paid by Parent) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent. SECTION 4.20 OWNERSHIP OF MERGER SUB; NO PRIOR ACTIVITIES. As of the date hereof and as of the Effective Time, except for obligations or liabilities incurred in connection with its incorporation or organization and the transactions contemplated by this Agreement and except for this Agreement and any other agreements or arrangements contemplated by this Agreement, Merger Sub has not and will not have incurred, directly or indirectly, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. SECTION 4.21 POOLING; TAX MATTERS. Neither Parent nor any of its affiliates has taken or agreed to take any action or failed to take any action, or has any reason to believe that any conditions exist, that would prevent (a) Parent from accounting for the business combination to be effected by the Merger as a pooling of interests or (b) the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code. SECTION 4.22 AFFILIATES. Section 4.22 of the Parent Disclosure Schedule contains a true, complete and correct list of all persons who, as of the date hereof, to 38 the best knowledge of Parent, may be deemed to be affiliates of Parent excluding all its Subsidiaries but including all directors and executive officers of Parent. ARTICLE V CONDUCT OF BUSINESS SECTION 5.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. The Company covenants and agrees that, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, unless Parent shall otherwise agree in writing or in accordance with Section 6.2(b), the Company shall conduct its business and shall cause the businesses of its Subsidiaries to be conducted only in, and the Company and its Subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice and in compliance in all material respects with all applicable laws and regulations; and the Company shall use commercially reasonable best efforts to preserve substantially intact the business organization of the Company and its Subsidiaries, to keep available the services of the current officers, employees and consultants of the Company and its Subsidiaries and to preserve the present relationships of the Company and its Subsidiaries with customers, suppliers and other persons with which the Company or any of its Subsidiaries has significant business relations. By way of amplification and not limitation, except (x) as set forth in Section 5.1 of the Company Disclosure Schedule, (y) as contem- plated by this Agreement or (z) in accordance with Section 6.2(b), the Company shall not and shall not permit its Subsidiaries to, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of Parent: (a) amend or otherwise change the Company Charter, Company By-Laws or any Subsidiary Document; (b) issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including, without limitation, any phantom interest) in the Company or any of its Subsidiaries, other than Company Common Stock pursuant to the exercise of (x) options currently outstanding, under the Company Stock Option Plans or the Company ESPP, in each case, in accordance with their current terms, (y) the Other Company Options in accordance with their current terms or (z) the warrants in accordance with their current terms; 39 (c) sell, pledge, dispose of or encumber any assets of the Company or any of its Subsidiaries (except for sales of assets in the ordinary course of business and in a manner consistent with past practice); (d) (i) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, except that a wholly owned Subsidiary of the Company may declare and pay a dividend to its parent, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) amend the terms or change the period of exercisability of, purchase, repurchase, redeem or otherwise acquire, or permit any Subsidiary to purchase, repurchase, redeem or otherwise acquire, any of its securities or any securities of its Subsidiaries, or any option, warrant or right, directly or indirectly, to acquire any such securities, or propose to do any of the foregoing, other than Company Common Stock pursuant to the exercise of options currently outstanding, under the Company Stock Option Plans or the Company ESPP, in each case, in accordance with their current terms, (y) the Other Company Options in accordance with their current terms or (z) the warrants in accordance with their current terms; (e) (i) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans or advances or capital contributions to or investments in any other person, except in the ordinary course of business and consistent with past practice; (iii) enter into or amend any material contract or agreement, or enter into, renew, amend or terminate any lease relating to real property; or (iv) authorize any capital expenditures or purchase of fixed assets which are, in the aggregate, in excess of $100,000 for the Company and its Subsidiaries taken as a whole; (f) except as disclosed in Section 5.1(f) of the Company Disclosure Schedule, increase the compensation payable or to become payable to its directors, officers or employees (except such increases payable to non-officer employees made in the ordinary course of business consistent with past practice), grant any severance or termination pay to, or enter into or amend any employment or severance agreement with, any director, officer or other employee of the Company or any of its Subsidiaries, establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any current or former directors, officers or employees, pay any bonuses to any officer of the Company, materially change any actuarial assumption or other assumption used to calculate funding obligations with respect to any pension or retirement plan, or change the 40 manner in which contributions to any such plan are made or the basis on which such contributions are determined; (g) take any action to change accounting policies or procedures (including, without limitation, procedures with respect to revenue recognition, payments of accounts payable and collection of accounts receivable), except as required by GAAP; (h) make any Tax election or settle or compromise any Tax liability or agree to an extension of a statute of limitations or file any amended Tax Returns or claims for refund; (i) except for the settlement of existing lawsuits disclosed in Section 5.1(i) of the Company Disclosure Schedule solely in exchange for the payment of not more than $50,000 per lawsuit (and $100,000 in the aggregate for all such lawsuits) in cash, pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in the financial statements contained in the Company SEC Reports filed prior to the date of this Agreement or incurred in the ordinary course of business and consistent with past practice; or (j) take, or agree in writing or otherwise to take, any of the actions described in Sections 5.1(a) through (i) above, or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue or incorrect or prevent the Company from performing or cause the Company not to perform its covenants hereunder, in each case, such that the conditions set forth in Sections 7.2(a) or 7.2(b), as the case may be, would not be satisfied. SECTION 5.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER. Parent covenants and agrees that, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, unless the Company shall otherwise agree in writing, Parent shall conduct its business and shall cause the businesses of its Subsidiaries to be conducted only in the ordinary course of business and in compliance in all material respects with all applicable laws and regulations; and Parent shall use commercially reasonable best efforts to preserve substantially intact the business organization of Parent and its Subsidiaries, to keep available the services of the current officers, employees and consultants of Parent and its Subsidiaries and to preserve the present relationships of Parent and its Subsidiaries with customers, suppliers and other persons with which Parent or any of its Subsidiaries has significant business relations. SECTION 5.3 ADVICE OF CHANGES. Parent and the Company shall promptly advise the other party orally and in writing to the extent it has knowledge of (i) any representation or warranty made by it (and, in the case of Parent, made by 41 Merger Sub) contained in this Agreement becoming untrue or inaccurate in any material respect, (ii) the failure by it (and, in the case of Parent, by Merger Sub) to comply in any material respect with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement and (iii) any change or event having, or which could reasonably be expected to have, a Company Material Adverse Effect or a Parent Material Adverse Effect, as the case may be, on such party or the ability for the conditions set forth in Article VII to be satisfied; PROVIDED, HOWEVER, that no such notification shall affect in any manner the representations, warranties, covenants or agreements of the parties (or remedies with respect thereto) or any matter set forth in the Company Disclosure Schedule, the Parent Disclosure Schedule or the conditions to the obligations of the parties under this Agreement. SECTION 5.4 COOPERATION. Subject to compliance with applicable law, from the date hereof until the Effective Time, (a) representatives of the Company shall confer on a regular and frequent basis with one or more representatives of Parent to discuss operational matters that are material and the general status of ongoing operations and (b) each of Parent and the Company shall promptly provide the other party or its counsel with copies of all filings made by such party with any Governmental Entity in connection with this Agreement, the Merger and the transactions contemplated hereby and thereby. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.1 ACCESS TO INFORMATION; CONFIDENTIALITY. (a) The Company shall (and shall cause its Subsidiaries and its and their respective officers, directors, employees, auditors and agents to) afford to Parent and to Parent's officers, employees, financial advisors, legal counsel, accountants, consultants and other representatives access during normal business hours throughout the period prior to the Effective Time to all of its books and records and its properties, plants and personnel and, during such period, the Company shall furnish promptly to Parent a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal securities laws, provided that no investigation pursuant to this Section 6.1(a) shall affect any representations or warranties made herein or the conditions to the obligations of the respective parties to consummate the Merger. (b) Parent shall (and shall cause its Subsidiaries and its and their respective officers, directors, employees, auditors and agents to) afford to the Company and to the Company's officers, employees, financial advisors, legal counsel, accountants, consultants and other representatives access during normal business hours throughout the period prior to the Effective Time to all of its books and records and its properties, plants and personnel and, during such period, Parent shall furnish 42 promptly to the Company a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal securities laws, provided that no investigation pursuant to this Section 6.1(b) shall affect any representations or warranties made herein or the conditions to the obligations of the respective parties to consummate the Merger. (c) Unless otherwise required by law, each party agrees that it (and its Subsidiaries and its and their respective representatives) shall hold in confidence all non-public information acquired in accordance with the terms of the Mutual Agreement of Confidentiality dated November 11, 1999 between Parent and the Company (the "Confidentiality Agreement"); provided, however, that the termination date of the Confidentiality Agreement is hereby extended to June 30, 2000. SECTION 6.2 NO SOLICITATION. (a) From and after the date of this Agreement until the earlier of the termination of this Agreement in accordance with its terms or the Effective Time, the Company and its Subsidiaries and affiliates shall not, directly or indirectly, through any officer, director, employee, advisor, financial advisor, representative or agent (and it shall cause such officers, directors, employees, advisors, financial advisors, representatives and agents not to, directly or indirectly), (i) solicit, initiate, facilitate or encourage any inquiries or proposals that constitute, or could be expected to lead to, an Acquisition Proposal or (ii) engage in negotiations or discussions concerning, or provide any non-public information with respect to the Company and its Subsidiaries to any person making or proposing to make, any Acquisition Proposal; PROVIDED, HOWEVER, that if, at any time prior to the date of the Company Shareholders Meeting, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, the Company may, in response to an unsolicited Acquisition Proposal, and subject to the Company's compliance with Section 6.2(c), (x) furnish information with respect to the Company and its Subsidiaries to any person making such Acquisition Proposal pursuant to a confidentiality agreement containing terms no less favorable to the Company than the Confidentiality Agreement and (y) participate in discussions or negotiations regarding such Acquisition Proposal. (b) From and after the date of this Agreement until the earlier of the termination of this Agreement in accordance with its terms or the Effective Time, neither the Board of Directors of the Company nor any committee thereof shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to Parent, the approval or recommendation by such Board of Directors or such committee of the Company Voting Proposal, (ii) approve or recommend, or propose publicly to approve or recommend, any Acquisition Proposal, or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or similar agreement related to any Acquisition Proposal; PROVIDED, 43 HOWEVER, that if, at any time prior to the date of the Company Shareholders Meeting, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, the Board of Directors of the Company may, in response to an unsolicited Superior Proposal, and subject to the Company's compliance with Section 6.2(c), (x) take any action prohibited by clause (i) of this sentence or (y) if prior to taking any action prohibited by clauses (ii) or (iii) of this sentence the Company terminates this Agreement pursuant to Section 8.1(g) and pays to Parent all amounts due Parent in connection with such termination pursuant to Sections 8.3(b) and (c) in accordance therewith, take any action prohibited by clauses (ii) or (iii) of this sentence. For purposes of this Agreement, "Acquisition Proposal" means any inquiry, proposal or offer from any person relating to any direct or indirect acquisition or purchase of a business that constitutes 15% or more of the net revenues, net income or the assets of the Company and its Subsidiaries, taken as a whole, or 15% or more of any class of equity securities of the Company or any of its Subsidiaries, any tender offer or exchange offer that if consummated would result in any person beneficially owning 15% or more of any class of equity securities of the Company or any of its Subsidiaries, or any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company or any of its Subsidiaries, other than the transactions contemplated by this Agreement. For purposes of this Agreement, a "Superior Proposal" means any proposal made by a third party to acquire, directly or indirectly, including pursuant to a tender offer, exchange offer, merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction, for consideration consisting of cash or securities, more than 50% of the combined voting power of the shares of Company Common Stock then outstanding or all or substantially all the assets of the Company and otherwise on terms which the Board of Directors of the Company determines in its good faith judgment (based on the advice of a financial advisor of nationally recognized reputation, including First Security Van Kasper) to be more favorable to the Company's shareholders than the Merger and for which financing, to the extent required, is then committed. (c) The Company, its Subsidiaries and affiliates (and their respective officers, directors, employees, advisors, financial advisors, representatives and agents) shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any person (other than Parent or its representatives) conducted heretofore with respect to any Acquisition Proposal. The Company shall notify Parent immediately after receipt by the Company (or its counsel, advisors or agents) of any Acquisition Proposal or any request for nonpublic information in connection with an Acquisition Proposal or for access to the properties, books or records of the Company or any of its Subsidiaries by any person or entity that informs the Company that it is considering making, or has made, an Acquisition Proposal. Such notice to Parent shall be made orally and in writing and shall indicate in detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. The Company shall keep Parent informed of all developments 44 and the status of any Acquisition Proposal, any negotiations or discussions with respect to any Acquisition Proposal or any request for nonpublic information in connection with any Acquisition Proposal or for access to the properties, books or records of the Company or any of its Subsidiaries by any person or entity that is considering making, or has made, an Acquisition Proposal. The Company shall give Parent five business days advance notice of its intention to exercise its rights under the proviso to (i) Section 6.2(a) specifying the material terms and conditions of the Acquisition Proposal with respect to which it intends to exercise such rights and identifying the person making such Acquisition Proposal, or (ii) Section 6.2(b) specifying the material terms and conditions of the Superior Proposal with respect to which it intends to exercise such rights and identifying the person making such Superior Proposal. The Company shall provide Parent with (i) copies of all documents received from any person or entity that is considering making or has made an Acquisition Proposal and (ii) copies of all documents to be delivered or sent to any person or entity that is considering making or has made an Acquisition Proposal. (d) Nothing contained in this Section 6.2 shall prohibit the Company from taking and disclosing to its shareholders a position with respect to a tender or exchange offer by a third party contemplated by Rule 14d-9 or 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's shareholders if, in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, failure so to disclose would be inconsistent with its obligations under applicable law; PROVIDED, HOWEVER, that, except as expressly provided in Sections 6.2(b) and 6.4, neither the Company nor its Board of Directors nor any committee thereof shall withdraw or modify, in a manner adverse to Parent, or propose publicly to withdraw or modify, in a manner adverse to Parent, its position with respect to the Company Voting Proposal or approve or recommend, or propose publicly to approve or recommend, an Acquisition Proposal. SECTION 6.3 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT. (a) As promptly as practicable after execution of this Agreement, Parent and the Company shall in consultation with each other prepare, and shall file with the SEC, preliminary joint proxy materials which shall constitute the Proxy Statement/Prospectus. As promptly as practicable after comments are received from the SEC thereon and after the furnishing by the Company and Parent of all information required to be contained therein, (i) Parent and the Company shall file with the SEC the Proxy Statement/Prospectus and (ii) Parent shall file with the SEC the Registration Statement. The Company and Parent shall use all reasonable efforts to cause the Registration Statement to become effective as soon thereafter as practicable. (b) The Company shall use all reasonable efforts to mail the Proxy Statement/Prospectus to the shareholders of the Company and Parent shall use all reasonable efforts to mail the Proxy Statement/Prospectus to the stockholders of 45 Parent as soon as practicable after the Registration Statement is declared effective by the SEC. (c) The Company shall furnish Parent with all information concerning the Company and the holders of its capital stock and shall take such other action as Parent may request pursuant to this Agreement in connection with the Registration Statement and the issuance of the shares of Parent Common Stock. (d) The Company and Parent shall make any necessary filing with respect to the Merger under the Securities Act and the Exchange Act and the rules and regulations thereunder. SECTION 6.4 SHAREHOLDERS' AND STOCKHOLDERS' MEETINGS. (a) The Company shall, subject to and in accordance with applicable law and the Company Charter and Company By-Laws, promptly and duly call, give notice of, convene and hold the Company Shareholders Meeting to be held as promptly as practicable following the date upon which the Registration Statement becomes effective for the purpose of voting on the Company Voting Proposal. The Company will, through its Board of Directors, recommend to its shareholders the approval of the Company Voting Proposal and the other transactions contemplated, which recommendation shall be included in the Proxy Statement/Prospectus, and will use its best efforts to solicit from its shareholders proxies in favor of the Company Voting Proposal; PROVIDED, HOWEVER, that the Board of Directors of the Company may withdraw or modify, in a manner adverse to Parent, such recommendation (i) if a Superior Proposal has been made and remains in effect, then if the Board of Directors of the Company is permitted to do so under Section 6.2(b) or (ii) if no Acquisition Proposal or Superior Proposal has been made, then if, at any time prior to the date of the Company Shareholders Meeting, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's stockholders under applicable law. (b) At or prior to the Closing, the Company shall deliver to Parent a certificate of its Corporate Secretary setting forth the voting results from the Company Shareholders Meeting. (c) Parent shall, subject to and in accordance with applicable law and the Parent Charter and Parent By-Laws, promptly and duly call, give notice of, convene and hold the Parent Stockholders Meeting to be held as promptly as practicable following the date upon which the Registration Statement becomes effective for the purpose of voting on the Parent Voting Proposal. Parent will, through its Board of Directors, recommend to its stockholders the approval of the Parent Voting Proposal and will use its best efforts to solicit from its stockholders proxies in favor of the Parent Voting Proposal. In addition to a proposal that four of its five existing directors be reelected to it's Board of Directors, Parent will include in the Proxy 46 Statement/Prospectus, a proposal that Mark Housley and Carl Rosendahl be elected to it's Board of Directors, effective as of the Effective Time. Management of Parent shall recommend to the Board of Directors of Parent that Parent include in the Proxy Statement/Prospectus a proposal to increase the number of shares reserved for issuance under the Parent's Stock Option Plan by an amount to be determined by the management of Parent to be prudent under the circumstances. (d) At or prior to the Closing, Parent shall deliver to the Company a certificate of its Corporate Secretary setting forth the voting results from the Parent Stockholders Meeting. SECTION 6.5 LEGAL CONDITIONS TO MERGER. Each of Parent and, subject to Section 6.2, the Company will use its commercially reasonable best efforts to comply promptly with all legal requirements which may be imposed with respect to the Merger (which actions shall include, without limitation, furnishing all information required under the HSR Act and in connection with approvals of or filings with any other Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their Subsidiaries in connection with the Merger. Each of Parent and the Company will, and will cause its Subsidiaries to, take all actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity required to be obtained or made by Parent, the Company or any of their Subsidiaries in connection with the Merger or taking of any action contemplated thereby or by this Agreement. SECTION 6.6 AGREEMENTS WITH RESPECT TO AFFILIATES. (a) The Company will use its commercially reasonable best efforts to cause each person who is identified in Section 3.28 of the Company Disclosure Schedule and any other person who may be or become an "affiliate" of the Company as of the time of the Company Shareholders Meeting for purposes of (i) Rule 145 under the Securities Act ("Rule 145") or (ii) qualifying the merger for pooling of interests accounting treatment under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations to deliver to Parent, as soon as practicable but not later than thirty days preceding the Effective Time, a written agreement (a "Company Affiliate Agreement") in connection with restrictions on affiliates under Rule 145 and pooling of interests accounting treatment, substantially in the form of EXHIBIT B hereto. The Company shall provide prompt notice to Parent of any such other person who may be or become an "affiliate" of the Company as of the time of the Company Shareholders Meeting who is not identified in Section 3.28 of the Company Disclosure Schedule. 47 (b) Parent will use its commercially reasonable best efforts to cause each person who is identified in Section 4.22 of the Parent Disclosure Schedule and any other person who may be or become an "affiliate" of Parent as of the time of the Parent Stockholders Meeting for purposes of qualifying the merger for pooling of interests accounting treatment under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations to deliver to the Company, as soon as practicable but not later than thirty days preceding the Effective Time, a written agreement (a "Parent Affiliate Agreement") in connection with restrictions on affiliates under pooling of interests accounting treatment, substantially in the form of EXHIBIT C hereto. Parent shall provide prompt notice to the Company of any such other person who may be or become an "affiliate" of Parent as of the time of the Parent Stockholders Meeting who is not identified in Section 4.22 of the Parent Disclosure Schedule. SECTION 6.7 TAX-FREE REORGANIZATION. Parent and the Company intend that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. Parent and the Company shall each use its commercially reasonable best efforts to cause the Merger to so qualify. Neither Parent nor the Company shall knowingly take any action, or knowingly fail to take any action, that could jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. SECTION 6.8 POOLING ACCOUNTING. Parent and the Company shall each use its commercially reasonable best efforts to cause the business combination to be effected by the Merger to be accounted for as a pooling of interests for accounting purposes. Neither Parent nor the Company shall knowingly take any action, or knowingly fail to take any action, that could jeopardize the treatment of the Merger as a pooling of interests for accounting purposes. Each of Parent and the Company agrees to take such commercially reasonable action as may be required to negate the impact of any past actions which to its knowledge could jeopardize the treatment of the Merger as a pooling of interests for accounting purposes. SECTION 6.9 LETTERS OF ACCOUNTANTS. (a) Parent shall use its commercially reasonable best efforts to cause to be delivered to the Company (i) a copy of a letter of Arthur Andersen LLP, Parent's independent auditors, dated a date within two business days before the date on which the Registration Statement shall become effective, in form and substance satisfactory to Parent and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement, which letter shall be brought down to the Effective Time and (ii) the letter of Arthur Andersen LLP referred to in Section 7.1(h). (b) The Company shall use its commercially reasonable best efforts to cause to be delivered to Parent (i) a copy of a letter of Ernst & Young LLP, the Company's independent auditors, dated a date within two business days before the 48 date on which the Registration Statement shall become effective, in form and substance satisfactory to Parent and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement, which letter shall be brought down to the Effective Time and (ii) the letter of Ernst & Young LLP referred to in Section 7.1(h). SECTION 6.10 PUBLIC ANNOUNCEMENTS. Parent and the Company shall consult with each other before issuing any press release or making any public statement with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement without the prior written consent of the other party, which shall not be unreasonably withheld or delayed; PROVIDED, HOWEVER, that a party may, without the prior consent of the other party, issue such press release or make such public statement as may upon the advice of counsel be required by law or the rules and regulations of the NASDAQ if it has used all reasonable efforts to consult with the other party prior thereto. SECTION 6.11 LISTING OF PARENT SHARES. Parent shall use its commercially reasonable best efforts to have authorized for listing on the NASDAQ, upon official notice of issuance, the shares of Parent Common Stock to be issued in the Merger. SECTION 6.12 OPTIONS. As of the Effective Time, each option to acquire shares of Company Common Stock (each, a "Company Option") other than options issued pursuant to the Radius, Inc. Directors' Stock Option Plan (all of which accelerate and will be exercised or will expire pursuant to their existing terms as of the Effective Time) shall become and represent an option to purchase (i) the number of shares of Parent Common Stock (a "Parent Option") determined by multiplying (x) the number of shares of Company Common Stock which would have been purchasable pursuant to such Company Option by (y) the Exchange Ratio (with the result rounded up to the nearest whole share) (ii) at an exercise price per share of Parent Common Stock equal to the exercise price per share of Company Common Stock subject to the Company Option divided by the Exchange Ratio (with the result rounded to the nearest whole cent); provided, however, that in the case of any Company Option to which Section 421 of the Code applies by reason of its qualification as an incentive stock option under Section 422 of the Code, the conversion formula shall be adjusted if necessary to comply with Section 424(a) of the Code. After the Effective Time, (i) each Parent Option shall be exercisable upon the same terms and conditions as were applicable to the related Company Option immediately prior to the Effective Time and (ii) Parent shall promptly file a Registration Statement on Form S-8 with respect to the shares of Parent Common Stock issuable with respect thereto and shall use its commercially reasonable best efforts to list such shares with the NASDAQ. Prior to the Effective Time, the Company shall take all necessary and appropriate action to effectuate the provisions of this Section 6.12. 49 SECTION 6.13 CONSENTS. The Company shall use its commercially reasonable best efforts to obtain all necessary consents, waivers and approvals under any of the Company's material agreements, contracts, licenses or leases in connection with the Merger, including without limitation each of the consents listed in Section 3.5 of the Company Disclosure Schedule. SECTION 6.14 INDEMNIFICATION AND INSURANCE. (a) All rights to indemnification, advancement of litigation expenses and limitation of personal liability existing in favor of the directors, officers and employees of the Company and its Subsidiaries under the provisions existing on the date hereof in the Company Charter or Company By-Laws or in the indemnification agreements previously provided by the Company to Parent (collectively "Existing Indemnification Obligations") shall, with respect to any matter existing or occurring at or prior to the Effective Time (including the transactions contemplated by this Agreement), survive the Effective Time. Parent shall cause the Existing Indemnification Obligations to be assumed (by operation of law or otherwise) by any successor to the Surviving Corporation by merger or sale of all or substantially all assets and shall guarantee the performance of the Existing Indemnification Obligation by the Surviving Corporation (or any such successor) with respect to claims thereunder related to the transactions contemplated by this Agreement. (b) For a period of five years after the Effective Time, Parent shall cause the Surviving Corporation (or any successor of the Surviving Corporation by merger or sale of all or substantially all assets) to maintain in effect the current policies of directors' and officers' and fiduciary liability insurance maintained by the Company (provided that the Surviving Corporation may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are no less advantageous to former officers and directors of the Company) only with respect to claims arising from facts or events which occurred at or before the Effective Time; PROVIDED, HOWEVER, that in no event shall the Surviving Corporation (or any such successor) be required to expend pursuant to this Section 6.14(b) more than an aggregate amount equal to 125% the current aggregate annual premiums paid by the Company for such insurance (the "Maximum Amount") (which premiums the Company represents and warrants to be $117,000 in the aggregate). If the amount of the aggregate annual premiums necessary to maintain or procure such insurance coverage exceeds the Maximum Amount, the Surviving Corporation (or any such successor) during such five-year period shall maintain or procure as much coverage as possible for aggregate annual premiums not to exceed the Maximum Amount and shall promptly send a letter to the persons listed in Section 6.14(b) of the Company Disclosure Schedule notifying them of such occurrence. SECTION 6.15 ADDITIONAL AGREEMENTS; BEST EFFORTS. Subject to the terms and conditions of this Agreement, each of the parties agrees to use its commercially reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regula- 50 tions to consummate and make effective the transactions contemplated by this Agreement. ARTICLE VII CONDITIONS TO THE MERGER SECTION 7.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose and no similar proceeding in respect of the Proxy Statement/Prospectus shall have been initiated or threatened by the SEC; (b) SHAREHOLDER APPROVAL. The Company Voting Proposal shall have been approved and adopted by the requisite vote of the shareholders of the Company; (c) HSR ACT AND OTHER APPROVALS. The waiting period applicable to the consummation of the Merger under the HSR Act and under any other legal requirement (including without limitation any authorization, consent, order or approval, or dedication, filing or expiration of any waiting period) of any Governmental Entity shall have expired or been terminated, as the case may be, and any requirements of other jurisdictions applicable to the consummation of the Merger shall have been satisfied; (d) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by any administrative agency or commission or other Governmental Entity seeking any of the foregoing be pending; and there shall not 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; (e) TAX OPINIONS. (i) Parent shall have received an opinion of its counsel, Skadden, Arps, Slate, Meagher & Flom LLP, in form and substance reasonably satisfactory to Parent, dated as of the Effective Time, substantially to the effect that for U.S. federal income tax purposes the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code, (ii) the Company shall have received an opinion of its counsel, Fenwick & West LLP, in form and substance 51 reasonably satisfactory to the Company, dated as of the Effective Time, substantially to the effect that for U.S. federal income tax purposes the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code, and (iii) the issuance of the opinions described in clauses (i) and (ii) of this paragraph shall be conditioned upon the receipt by counsel for Parent and the Company of representation letters from each of Parent, Merger Sub and Company, in each case, in form and substance reasonably satisfactory to both of such counsel; (f) GOVERNMENTAL ACTIONS. There shall not be pending or threatened any action or proceeding (or any investigation or other inquiry that might result in such an action or proceeding) by any Governmental Entity or administrative agency before any Governmental Entity, administrative agency or court of competent jurisdiction, nor shall there be in effect any judgment, decree or order of any Governmental Entity, administrative agency or court of competent jurisdiction, in either case, seeking to prohibit or limit Parent from exercising all material rights and privileges pertaining to its ownership of the Surviving Corporation or the ownership or operation by Parent of all or a material portion of the business or assets of Parent, or seeking to compel Parent to dispose of or hold separate all or any portion of the business or assets of Parent (including the Surviving Corporation and its subsidiaries), as a result of the Merger or the transactions contemplated by this Agreement; (g) NASDAQ LISTING. The shares of Parent Common Stock issuable in the Merger shall have been authorized for listing on the NASDAQ upon official notice of issuance; (h) OPINION OF ACCOUNTANTS. Parent shall have received (and delivered to the Company copies of) a letter from Arthur Andersen LLP, dated a date within two business days of the Proxy Statement/Prospectus and within two business days of the Closing Date, stating that the business combination to be effected by the Merger will qualify as a pooling of interests transaction under generally accepted accounting principles. The Company shall have received (and delivered to Parent copies of) a letter from Ernst & Young LLP, dated a date within two business days of the Proxy Statement/Prospectus and within two business days of the Closing Date, stating that neither the Company nor any of its Subsidiaries has taken or agreed to take any action that (without giving effect to this Agreement, the transactions contemplated hereby, or any action taken or agreed to be taken by Parent or any of its Subsidiaries) would prevent Parent from accounting for the business combination to be effected by the Merger as a pooling of interests transaction under generally accepted accounting principles; and (i) STOCKHOLDER APPROVAL. The Parent Voting Proposal shall have been approved and adopted by the requisite vote of the stockholders of Parent. SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent and Merger Sub to effect the Merger are also subject to the following conditions: 52 (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the Company contained in this Agreement shall be true and correct, in each case as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except (x) for changes contemplated by this Agreement and (y) where the failures to be true and correct (without regard to any materiality, Company Material Adverse Effect or knowledge qualifications contained therein), individually or in the aggregate, have not had, and could not reasonably be expected to have, a Company Material Adverse Effect; and Parent and Merger Sub shall have received a certificate signed on behalf of the Company by the chief executive officer and chief financial officer of the Company to such effect; (b) AGREEMENTS AND COVENANTS. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Closing Date; and Parent and Merger Sub shall have received a certificate signed by the chief executive officer and the chief financial officer of the Company to such effect; (c) CONSENTS OBTAINED. All consents, waivers, approvals, authorizations and orders required to be obtained, and all filings required to be made, by the Company for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by the Company; and (d) AFFILIATE AGREEMENTS. Parent shall have received from each person within the time frame specified in Section 6.6(a) who is identified in Section 3.28 of the Company Disclosure Schedule or in any notice delivered by the Company to Parent pursuant to Section 6.6(a) as an "affiliate" of the Company, an Affiliate Agreement, and each such Affiliate Agreement shall be in full force and effect. SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company to effect the Merger is also subject to the following conditions: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct, in each case as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except (x) for changes contemplated by this Agreement, and, (y) where the failures to be true and correct (without regard to any materiality, Parent Material Adverse Effect or knowledge qualifications contained therein), individually or in the aggregate, have not had, and could not reasonably be expected to have, a Parent Material Adverse Effect; and the Company shall have received a certificate signed on behalf of the Company by the chief executive officer and chief financial officer of Parent to such effect; 53 (b) AGREEMENTS AND COVENANTS. Parent and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing Date; and the Company shall have received a certificate signed by the chief executive officer and the chief financial officer of Parent to such effect; and (c) AFFILIATE AGREEMENTS. The Company shall have received from each person within the time frame specified in Section 6.6(b) who is identified in Section 4.22 of the Parent Disclosure Schedule or in any notice delivered by Parent to the Company pursuant to Section 6.6(b) as an "affiliate" of the Company, an Affiliate Agreement, and each such Affiliate Agreement shall be in full force and effect. ARTICLE VIII TERMINATION SECTION 8.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, notwithstanding approval thereof by the shareholders of the Company: (a) by mutual written consent duly authorized by the Boards of Directors of Parent and the Company; (b) by either Parent or the Company if the Merger shall not have been consummated by June 30, 2000 (the "Outside Date") (provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); (c) by either Parent or the Company if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission shall have issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger (provided that the party seeking to terminate pursuant to this Section 8.1(c) shall have complied with its obligations under Section 6.5 and used its reasonable best efforts to have any such order, decree, ruling or other action vacated or lifted); (d) by either Parent or the Company, if at the Company Shareholders Meeting (including any adjournment or postponement), the requisite vote of the shareholders of the Company in favor of the Company Voting Proposal shall not have been obtained; (e) by Parent, if the Company shall have breached or failed to perform any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would cause the conditions set forth 54 in Sections 7.2(a) or 7.2(b) to not be satisfied and which breach shall not have been cured within 10 business days following receipt by the Company of written notice of such breach from Parent; (f) by the Company, if Parent shall have breached or failed to perform any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would cause the conditions set forth in Sections 7.3(a) or 7.3(b), to not be satisfied and which breach shall not have been cured within 10 business days following receipt by Parent of written notice of such breach from the Company; (g) by the Company at any time prior to the date of the Company Shareholders Meeting if, in response to an unsolicited Superior Proposal, and, subject to the Company's compliance with Section 6.2(c), the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to terminate this Agreement in order to comply with its fiduciary duties to the Company's shareholders under applicable law; provided that any termination by the Company pursuant to this Section 8.1(g) shall not be effective unless and until the Company shall have paid to Parent all amounts due Parent in connection with such termination pursuant to Sections 8.3(b) and (c) in accordance therewith; (h) by Parent in the event of a breach of Section 6.2 or Section 6.4(a) or (b); (i) by Parent or the Company if, at the Parent Stockholders Meeting (including any adjournment or postponement thereof), the Parent Voting Proposal shall not have been approved ; (j) by Parent, if for any reason other than Parent's failure to perform its obligations under this Agreement the Company fails to call and hold the Company Shareholders Meeting by the date which is one business day prior to the Outside Date; or (k) by the Company, if for any reason other than the Company's failure to perform its obligations under this Agreement Parent fails to call and hold the Parent Stockholders Meeting by the date which is one business day prior to the Outside Date. SECTION 8.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement pursuant to Section 8.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto or any of its affiliates, directors, officers, stockholders or shareholders except (i) that the provisions of Sections 3.27, 4.19, 8.3, this Section 8.2 and Article IX shall survive termination and (ii) nothing herein shall relieve any party from liability for any breach hereof prior to such termination. 55 SECTION 8.3 FEES AND EXPENSES. (a) Except as set forth in this Section 8.3, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Merger is consummated; PROVIDED, HOWEVER, that Parent shall bear all fees and expenses, other than the Company's financial advisor's, accountant's and attorneys' fees and expenses, incurred in connection with preparing the printing and filing of the Proxy Statement/Prospectus (including any preliminary materials related thereto), the Registration Statement (including financial statements and exhibits) and any amendments or supplements thereto and filings under the HSR Act. (b) The Company shall reimburse Parent for all fees and expenses of Parent (or in the case of clause (i) of this Section 8.3(b), up to $750,000 of fees and expenses of Parent) actually incurred relating to the transactions contemplated by this Agreement prior to termination (including without limitation fees and expenses of Parent's counsel, accountants and financial advisors), upon the termination of this Agreement (i) by Parent or the Company pursuant to Section 8.1(d) (if prior to such termination an Acquisition Proposal shall have been publicly announced or otherwise become publicly known or any person shall have publicly announced an intention (whether or not conditional) to make an Acquisition Proposal), or (ii) by Parent pursuant to Sections 8.1(e), 8.1(h) or 8.1(j) or (iii) by the Company pursuant to Section 8.1(g). (c) The Company shall pay Parent a termination fee of $1,620,000 (and in the case of termination of this Agreement pursuant to Section 8.1(d), the Company shall also reimburse Parent for all fees and expenses of Parent actually incurred relating to the transactions contemplated by this Agreement prior to termination in excess of the amount previously reimbursed pursuant to 8.3(b)) on the date of the first to occur of the following events: (i) the entry by the Company into an agreement with respect to, or the consummation of, any Acquisition Proposal within six months of the termination of this Agreement pursuant to Sections 8.1(d), 8.1(e), 8.1(h) or 8.1(j) if prior to such termination an Acquisition Proposal shall have been publicly announced or otherwise become publicly known or any person shall have publicly announced an intention (whether or not conditional) to make an Acquisition Proposal; or (ii) the termination of this Agreement by the Company pursuant to Section 8.1(g). (d) Parent shall reimburse the Company for all fees and expenses of the Company actually incurred relating to the transactions contemplated by this Agreement prior to termination (including without limitation fees and expenses of the Company's counsel, accountants and financial advisors), upon the termination of this 56 Agreement (i) by Parent or the Company pursuant to Section 8.1(i), or (ii) by the Company pursuant to Sections 8.1(f) or 8.1(k). (e) Parent and the Company each acknowledge that the agreements contained in this Section 8.3 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, the other party would not enter into this Agreement; accordingly, if Parent or the Company fails promptly to pay the amount due pursuant to this Section 8.3, and, in order to obtain such payment, the other party commences a suit which results in a judgment against Parent or the Company, as the case may be, for the fee set forth in this Section 8.3, Parent or the Company, as the case may be, shall pay to the other party its costs and expenses (including attorneys' fees and expenses) in connection with such suit, together with interest on the amount of the fee at the prime rate of Citibank, N.A. in effect on the date such payment was required to be made. ARTICLE IX GENERAL PROVISIONS SECTION 9.1 NONSURVIVAL OF REPRESENTATIONS; WARRANTIES AND AGREEMENTS. None of the representations, warranties or agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for the agreements contained in Articles I and II, Sections 6.12, 6.14 and 6.15, this Article IX and the Affiliate Agreements. SECTION 9.2 NOTICES. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made if and when delivered personally or by overnight courier to the parties at the following addresses or sent by electronic transmission, with confirmation received, to the telecopy numbers specified below (or at such other address or telecopy number for a party as shall be specified by like notice): (a) If to Parent or Merger Sub: 290 Donald Lynch Boulevard Marlborough, Massachusetts 01752-4748 Attention: Steven Shea Telecopier No.: (508) 303-4620 Telephone No.: (508) 303-4800 57 With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP One Beacon Street Boston, MA 02108 Attn: David Brewster, Esq. Telecopier No.: (617) 573-4822 Telephone No.: (617) 573-4825 (b) If to the Company: 460 E. Middlefield Road Mountain View, California 94043 Attention: Mark Housley Telecopier No.: (650) 404-6205 Telephone No.: (650) 404-6301 With a copy to: Fenwick & West LLP Two Palo Alto Square Palo Alto, CA 94306 Attention: Gordon Davidson, Esq. Telecopier No.: (650) 494-1417 Telephone No.: (650) 858-7237 SECTION 9.3 CERTAIN DEFINITIONS. For purposes of this Agreement, the term: (a) "affiliate" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; including, without limitation, any partnership or joint venture in which the first mentioned person (either alone, or through or together with any other subsidiary) has, directly or indirectly, an interest of 5% or more; (b) "beneficial owner" with respect to any shares of Company Common Stock means a person who shall be deemed to be the beneficial owner of such shares (i) which such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 of the Exchange Act) beneficially owns, directly or indirectly, (ii) which such person or any of its affiliates or associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, 58 or (B) the right to vote pursuant to any agreement, arrangement or understanding, or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares; (c) "business day" means any day other than a Saturday or Sunday or any day on which banks in The Commonwealth of Massachusetts are required or authorized to be closed; (d) "control" including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; and (e) "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act). SECTION 9.4 AMENDMENT. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; PROVIDED, HOWEVER, that, after approval of the Company Voting Proposal by the shareholders of the Company, no amendment may be made which by law requires further approval by such shareholders without such further approval. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 9.5 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of any other party hereto, (b) waive any inaccuracies in the representations and warranties of any other party hereto contained herein or in any document delivered pursuant hereto or (c) waive compliance with any of the agreements or conditions of any other party hereto 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 an instrument in writing signed on behalf of such party. SECTION 9.6 HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.7 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. 59 Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. SECTION 9.8 ENTIRE AGREEMENT, NO THIRD PARTY BENEFICIARIES. This Agreement (including the documents and instruments referred to herein, including the Confidentiality Agreement) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and (b) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder, other than the persons intended to benefit from the provisions of Section 6.14, who shall have the right to enforce such provisions directly. SECTION 9.9 ASSIGNMENT. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Merger Sub may assign all or any of their rights hereunder to any wholly owned subsidiary thereof; PROVIDED, HOWEVER, that no such assignment pursuant to this Section 9.9 shall relieve Parent of its obligations hereunder. SECTION 9.10 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." SECTION 9.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 9.12 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to the conflict of law provisions thereof, including that the Merger shall be effected in accordance with the applicable provisions of the CGCL. Each of the parties hereto agrees that any action or proceeding brought to enforce the rights or obligations of any party hereto under this Agreement will be commenced and maintained in any court of competent jurisdiction located in the State of California. Each of the parties hereto further agrees that process may be served upon it by certified mail, return receipt requested, addressed as more generally provided in 60 Section 9.2, and consents to the exercise of jurisdiction of a court of the State of California over it and its properties with respect to any action, suit or proceeding arising out of or in connection with this Agreement or the transactions contemplated hereby or the enforcement of any rights under this Agreement. SECTION 9.13 COUNTERPARTS. This Agreement may be executed in two or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 61 IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. MEDIA 100 INC. By: ________________________________ Name: Steven D. Shea Title: Vice President of Finance DERRINGER ACQUISITION CORP. By: ________________________________ Name: Steven D. Shea Title: President and Secretary DIGITAL ORIGIN, INC. By: ________________________________ Name: Mark Housley Title: Chairman and Chief Executive Officer 62 TABLE OF DEFINED TERMS
CROSS REFERENCE TERMS IN AGREEMENT Acquisition Proposal............................................................ Section 6.2(b) Affiliate....................................................................... Section 9.3(a) Affiliated Group................................................................ Section 3.15(a) Affiliated Return............................................................... Section 3.15(a) Agreement....................................................................... Preamble Beneficial Owner................................................................ Section 9.3(b) Business Day.................................................................... Section 9.3(c) Certificates.................................................................... Section 2.1(a) CGCL............................................................................ Preamble Closing......................................................................... Section 1.6 Closing Date.................................................................... Section 1.6 Code............................................................................ Preamble Common Shares Trust............................................................. Section 2.2(d)(ii) Company......................................................................... Preamble Company Affiliate Agreement..................................................... Section 6.6(a) Company Balance Sheet........................................................... Section 3.6(b) Company By-Laws................................................................. Section 3.2 Company Charter................................................................. Section 3.2 Company Common Stock............................................................ Section 2.1 Company Disclosure Schedule..................................................... Article III Company ESPP.................................................................... Section 2.1(e) Company Intellectual Property Rights............................................ Section 3.17(a) Company Material Adverse Effect ................................................ Section 3.1 Company Merger Documents........................................................ Section 3.4 Company Option.................................................................. Section 6.12
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CROSS REFERENCE TERMS IN AGREEMENT Company Permits................................................................. Section 3.11(b) Company Plans................................................................... Section 3.12(a) Company Preferred Stock......................................................... Section 3.3(a) Company SEC Reports............................................................. Section 3.6(a) Company Shareholders Meeting.................................................... Section 3.20 Company Stock Option Plans ..................................................... Section 2.1(e) Company Voting Proposal......................................................... Section 3.4 Company Warrants ............................................................... Section 2.1(b) Confidentiality Agreement....................................................... Section 6.1(c) Control......................................................................... Section 9.3(d) DGCL............................................................................ Preamble Dissenting Shares .............................................................. Section 2.1(c) Effective Time.................................................................. Section 1.2 Environmental Claim............................................................. Section 3.16(e) Environmental Laws.............................................................. Section 3.16(f) ERISA........................................................................... Section 3.12(a) ERISA Affiliate................................................................. Section 3.12(a) Excess Shares .................................................................. Section 2.2(a)(ii) Exchange Act.................................................................... Section 3.5(b) Exchange Agent ................................................................. Section 2.2(a) Exchange Ratio.................................................................. Section 2.1(a) Existing Indemnification Obligations............................................ Section 6.14(a) GAAP............................................................................ Section 3.6(b) Governmental Entity............................................................. Section 3.5(b) Hazardous Materials............................................................. Section 3.16(g) HSR Act......................................................................... Section 3.5(b)
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CROSS REFERENCE TERMS IN AGREEMENT Liens........................................................................... Section 3.3(a) Material Contract............................................................... Section 3.10(b) Maximum Amount.................................................................. Section 6.14(b) Merger.......................................................................... Preamble Merger Agreement................................................................ Section 1.2 Merger Consideration ........................................................... Section 2.1(a) Merger Sub...................................................................... Preamble Merger Sub Common Shares ....................................................... Section 2.1(d) NASDAQ.......................................................................... Section 2.2.(d)(ii) Other Company Options........................................................... Section 2.1(e) Outside Date.................................................................... Section 8.1(b) Parent.......................................................................... Preamble Parent Affiliate Agreement...................................................... Section 6.6(b) Parent Affiliated Group......................................................... Section 4.14(a) Parent Affiliated Return........................................................ Section 4.14(a) Parent Balance Sheet............................................................ Section 4.7 Parent By-Laws.................................................................. Section 4.2 Parent Charter.................................................................. Section 4.2 Parent Common Stock............................................................. Section 2.1(a) Parent Disclosure Schedule...................................................... Article IV Parent ERISA Affiliate.......................................................... Section 4.11(a) Parent Intellectual Property Rights............................................. Section 4.16(a) Parent Material Adverse Effect.................................................. Section 4.1 Parent Merger Documents......................................................... Section 4.4 Parent Option................................................................... Section 6.12 Parent Plans.................................................................... Section 4.11(a)
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CROSS REFERENCE TERMS IN AGREEMENT Parent Preferred Stock.......................................................... Section 4.3(a) Parent SEC Reports.............................................................. Section 4.6(a) Parent Stockholders' Meeting.................................................... Section 3.20 Parent Voting Proposal.......................................................... Section 4.4 Person.......................................................................... Section 9.3(e) Proxy Statement/Prospectus...................................................... Section 3.20 Registration Statement.......................................................... Section 3.5(b) Release......................................................................... Section 3.16(h) Rule 145........................................................................ Section 6.6(a) SEC............................................................................. Section 3.5(b) Securities Act.................................................................. Section 3.5(b) Subsidiary...................................................................... Section 3.1 Subsidiary Documents............................................................ Section 3.2 Superior Proposal............................................................... Section 6.2(b) Surviving Corporation........................................................... Section 1.1 Tax Returns..................................................................... Section 3.15(e) Tax/Taxes....................................................................... Section 3.15(e) Year 2000 Compliant............................................................. Section 3.23(e)
66 EX-10.13 4 EXHIBIT 10.13 OEM DEVELOPMENT AND LICENSE AGREEMENT WHEREAS, Media 100 develops and markets certain software and other computer-related products and services and desires to include Supplier's software product as a component of Media 100's product or services. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree to the following terms and conditions, which set forth the rights, duties, and obligations of the parties. 1. DEFINITIONS. The following terms, when used with initial capital letters in this Agreement, shall have the following definitions, unless the context in which the term is used expressly provides otherwise. "ACCEPTANCE CRITERIA" means a set of criteria (set forth in the Specifications) that will be used to judge whether a Deliverable meets the Specifications. "AFFILIATE" means with respect to any entity, any other entity controlling, controlled by or under common control of such entity. "APPLICATIONS PROGRAMMING INTERFACE" means the specifications of a Supplier Product which define the external programming interface between that Supplier Product and other Object Code. The Applications Programming Interface includes the elements of such programming interface that are directly exposed and recommended as mandatory to implement extension to that Supplier Product. "APPLICATIONS PROGRAMMING INTERFACE ITEMS" means the following set of items implementing the Applications Programming Interface: (a) System Documentation describing the Applications Programming Interface; (b) fully functional and tested Supplier Product (Object Code and System Documentation) designed for use on, and implementing the Applications Programming Interface; and (c) a fully functional and tested validation test suite and System Documentation describing the associated test procedures. "CONFIDENTIAL INFORMATION" means any information disclosed by one party to the other pursuant to this Agreement which is in written, graphic, machine readable or other tangible form and is marked "Confidential", "Proprietary", "Source Code", or in some other manner to indicate its confidential nature. Confidential Information may also include oral or visual information disclosed by one party to the other pursuant to this Agreement, provided that such information is designated as confidential at the time of disclosure and is reduced to writing by the disclosing party within a reasonable time (not to exceed thirty (30) calendar days) after its oral or visual disclosure, and such writing is marked in a manner to indicate its confidential nature and delivered to the receiving party. "BUNDLED PRODUCT" means the combination of a Restricted Streaming Product and a Supplier Product being distributed to third parties in accordance with this Agreement. 1 "CONTRACTOR" of a company means a person or group of persons (whether incorporated or not) providing services to that company as independent contractors. "DELIVERABLES" means the Supplier Product or any portion thereof to be delivered by the Supplier identified in Exhibits A and B. "DERIVATIVE WORKS" means a revision, modification, translation, abridgment, condensation or expansion of the Supplier Product or Documentation or any form in which the Supplier Product or Documentation may be recast, transferred, or adapted, which, if prepared without the consent of Supplier, would be a copyright infringement. "DISTRIBUTOR" means any third party which acquires possession of the Supplier Product from Media 100 and is not a Reseller or End User and distributes it to a Reseller. "DOCUMENTATION" means End User Documentation and System Documentation. "END USER DOCUMENTATION" means those software user manuals, reference manuals and installation guides, or portions thereof, which are distributed in conjunction with the Supplier Product including but not limited to those set forth in Exhibit C. "End User Documentation" excludes System Documentation. "SYSTEM DOCUMENTATION" means all user manuals and other written materials, including style guides, that relate to particular Source Code or Object Code, including without limitation materials useful for understanding, designing, developing, building, implementing, maintaining and operating Source Code or Object Code (for example, logic manuals, flow charts and principles of operation) and machine-readable text or graphic files subject to display or printout. "END USER" means an entity that acquires the Supplier Product for Internal Use and is not an affiliate of Media 100's enterprise. "End User" does not include an entity that distributes, resells, sells, licenses, rents or leases the Supplier Product to other parties in the regular course of business. "ERROR" means any mistake, problem or defect that causes either an incorrect functioning of code or an incorrect or incomplete statement or graphic in Documentation, if such mistake, problem or defect (a) renders the code inoperable, (b) causes the code to fail to meet the Specifications or Acceptance Criteria, (c) causes the Documentation to be inaccurate or inadequate in any material respect, (d) causes incorrect results, or (e) causes incorrect functions to occur. "EVENT OF BANKRUPTCY" with respect to a company means (a) the commencement by the company of a voluntary case under the United States Bankruptcy Code or under any similar law, (b) the commencement against the company of an involuntary case under the United States Bankruptcy Code or under any similar law if the case is not vacated within ninety calendar days, (c) the entry of a final order by a court of competent jurisdiction finding the company to be bankrupt or insolvent, ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its general creditors or assuming custody of or appointing a receiver or other custodian for all or a substantial part of its property and such order shall not be vacated or stayed upon appeal or otherwise stayed within ninety calendar days or (d) the company making an assignment for the 2 benefit of, or entering into a composition with, its creditors, or appointing or consenting to the appointment of a receiver or other custodian for all or a substantial part of its property. "INTERNAL USE" means use for purposes that do not directly produce revenue for the user. "MAJOR AND MINOR UPDATES" means updates, if any, to the Supplier Product. Major Updates involve additions of substantial functionality while Minor Updates do not. Major Updates are customarily designated by a change in the number to the left of the decimal point of the number appearing after the product name while Minor Updates are customarily designated by a change in such number to the right of the decimal point. Major Updates exclude software releases which are reasonably designated by Supplier as new products. Where used herein "Updates" shall mean Major Updates or Minor Updates interchangeably. "MARKS" means Supplier's trademarks, service marks, logos, designations and insignias. "MILESTONE SCHEDULE" means the schedule for delivery of Deliverables and payment therefor attached to this Agreement as Exhibit B. "MILESTONE" means the milestones set forth in the Milestone Schedule. "MEDIA 100 RELATED PERSONS" means Media 100 and Media 100's subsidiaries, and their respective directors, officers, employees, agents and Contractors. "MEDIA 100" means Media 100 Inc. "MONTH(S)" and "MONTHLY" refers to a calendar month. "OBJECT CODE" means any computer programming code that loads and executes without further processing by a software compiler or linker or that results when Source Code is processed by a software compiler. "RESELLER" means any third party which is not a Distributor but acquires the Supplier Product from Media 100 or an authorized Distributor and resells, licenses, rents, or leases to End Users. "RESTRICTED STREAMING PRODUCTS" means the Media Cleaner Product of Terran Interactive, Inc. (a subsidiary of Media 100), and any product which is reasonably a derivative or extension of such product; provided each such product shall be considered a "Restricted Streaming Product" only if it can ONLY produce streaming media output; for the purposes of this provision, products designed to or capable of output to physical media (such as video tape or DVD disk) or in "mini-DV" format shall not be considered to produce only streaming media output and thus not be "Restricted Streaming Products"; however, the ability to store a streaming media output on physical media shall not disqualify a product otherwise compliant from being a "Restricted Streaming Product". 3 "SALE," "SELL" and other similar terms, when used in connection with the marketing and distribution of the Supplier Product shall mean the granting of a license or sublicense and shall not be deemed for any purpose to mean a transfer of title or other rights of ownership to the Supplier Product, other than the rights to copy and use as specifically set out in this Agreement. "SOURCE CODE" means the human-readable form of programming code and related System Documentation, including all comments and any procedural language. Source Code does not include End User Documentation. "SPECIFICATIONS" mean specifications for the Supplier Product API necessary to ensure effective integration with the Restricted Streaming Products and as set forth in Exhibit B "SUBSIDIARY" of an entity means a corporation, company or other entity (a) more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are; or (b) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but more than fifty percent (50%) of whose ownership interest (representing the right to make decisions for such corporation, company or other entity) is; in each of (a) and (b) now or hereafter, owned or controlled, directly or indirectly, by the entity in question, as the case may be, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists. "SUPPLIER PRODUCT" means the Supplier's product identified in Exhibit A that Media 100 is authorized to sublicense, market and sell under this Agreement, including each of the Deliverables, if any. "SUPPLIER RELATED PARTY" means Supplier and Supplier's subsidiaries, Affiliates, directors, officers, employees, agents and Contractors. "SUPPLIER" means the company identified as such on the signature page to this Agreement. "SUPPORT SPECIFICATIONS" means the items set forth in Exhibit C. "TERM" means the term of this Agreement, as it may be extended or earlier terminated in accordance with Section 10. 2. DELIVERY OF DELIVERABLES; ACCEPTANCE. (a) DELIVERABLES. To the extent the Supplier Product or any part thereof is an existing product, then Supplier will deliver to Media 100 such existing materials in connection with the execution of this Agreement, and each Update thereto immediately upon such materials being released by Supplier, and Media 100 will make any payment specified in respect thereto as indicated in Exhibit A. These deliverables will be in object code form only. Despite the foregoing and except as provided by separate agreement, Major 4 Updates will not be supplied by Supplier after May 31, 2003 and no Updates will be delivered after Supplier terminates its general distribution of the Supplier Product. To the extent the Supplier Product consists of Deliverables to be created under this Agreement, Supplier will deliver to Media 100 the Deliverables in accordance with due dates for each set forth on the Milestone Schedule. Upon acceptance of each Deliverable pursuant to the provisions of this Section 2, Media 100 will make the payment specified on the Exhibit B - Milestone Schedule. These deliverables will be in object code form only. Supplier agrees that it will provide the Applications Programming Interface for the Supplier Product by delivery to Media 100 of the Applications Programming Interface Items together with such Supplier Product, and thereafter promptly following any changes made thereafter to such items. (b) CREATION OF MILESTONE SCHEDULE. As of the date of execution of this Agreement, Exhibit B - Milestone Schedule and Exhibit C -- specifications of API, are not completed. The parties will use all reasonable efforts to complete Exhibits B and C and attach them hereto as promptly as possible. In general, the parties expect that an alpha release of the API will be available in February 2000 and that the commercial release version of such product will be available no later than the anniversary of this Agreement. (c) ENGINEERING SUPPORT FOR DEVELOPMENT. Supplier will make available sufficient internal engineering support from its organization to ensure that the Supplier Product is commercially viable from a technical point of view, it being understood that the foregoing does not obligate Supplier to hire personnel not then employed at the Supplier, and is only a statement of allocation of resources, not a representation or promise that the Supplier Product will in fact be commercially viable. Appropriate Media100 engineering personnel will reasonably cooperate with Supplier's personnel. (d) REVIEW. Media 100 may conduct periodic reviews, including reviews at Supplier's premises to take place at a mutually convenient time, of the Supplier Product. At Media 100's reasonable request, Supplier will provide Media 100 with written reports regarding its work on the Supplier Product and with copies of any work in progress and related materials. (e) CHANGES TO THE SPECIFICATIONS. (i) Additional Specifications for the API may be agreed upon by the parties until Media 100's final acceptance of the Supplier Product. Media 100 acknowledges that significant changes to the Specifications may result in a change in the delivery time table. (ii) If any such modification of the Specifications by Media 100 does require Supplier's expenditure of significantly more time and effort, additional fees must be agreed upon in writing by the parties prior to implementation of modifications. (f) ACCEPTANCE OF SUPPLIER PRODUCT. 5 (i) Delivery will occur when Supplier delivers a testable Deliverable to Media 100 accompanied by a written statement listing the items delivered and stating that they are ready for Media 100's acceptance testing. Delivery of software will be via electronic transmission only, unless Media 100 gives Supplier written notice that such a Deliverable is to be delivered via another medium. Media 100, with the assistance of Supplier if requested by Media 100, will examine and test each Deliverable upon delivery to determine whether the Deliverable conforms to the Acceptance Criteria for the Deliverable. Within thirty (30) calendar days or such other number of days specified in the applicable Acceptance Criteria after such delivery, Media 100 will provide Supplier with written acceptance of such Deliverable or a specific and objective statement of Errors to be corrected prior to the next Milestone. (ii) Supplier will correct the Errors in any Deliverable set forth in the statement of Errors and redeliver the Deliverable to Media 100 within thirty (30) calendar days or such other number of days specified in the applicable Acceptance Criteria after receipt of the statement of Errors, and Media 100 will within fourteen (14) calendar days after such redelivery provide Supplier with written acceptance or another statement of Errors. The procedure set forth in this clause (ii) will be repeated until Media 100 accepts the Deliverable. (iii) If Media 100 fails to give a statement of Errors within the specified time, Media 100 will be deemed to have accepted the Deliverables as of the expiration of such specified time; provided that such acceptance shall not affect the Supplier's obligation hereunder to correct any Errors after such acceptance. (g) APPLICATIONS PROGRAMMING INTERFACE; SUPPLYING SOURCE CODE. Supplier agrees that the Applications Programming Interface Items to be delivered to Media 100 are intended to be used for, among other things, extension of the user interface functionality of Supplier Products by Media 100 without the use of Source Code of the Supplier Products, and Supplier has and will in creating such Applications Programming Interface's do so taking into account the need to facilitate such use. It is the Supplier's intention that the creation of such Applications Programming Interface will give Media 100 the same capability to extend user interface functionality as the Supplier has. In the event the Applications Programming Interface, as so supplied, fails to permit a reasonably skilled programmer the ability to do so, or if the parties otherwise agree it is appropriate for Supplier to provide Media 100 access to modules of Source Code to perform development work, the Supplier shall immediately give Media 100 access to those modules of Source Code necessary for Media 100 to perform such work, but only to the extent and for the time reasonably required for Media 100 to perform such work. Any modifications to Source Code made by Media 100 (but not the project developed by Media 100 using Source Code) shall belong to Supplier, and Media 100 shall convey any ownership rights it has in the modifications to the Source Code to Supplier. 6 3. GRANT OF LICENSES. (a) LICENSE GRANT. Subject to the terms and conditions of this Agreement, Supplier grants to Media 100 a non-exclusive, worldwide, perpetual license to the Supplier Product: (i) to use, reproduce and distribute the Supplier Product and System Documentation internally within Media 100; (ii) to create or have created Derivative Works based upon or compatible with the Supplier Applications Programming Interface (whether Supplier Applications Programming Interface-compliant or not) with or without the use of code supplied by Supplier and to reproduce and distribute internally the Derivative Works in Source Code form or in Object Code form; (iii) to the extent Source Code is supplied pursuant to Section 2(g) or 3(c), to create or have created Derivative Works by modifying the Source Code of the Supplier Product and to reproduce and distribute internally the Derivative Works in Source Code form or in Object Code form; (iv) to create or have created Derivative Works by modifying the End User Documentation of the Supplier Product and to reproduce and distribute internally such Derivative Works in any form; (v) to distribute externally to End Users, either directly or through distributors, but only in bundled form with Restricted Streaming Products, copies in Object Code form only of the Supplier Product or Derivative Works and copies in any form of the End User Documentation or any Derivative Works of the End User Documentation, such distribution shall be in accordance with Media 100's standard software distribution license agreement for a particular channel of distribution; and (vi) to exercise all rights to the Supplier Product with regard to pictorial, graphic or audio/visual works, including icons, screens, music and characters, that are created as a result of execution of any code or any Derivative Work thereof in accordance with the granted license (b) PROPRIETARY NATURE OF PRODUCTS AND OWNERSHIP. No title to or ownership of software licensed under this Agreement or proprietary technology in hardware acquired under this Agreement is transferred to Media 100. Notwithstanding any provision of this Agreement to the contrary, Supplier, or the licensor through which Supplier obtained the rights to distribute the Supplier Product, owns and retains all title and ownership of all intellectual property rights in the Supplier Product, including all software, firmware, software master diskettes, copies of software, master diskettes, documentation and related materials that are acquired, produced or shipped by Supplier under this Agreement, and all modifications to and derivative works of software acquired under this Agreement that are made by Supplier or any third party (other than on behalf of Media 100). Supplier does not transfer any portion of such title and ownership, or any of the associated goodwill, to Media 100. Supplier shall own all Derivative Works of the Supplier Product produced or created by or on behalf of Media 100 provided that Supplier shall have no rights independently to market or sublicense any Derivative Works created by Media 100 without Media 100's prior written approval. Media 100 shall have rights to use such Derivative Works subject to the terms and conditions of this Agreement. (c) ACCESS TO SOURCE CODE. Supplier agrees to execute a standard software escrow agreement (the "Escrow Agreement") supplied by an escrow agent selected by Media 100 and reasonably acceptable to Supplier (the "Escrow Agent"), and in connection therewith Supplier agrees that from time to time upon request of Media 100, Supplier shall deposit 7 in escrow with the Escrow Agent the latest versions of all intellectual property, as defined in section 101 of Title 11 of the United States Code, with respect to those portions of the software and other technology incorporated in the Supplier Product and reasonably relevant to the implementation of this Agreement (the "Technology") including without limitation all Source Code, designs, patents and Documentation ("Supplier Product Materials"), to be made available to Media 100 upon the conditions set forth in this Section. Media 100 will pay the Escrow Agent's charges. Regardless of whether "Source Code Escrowed" is indicated on Exhibit A and regardless of whether this license is identified in Exhibit A as including the right to Source Code, in the event that a trustee in bankruptcy is appointed for Supplier, then unless and until such trustee has rejected this Agreement, the trustee shall, at the written request of Media 100, (i) continue to perform all of the obligations of Supplier under this Agreement, or (ii) promptly deliver to Media 100 the Technology, including all Supplier Product Materials held by the trustee, including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law, and in either case not interfere with the rights of Media 100 to use such intellectual property (including such embodiment) as provided in this Agreement or any agreement supplementary hereto, including any right to obtain such intellectual property or such embodiment from any Escrow Agent under an Escrow Agreement. Regardless of whether "Source Code Escrowed" is indicated on Exhibit A and regardless of whether this license is identified in Exhibit A as including the right to Source Code, if the trustee rejects this Agreement, and Media 100 elects under section 365(n)(1)(B) of Title 11 of the United States Code to retain its rights under this Agreement, the trustee shall promptly deliver to Media 100 all intellectual property, as defined in section 101 of Title 11 of the United States Code, with respect to the Technology, including all Supplier Product Materials held by the trustee, including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law, and not interfere with the rights of Media 100 to use such intellectual property (including such embodiment) under this Agreement or any agreement supplementary hereto, including any right to obtain such intellectual property or such embodiment from any Escrow Agent under any Escrow Agreement. 4. SUPPORT, MARKETING AND DISTRIBUTION. (a) MAINTENANCE AND SUPPORT. Supplier shall provide Media 100 with maintenance and support according to the terms and conditions specified in Exhibit D. (b) NONEXCLUSIVITY; NO MARKETING OBLIGATION. Media 100 understands that Supplier reserves the right to directly license and sell the Supplier Product and to appoint other OEM's, distributors and resellers without restriction as to number or location. Supplier understands that Media 100 has no obligation to incorporate, bundle or market the Supplier Product with or into any Media 100 products, or otherwise, unless Media 100 believes in its sole discretion that such action is desirable from the Media 100's perspective. 8 (c) USE OF AUTHORIZED OEM TITLE. During the term of this Agreement, Media 100 may refer to itself and Supplier may refer to Media 100, in connection with exercising its rights under this Agreement, as a Supplier "Authorized OEM". (d) PUBLIC ANNOUNCEMENTS AND PROMOTIONAL MATERIALS. Supplier and Media 100 shall cooperate with each other so that each party may issue a press release other than as a customer reference concerning this Agreement, provided that each party must approve such press release prior to its release. (e) SOFTWARE. When marketing products incorporating the Supplier Product, Media 100 agrees to exercise commercially reasonable efforts (and no less effort than expended with respect to its own products) to ensure that each End User receiving the products or services through Media 100 or Media 100's lines of distribution understands and agrees to be bound by a Media 100 standard Software License Agreement consistent with the line of distribution. (f) USE OF SUPPLIER MARKS AND TRADE NAMES. Media 100 is authorized to use the Supplier Marks applicable to the Supplier Product in connection with its marketing of products or services incorporating the Supplier Product. Media 100 agrees not to alter, erase or overprint any notice provided by Supplier without the prior written consent of Supplier or affix any Supplier Marks. Media 100 recognizes Supplier's ownership and title to the Trade Names and Marks. Media 100 will abide by Supplier's generally applicable and reasonable usage guidelines established by Supplier from time to time. 5. FEES AND PAYMENT. (a) ROYALTY AND LICENSE FEES. As license fees for the rights herein granted, Media 100 shall pay to Supplier royalties on Media 100 sales and related licensing or sublicensing of Bundled Product at the rates and on the terms specified in Exhibit A hereto. Media 100 is free to determine its own resale prices for the Bundled Product it is authorized to license and sell hereunder. Although Supplier may publish suggested list prices, these are suggestions only and not binding in any way. Royalties shall accrue for a particular transaction in the Media 100 fiscal quarter in which Media 100 recognizes for its financial statement purposes the revenue for the shipment by Media 100 of the relevant quantity of the Bundled Product (to a distributor or end-user). Media 100 shall pay Supplier such license fees accrued during each such fiscal quarter, within forty-five (45) days following the end of such fiscal quarter, and shall be accompanied by a report in reasonable detail showing the calculation of such fees. All payments shall be made in United States dollars. For sales for which Supplier would otherwise be entitled to a royalty on a non-dollar based amount, Media 100 will make payment to Supplier in U.S. Dollars based upon the exchange rate used in connection with preparing its internal financial statements with respect to such transaction. In no event shall Media 100 be responsible to protect the value of sums against currency fluctuation, effects of inflation, or other economic or monetary adjustment. The 9 applicable fees for the products and services provided under this Agreement do not include any sales, use or similar taxes ("Taxes") payable on the part of the acquisition of the Supplier Product from Supplier. Such Taxes, if applicable and imposed on Supplier, shall be presented in a billing statement by Supplier to Media 100, and shall be payable by the Media 100 as specified herein; provided that Media 100 shall not be liable for any taxes based upon Supplier's net income or real or personal property owned by Supplier. Any payment to Supplier shall be net of any required withholding due to taxes under applicable law. Media 100 is responsible for Taxes resulting from its sales of Bundled Products to its customers. (b) INTERNATIONAL SALES RESTRICTIONS. If any payment to Media 100 with respect to sales in any country is blocked or subject to restrictions by governmental authorities, royalties with respect to such sales may either be held in the blocking or restricting country (if permitted by local regulations) or may be removed from such country and paid to Supplier, subject to whatever restrictions, limitations and/or taxes may be imposed by the government of such country on receipts from the underlying sale. If the government of a country requires a reduction in the royalty rate set forth in this Agreement as a condition of approving the payment of royalties to Supplier, Supplier agrees to reduce such rate for that country so as to provide for the maximum royalty payment allowed by such government. When deemed reasonably necessary by Media 100, Supplier shall enter into separate agreements with affiliates of Media 100 for the purpose of facilitating the payment of royalties. (c) RECORDS EXAMINATIONS. Media 100 agrees to allow Supplier to examine its records to determine compliance or noncompliance with this Agreement. Any examination will be conducted only by an authorized representative of Supplier, and will occur during regular business hours at Media 100's offices and will not interfere unreasonably with Media 100's business activities. Examinations will be made no more frequently than annually, and Supplier will give Media 100 fifteen (15) business days or more prior written notice of the date of the examination and the name of Supplier's authorized representative who will be conducting the examination. The audit will be conducted at Supplier's expense, unless the audit reveals an underpayment for the reviewed period of more than five percent, in which case the reasonable audit cost will be borne by Media 100. . All information obtained by Supplier's authorized representative conducting the audit will be maintained confidential by the representative. The examiner will give Media 100 and Supplier an examination report containing only the information necessary to indicate compliance or non-compliance with this Agreement. Underpayments will be promptly paid. All late payments will bear interest at the rate of one percent per month until paid. 6. WARRANTIES. (a) GENERAL. Supplier represents and warrants (i) that the Supplier Product being delivered to Media 100 is identical to that generally marketed by Supplier, except to the extent specifically agreed to between the parties; and (ii) it has and will have full and sufficient authority to assign or grant the rights and/or licenses granted in the Supplier Product pursuant to this Agreement. 10 (b) NO VIRUS. Supplier has taken reasonable steps to test the Supplier Product for programming devices (e.g., viruses, key locks (including, without limitation, that control the number of users), backdoors, etc.) that would (i) disrupt the use of the Supplier Product or any system, device or software to which the Supplier Product is interfaced or other computer equipment with which such equipment communicates; (ii) destroy or damage data or make data inaccessible or delayed, except for file and purge routines necessary to the routine functioning of the Supplier Product; or (iii) permit Supplier personnel, agents or subcontractors access to any portion of the Supplier Product other than as necessary to carry out the terms of this Agreement. Supplier agrees to use programming practices and security procedures to avoid insertion of such devices and to scan for viruses before sending any media containing programming code to Customer. (c) NO EXPORT RESTRICTION. Supplier further represents and warrants that to its knowledge, except as disclosed to Media 100 the Supplier Product does not contain cryptographic code or any other code that would subject it any United States export license restrictions. THE WARRANTIES DESCRIBED IN THIS SECTION 6 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. 7. INDEMNIFICATION. (a) INDEMNIFICATION. Supplier will indemnify, defend and hold Media 100, its affiliates and, subsidiaries, and its and their respective directors, officers, employees and agents (collectively, "Media 100 Persons") harmless from any and all damages, liabilities, costs and expenses incurred by any Media 100 Person as a result of any claim, judgment or adjudication against Media 100 Person that alleges that the Supplier Product, Trade Names or the Marks infringe any trademark, copyright, patent or trade secret rights of any third party. Media 100 shall promptly notify Supplier in writing of any claim for which it seeks indemnification, provided the failure or delay in doing so shall not relieve Supplier from any obligation to indemnify any Media 100 Person except to the extent such delay or failure materially prejudices the defense of any such claim. Supplier will have control of the defense of any action and all negotiations for settlement and compromise, but shall not make any settlement binding on any Media 100 Person without Media 100's consent except if such settlement provides a complete and absolute release of such person. Media 100 shall provide Supplier with reasonable assistance and information necessary to perform the above, with Supplier to be responsible for any out-of-pocket expenses of any Media 100 Person in providing such assistance. If any Media 100 Person desires to have separate legal representation in any such action, such Media 100 Person shall be responsible for the costs and fees of its separate counsel. (b) LIMITATION ON INDEMNIFICATION. Supplier shall have no liability for infringement to the extent based on (i) modification of the Products by Media 100 or to Media 100's specifications, or (ii) the combination or use of the Supplier Product with any other computer program, equipment, product, device, item or process to the extent (A) such 11 program, equipment, product, device or process is not furnished by Supplier and (B) such infringement would have been avoided by the use of the Supplier Product alone and in its unmodified form. Moreover, Supplier shall have no liability for infringement, unless it knew or should have known of the infringement on the date of this Agreement or any significant amendment thereto and had not previously disclosed the possibility of such infringement to Media100 in writing specifying either the specific technology, algorithm, standard or similar item which is anticipated to be the source of infringement, or the party from which infringement is reasonably expected. 8. CONFIDENTIAL INFORMATION. (a) RESTRICTION ON USE. Each party and its Related Persons shall treat as confidential all Confidential Information of the other party, shall not use such Confidential Information except as contemplated under this Agreement, and each party and its Related Persons shall not disclose such Confidential Information to any third party except as may be reasonably required in connection with the manufacture, use, sale or distribution of products pursuant to this Agreement, and subject to confidentiality obligations at least as protective as those set forth in this Agreement. Without limiting the foregoing, each of the parties shall use at least the same degree of care which it uses to prevent the disclosure of confidential information of like importance to the disclosing party to prevent the disclosure of Confidential Information disclosed to it by the other party under this Agreement. (b) EXCEPTIONS. Notwithstanding the above, neither party shall have liability to the other with regard to any Confidential Information of the other which (i) was in the public domain at the time it was disclosed or enters the public domain without violation of this Agreement by the receiver; (ii) was known to the receiver, without restriction, at the time of the disclosure as shown by the files of the receiver in existence at the time of disclosure; (iii)is disclosed with the prior written approval of the discloser; (iv) was independently developed by the receiver without any use of the Confidential Information and by employees or other agents of (or Contractors hired by) the receiver who have not been exposed to the Confidential Information; (v) becomes known to the receiver, without restriction, from a third party without breach of this Agreement by the receiver and otherwise not in violation of the discloser's rights; (vi) is disclosed to third parties by the discloser, intentionally without restrictions similar to those contained in this Agreement; (vii)to the extent disclosed in accordance with the order or requirement of a court, administrative agency, or other governmental body, provided, however, that the receiver shall provide prompt notice thereof to enable the discloser to seek a protective order or otherwise prevent such disclosure; or 12 (viii)is inherently disclosed in the use, lease, sale or other distribution of, or publicly available supporting documentation for, any present or future product or service by or for the receiving party or any of its Subsidiaries as otherwise permitted in this Agreement. (c) TERMINATION OF OBLIGATIONS. The parties' obligations under this Section with respect to nontechnical sales, marketing and financial Confidential Information terminate three (3) years from the end of the Term, if not terminated earlier pursuant to Section 8(b). The parties' obligations with respect to all technical Confidential Information shall be terminated only pursuant to Section 8(b). 9. LIMITATION OF REMEDIES. (a) LIMITATIONS. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER SUPPLIER NOR MEDIA 100 WILL BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) SUSTAINED OR INCURRED IN CONNECTION WITH THIS AGREEMENT AND THE SUPPLIER PRODUCT THAT IS SUBJECT TO THIS AGREEMENT REGARDLESS OF THE FORM OF ACTION AND WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE. Supplier's liability to Media 100 under this Agreement shall not exceed the greater of amounts paid by Media 100 to Supplier under this Agreement. Media 100's liability to Supplier under this Agreement shall not exceed the amounts payable by Media 100 to Supplier under Section 5. (b) EXCEPTIONS. The limitation set forth in subsection (a) above do not apply to any payment under Section 7; to breach of Section 8; to claims by either party for personal injury or damage to real property or tangible personal property caused by other's negligence; or in the case of fraud. 10. TERM; TERMINATION. (a) TERM. This Agreement shall commence on the date it is executed by an authorized Supplier signatory and continue until terminated in accordance with its terms. (b) TERMINATION FOR CAUSE. Either party may terminate this Agreement for the substantial breach by the other party of a material term. The terminating party will first give the other party written notice of the breach and a reasonable period of at least sixty (60) days in which to cure the alleged breach. If a cure is not achieved during the cure period, then the non-breaching party may terminate this Agreement upon written notice. (c) INSOLVENCY, ASSIGNMENT, OR BANKRUPTCY. Either party may terminate this Agreement upon written notice to the other party if the other party (i) is not paying its debts as such debts generally become due, (ii) becomes insolvent, (iii) files or has filed against it a petition (or other document) under any Bankruptcy Law or similar law that is unresolved within sixty (60) days of the filing of such petition (or document), (iv) proposes any dissolution, liquidation, composition, financial reorganization or 13 recapitalization with creditors, (v) makes a general assignment or trust mortgage for the benefit of creditors, or (vi) if a receiver, trustee, custodian or similar agent is appointed or takes possession of any of its property or business. (d) TERMINATION BY MEDIA 100 FOR CONVENIENCE. Media 100 may terminate this Agreement for its convenience at any time, for any reason or for no reason, by giving Supplier written notice of termination prior to the beginning of the next Media 100 fiscal quarter. Termination will become effective upon receipt of such notice by Supplier. (e) EFFECT OF TERMINATION ON OBLIGATIONS. Termination of this Agreement will not affect any pre-termination obligations of either party under this Agreement, and any termination is without prejudice to the enforcement of any undischarged obligations existing at the time of termination. Within thirty (30) calendar days after termination of this Agreement, Media 100 shall either deliver to Supplier or destroy all copies of the Supplier Product and Documentation and any other materials provided by Supplier to Media 100 hereunder in its possession or under its control, and shall furnish to Supplier an affidavit signed by an officer of Media 100 certifying that, to the best of its knowledge, such delivery or destruction has been fully effected. Notwithstanding the foregoing, (i) all licenses to the Bundled Product granted prior to termination to End Users by or on behalf of Media 100 and in connection with products incorporating the Supplier Product shall survive any termination of the Agreement, and in particular, it is agreed that upon the termination of the Agreement for any reason, such termination shall not abridge or diminish in any way the rights of existing End Users to the licensed use and enjoyment of any product utilizing or incorporating the Supplier Product or any Derivative Work already distributed in accordance with the Agreement prior to its termination; and (ii) for a period of up to one year after the date of the termination of this Agreement Media 100 may continue, subject to payment of amounts which may be due as of the date of such termination and at any time thereafter, to sell the Bundled Product and grant End User licenses to in connection therewith, under the provisions of this Agreement solely to (A) work off existing inventory, (B) fulfill contract commitments existing at the date of termination, or (C) satisfy binding quotations in effect at the date of termination, and may thereafter retain such rights as are necessary to support users at the release level existing at the time of termination. Upon termination, Media 100's sole monetary obligation arising out of termination will be to pay Supplier the fees set forth in Exhibit A of this Agreement. 11. GENERAL PROVISIONS. (a) FORCE MAJEURE. If either party is prevented from performing any portion of this Agreement (except the payment of money) by causes beyond its control, including labor disputes, civil commotion, war, governmental regulations or controls, casualty, inability to obtain materials or services or acts of God, such defaulting party will be excused from performance for the period of the delay and for a reasonable time thereafter. (b) CHOICE OF LAW; JURISDICTION. The validity, construction and performance of this Agreement will be governed by and construed in accordance with the laws of the State of 14 California applicable to contracts executed in and performed entirely within such State, without reference to any choice of law principles of such State. With respect to any suit, action or other proceeding arising out of this Agreement, or any other transaction contemplated thereby, the parties hereto expressly waive any right they may have to a jury trial and agree that any proceeding hereunder shall be tried by a judge without a jury. Each party acknowledges that injunctive relief is an appropriate remedy for a breach of Sections 3, 8 or 11. The parties agree to non-exclusive personal jurisdiction and venue of the United States District Court for Massachusetts (and any Massachusetts State Court) and the United States District Court for the Northern District of California (and any California State Court in Santa Clara County) for that purpose. (c) SURVIVAL OF TERMS. The provisions of this Agreement that by their nature extend beyond the termination of this Agreement will survive and remain in effect until all obligations are satisfied. Confidentiality provisions of Section 8 shall remain in effect until the Confidential Information is no longer Confidential. (d) ENTIRE AGREEMENT. This Agreement, including the following Exhibits, constitutes the entire Agreement between the parties pertaining to the subject matter and supersedes all prior agreements and understandings between the parties, written or oral, with respect to such subject matter. No representations or statements of any kind made by any representative of either party which are not stated in this Agreement or other substantially contemporaneous written agreements between the parties shall be binding on such party. No course of dealing or course of performance shall be relevant to explain or supplement any term expressed in this contract. In the event of any conflict between this Agreement and any purchase order or acknowledgment, this Agreement shall take precedence over any written or typed instructions in a written or electronic purchase order or acknowledgment. References to Sections without decimals (such as "Section 2") shall include all sections numbered with decimals in such Section (i.e. Section 2.1, 2.2, etc.). The pre-printed provisions of any written or electronic purchase order or acknowledgment shall be void and of no effect. This Agreement shall be valid when signed by authorized officers of both parties. The parties agree that this Agreement, together with any appendices, addenda or exhibits attached hereto, may be amended from time to time in writing by mutual agreement of the parties. No party shall be bound by any change, alteration, amendment, modification or attempted waiver of any of the provisions of this Agreement unless in writing and signed by an authorized officer of the party against whom it is sought to be enforced. (e) ASSIGNMENT. (i) The rights and liabilities of the parties hereto will bind and inure to the benefit of their respective successors, executors and administrators, as the case may be; provided that neither party may assign or delegate its obligations under this Agreement either in whole or in part, expressly or by operation of law, without the prior written consent of the other, except that each party may assign this Agreement (A) to any Subsidiary or company of which it is a Subsidiary so long as it remains responsible for such Subsidiary's performance or (B) to a person or entity into which it has merged or which has otherwise succeeded to all or substantially all of its 15 business and assets to which this Agreement pertains, by purchase of stock, assets, merger, reorganization or otherwise, and which has assumed in writing or by operation of law its obligations under this Agreement. Any attempted assignment in violation of the provisions of this Section will be void. (ii)All rights and licenses granted to a party under this Agreement shall apply to that party's Subsidiaries so long as such Subsidiaries agree to comply fully with the obligations imposed on that party by this Agreement and so long as such Subsidiary continues to be a Subsidiary of a party. Each party shall remain fully liable for the actions and omissions of its Subsidiaries relative to rights granted under this Section 11(f). (f) NOTICE. All notices, demands, requests or other communications that may be or are required to be given, served or sent by any party pursuant to this Agreement will be in writing (and shall be deemed to have been duly given upon receipt), will reference this Agreement and shall be mailed by first class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by express courier or hand delivery or facsimile transmission, addressed to the address below the party's name on the signature page of this Agreement. Each party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice that is mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt or the affidavit of messenger or courier being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. (g) SEVERABILITY. If any term, provision, covenant or condition of this Agreement is held invalid or unenforceable for any reason, the remainder of the provisions will continue in full force and effect as if this Agreement had been executed with the invalid portion eliminated. The parties further agree to substitute for the invalid provision a valid provision that most closely approximates the intent and economic effect of the invalid provision. (h) INDEPENDENT CONTRACTORS. Each party acknowledges that the parties to this Agreement are independent contractors and that it will not, except in accordance with this Agreement, represent itself as an agent or legal representative of the other. (i) EXPORT CONTROL. Each party agrees that it will comply with the provisions of United States laws restricting export of any software, technical data or other information or materials, including without limitation the United States Export Administration Act and regulations thereunder, and will not export any software, technical data or other information or materials to any country in violation thereof. This clause shall survive termination or cancellation of this Agreement. (j) HEADINGS. The headings provided in this Agreement are for convenience only and will not be used in interpreting or construing this Agreement. 16 (j) NONSOLICITATION. During the term of this Agreement and for one year thereafter, (i) neither party shall solicit the employees or contractors of the other for employment or consulting and shall promptly advise the other if approached by same for such purposes; and (ii) Media100 agrees not to distribute the Bundled Products through any distributor of Supplier's as of the date of this Agreement without Supplier's prior written approval, which approval will not be unreasonably withheld.. (k) ATTORNEYS' FEES. In the event of any dispute in connection with this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' and experts' charges, in addition to such other relief as the court may award. Executed as of the date first above written. SUPPLIER: Media 100: DIGITAL ORIGIN, INC. MEDIA 100 INC. By By ---------------------- --------------------------- Name: Name: Title: Title: Address: 460 East Middlefield Road Address: 290 Donald Lynch Boulevard Mountain View CA 94043 Marlboro, MA 01752-4748 17 EXHIBIT A SUPPLIER PRODUCT, ROYALTIES 1. SUPPLIER PRODUCT: The Agreement to which this is appended applies to the following Supplier Product: a. IntroDV 1.0 For Windows, Software Only Version. The Digital Origin Software content of retail SKU 0752 (see company website for complete description). Specifically excludes all other bundled products from DO or third parties, specifically excluded hardware, cables, and other miscellaneous contained in that SKU. 2. ROYALTY/LICENSE FEES: a. DEVELOPMENT PAYMENTS Payment of $500,000 upon the earlier to occur of February 1, 2000 and Acceptance of all Deliverables of the Supplier Product (in accordance with Exhibit B). b. ONGOING ROYALTIES 1. Payment of $250,000 advance pre-paid royalty upon execution of this Agreement, considered to be the minimum royalty payment for the quarter ending February 29, 2000. 2. Royalty of 5% of Net Sales of Bundled Product each quarter. Net Sales means gross receipts from the license or sale of the Bundled Products less applicable sales and use taxes, shipping, insurance and reasonable returns. 3. Cumulative minimum payment of $250,000 per quarter for the first 14 quarters of the Agreement, such last payment being for the quarter ended May 31, 2003. "Cumulative" means that if in a particular quarter, (a) the cumulative payments under this Agreement under clause (1) and (2) in previous quarters, plus the amount to be paid based on the foregoing 5% royalty, is less than (b) $250,000 multiplied by the total number of elapsed quarters, then the payment due in such quarter is such difference, up to $250,000.) The $500,000 payment made pursuant to clause (a) shall not be considered in making the calculation of "cumulative", but shall be treated as an advance against royalties for the payments for the quarters ended August 31, 2003, and November 30, 2003 payments under clause (b), such that only to the extent the 5% royalty set for in clause (b) above exceeds such amount would Media 100 be obligated to make payments under clause (b) above for such quarters. (Note: because of the $250,000 payment on execution, no further minimum royalty payment is due for the quarter ended February 29, 2000; payment with respect to such 18 quarter shall only be made if the amount payable under the 5% royalty exceeds that amount.). c. TREATMENT OF TERMINATION 1. In the event of termination of the Agreement prior to February 28, 2001 by Media 100 for cause or convenience pursuant to Section 10, the $500,000 payment made pursuant to clause (a) above shall be promptly refunded by Supplier to Media 100. However, payments made under clause (b) above shall not be refundable. 2. In the event of termination of the Agreement by Media 100 pursuant to Section 10 prior to the end of a quarter which quarter is after the quarter ended February 28, 2001, Media 100 shall pay to Supplier in accordance with the Agreement the payment for such quarter in accordance with the provisions of (b) above. If Media 100 terminates the Agreement in or prior to the quarter ended February 28, 2001, or if, pursuant to Section 10(e) above, Media 100 shall provide residual post-termination copies of materials in a quarter following any quarter in which the Agreement is terminated, it shall pay to Supplier solely the 5% royalty specified in clause (b)(2) above with respect to such sales, without any obligation of a minimum royalty. For avoidance of doubt, in no case will Media 100 have liability for any minimum royalties following termination of the Agreement other than as specifically stated in the first sentence of this clause (c)(2). 19 EXHIBIT B MILESTONES SCHEDULE [to be completed after execution, in accordance with Section 2(b)] DESCRIPTION OF MILESTONE DUE DATE 20 EXHIBIT C PRODUCT SPECIFICATIONS [to be completed after execution, in accordance with Section 2(b)] 21 EXHIBIT D MAINTENANCE AND SUPPORT Supplier shall not be responsible for first-level support (i.e., direct support of customer questions) of products incorporating the Supplier Product. However, during the term of this Agreement, and for a period of one (1) year thereafter but not longer than Supplier provides general support for the Supplier Product or if Supplier terminates the Agreement pursuant to Section 10(b), Supplier shall provide to Media 100 second level support services, consistent with the support obligations described below with respect to the Supplier Product including, without limitation, identification of defective Source Code and Object Code and providing corrections, Workarounds and/or patches to correct defects or errors in such Code. During the term of this Agreement and for one year thereafter, Media 100 shall provide first-level customer support of products incorporating the Supplier Product on the same basis as the Restricted Streaming Products or other comparable products that do not incorporate the Supplier Product. TECHNICAL SUPPORT. While obligated to provide second level support as provided above, in addition to the second level support services described above, (i) Supplier shall appoint a technical contact to whom Media 100 may address all technical questions relating to Supplier technologies; (ii) the parties shall determine a mutually acceptable procedure by which Media 100 shall direct its technical questions to the appropriate Supplier technical contact; and (iii) Supplier shall promptly answer all technical questions asked by Media 100 relative to the Supplier Product. TRAINING OF MEDIA 100. Supplier shall provide training of up to two members of Media 100's technical and marketing staff on the following topics: IntroDV. Training of Media 100 personnel will be provided by Supplier at Mountain View CA or other mutually agreeable location. The training duration is estimated at 2 days. Media 100 is responsible for Media 100 personnel's out of pocket expenses including travel, room and board. Supplier is responsible for the facilities, training materials and equipment. There are no tuition charges. The course will be scheduled at a mutually agreed upon time. UPGRADES, UPDATES, ERROR CORRECTIONS AND ENHANCEMENTS. Supplier will include Media 100 in its alpha programs for any Updates to the technology underlying the Supplier Product (the "Technology") released during the term of this Agreement, and will provide Media 100 with the production version of such upgrades, subject to Section 2(a) of the Agreement. Beta testing will be managed by Media 100, with support from Supplier. Media 100 may, but is not required to, incorporate any such Updates in a product. To enable Media 100 to provide standard support, while Supplier provides second level support as provided above, Supplier shall provide to Media 100, at no cost, all pertinent System Documentation for the Supplier Product and any new releases thereof which is reasonably necessary for the purpose of providing standard software support for the Supplier Product. Supplier shall also provide to Media 100, at no cost and on an as needed basis, timely qualified technical support by phone during Supplier's Business 22 Hours to answer questions from a designated Media 100 representative consistent with the following support obligations. Errors may be reported, on a 24 hours per day, 365 day per year basis, by electronic mail, voice mail, fax or telephonic recording capability. While Supplier is obligated to provide second level support as provided above, Supplier will use reasonable commercial efforts to resolve each significant Error by providing either a reasonable work around, an object code patch, or a specific action plan for how Supplier will address the problem and an estimate of how long it will take to rectify the defect. Notwithstanding the foregoing, Supplier has no obligation to perform services in connection with (i) Errors resolution from hardware or software not supplied by Supplier or (ii) which occur in the Supplier Product release which is not the then-current release. EX-23 5 EXHIBIT 23 MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report set forth on page F-2 of this Form 10-K, into the Company's previously filed Registration Statements on Form S-8, File Nos. 33-00346, 33-06609, 33-50692, 33-59937, 333-24139 and 333-52139. ARTHUR ANDERSEN LLP Boston, Massachusetts February 25, 2000 EX-27 6 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET ON FORM 10-K FOR THE PERIOD ENDED NOVEMBER 30, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS AS FILED ON FORM 10-K FOR THE PERIOD ENDED NOVEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR NOV-30-1999 DEC-01-1998 NOV-30-1999 10,231 18,169 6,783 402 1,478 37,344 15,191 8,682 45,843 14,594 0 0 0 85 31,164 45,843 51,479 51,479 19,704 19,704 32,592 154 0 570 0 570 0 0 0 570 0.07 0.06
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