-----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, TWqgGzyCcHhy9UeJjuONFELnj8pwZs6tkpEA5MsjIqMXTBzuQRjoqug9jxpr4x0D sY80XoDk5SaOENokebD72g== 0000912057-96-002368.txt : 20030213 0000912057-96-002368.hdr.sgml : 20030213 19960213173422 ACCESSION NUMBER: 0000912057-96-002368 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 DATE AS OF CHANGE: 19960221 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIUS INC CENTRAL INDEX KEY: 0000805574 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 680101300 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-35769 FILM NUMBER: 96517808 BUSINESS ADDRESS: STREET 1: 215 MOFFETT PARK DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-1374 BUSINESS PHONE: 4085416100 MAIL ADDRESS: STREET 1: RADIUS INC STREET 2: 215 MOFFETT PARK DR CITY: SUNNYVALE STATE: CA ZIP: 94089-1374 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 30, 1995. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13(D) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . --------- --------- COMMISSION FILE NUMBER: 0-18690 RADIUS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 68-0101300 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 215 MOFFETT PARK DRIVE SUNNYVALE, CA 94089 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (408) 541-6100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ---------------------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON FEBRUARY 10, 1996 WAS 17,401,611. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This report consists of 20 sequentially numbered pages. The exhibit index on this report is located on sequentially numbered page 19. RADIUS INC. INDEX PART I. FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1. Financial Statements Consolidated Balance Sheets at December 31, 1995 and September 30, 1995 3 Consolidated Statements of Operations for the Three Months Ended December 31, 1995 and 1994 4 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 1995 and 1994 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 18 - ---------- -2- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RADIUS INC. CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 31, SEPTEMBER 30, 1995 1995 (1) ------------ ------------- (unaudited) ASSETS: Current assets: Cash $ 6,990 $ 4,760 Accounts receivable, net 25,308 61,644 Inventories 12,564 15,071 Prepaid expenses and other current assets 12,091 2,336 Income tax receivable 517 519 -------- -------- Total current assets 57,470 84,330 Property and equipment, net 2,572 3,031 Deposits and other assets 512 517 -------- -------- $ 60,554 $ 87,878 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency) Current liabilities: Accounts payable $42,886 $73,098 Accrued payroll and related expenses 6,083 5,815 Accrued warranty costs 2,510 3,170 Other accrued liabilities 11,231 11,920 Accrued income taxes 1,636 1,665 Accrued restructuring and other charges 16,980 17,013 Short-term borrowings 43,795 29,489 Obligation under capital leases - current portion 1,524 1,494 -------- -------- Total current liabilities 126,645 143,664 Obligations under capital leases - noncurrent portion 831 1,331 Commitments and contingencies Shareholders' equity: (Net capital deficiency) Common stock 117,127 113,791 Common stock to be issued 8,695 12,022 Accumulated deficit (192,776) (182,993) Accumulated translation adjustment 32 63 -------- -------- Total shareholders' equity (Net capital deficiency) (66,922) (57,117) -------- -------- $60,554 $87,878 -------- -------- -------- --------
(1) The balance sheet at September 30, 1995 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. -3- RADIUS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data; unaudited)
THREE MONTHS ENDED DECEMBER 31, ------------------ 1995 1994 ---- ---- Net sales $32,652 $79,235 Cost of sales 28,607 56,758 ------- ------- Gross profit 4,045 22,477 ------- ------- Operating expenses: Research and development 3,630 4,118 Selling, general and administrative 9,961 15,882 ------- ------- Total operating expenses 13,591 20,000 ------- ------- Income (loss) from operations (9,546) 2,477 Other expense (46) (920) Settlement of litigation - (12,422) ------- ------- Loss before income taxes (9,592) (10,865) Provision for income taxes 191 156 ------- ------- Net loss $(9,783) $(11,021) ------- ------- ------- ------- Loss per share: Net loss per share $ (0.57) $ (0.78) ------- ------- ------- ------- Common and common equivalent shares used 17,248 14,215 in computing net loss per share ------- ------- ------- -------
See accompanying notes. -4- RADIUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (in thousands, unaudited)
THREE MONTHS ENDED DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- Cash flows from operating activities: Net loss $ (9,783) $ (11,021) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 654 688 Common stock to be issued - 12,022 (Increase) decrease in assets: Accounts receivable 36,352 (1,425) Allowance for doubtful accounts (47) 283 Inventories 2,507 (10,620) Prepaid expenses and other current assets (9,755) (16) Income tax receivable 2 - Deferred income taxes - - Increase (decrease) in liabilities: Accounts payable (30,212) 8,894 Accrued payroll and related expenses 268 499 Accrued warranty costs (660) 15 Other accrued liabilities (689) 3,748 Accrued restructuring costs (33) (7,165) Accrued income taxes (29) 103 --------- --------- Net cash used in operating activities (11,425) (3,995) Cash flows from investing activities: Capital expenditures (195) (955) Deposits and other assets 5 (270) --------- --------- Net cash used in investing activities (190) (1,225) Cash flows from financing activities: Principal borrowings(payments) of short-term borrowings, net 14,306 (17) Principal payments of long-term debt and capital leases (470) (604) Issuance of common stock 9 299 --------- --------- Net cash provided by (used in) financing activities 13,845 (322) --------- --------- Net increase (decrease) in cash and cash equivalents 2,230 (5,542) Cash and cash equivalents, beginning of period 4,760 15,997 --------- --------- Cash and cash equivalents, end of period $ 6,990 $ 10,455 --------- --------- --------- --------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest paid $ 934 $ 389 --------- --------- --------- --------- Income taxes paid $ 218 $ - --------- --------- --------- ---------
See accompanying notes. -5- RADIUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The consolidated financial statements of Radius Inc. ("Radius") as of December 31, 1995 and for the three months ended December 31, 1995 and 1994 are unaudited. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial position and results of operations for the interim periods presented. These consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1995. During the first quarter of its 1995 fiscal year, the Company changed its fiscal year end from the Sunday closest to September 30 to the Friday closest to September 30. During the second quarter of its 1995 fiscal year, the Company changed its fiscal year end to the Saturday closest to September 30 for operational efficiency purposes. For clarity of presentation, all fiscal periods are reported as ending on a calendar month end. NOTE 2. INVENTORIES Inventories, stated at the lower of cost or market, consist of (in thousands):
DECEMBER 31, SEPTEMBER 30, 1995 1995 ------------ ------------- (unaudited) Raw materials $ 1,927 $ 1,559 Work in process 1,107 2,258 Finished goods 9,530 11,254 -------- -------- $ 12,564 $ 15,071 -------- -------- -------- --------
NOTE 3. COMMITMENTS AND CONTINGENCIES (a) In November 1995, Electronics for Imaging, Inc. ("EFI") filed a suit in the United States District Court in the Northern District of California alleging that the Company infringes a patent allegedly owned by EFI. Although the complaint does not specify which of the Company's products allegedly infringe the patent, subsequent pleading indicates that EFI alleges that the Company's Color Server products allegedly infringe. As of December 31, 1995, the Company's Color Server products were material to its business. In January 1996, the Company completed its divestiture of the Color Server Group. The Company has certain indemnification obligations relating to this litigation. See Item 5 Other Information - Color Server Group Divestiture. The Company has filed an answer denying all material allegations, and has filed amended counterclaims against EFI alleging causes of action for interference with prospective economic benefit, antitrust violations, and unfair business practices. EFI has filed a motion to dismiss or sever the Company's amended counterclaims. The Company believes it has meritorious defenses to EFI's claims and is defending them vigorously. In addition, the Company believes it may have indemnification rights with respect to EFI's claims. In the opinion of management, based on the facts known at this time, the eventual outcome of this case is unlikely to have a material adverse effect on the results of operations or financial position of the Company. (b) The Company was named as one of approximately 42 defendants in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara County, case no. CV751685, filed August 14, 1995. Radius was named as one of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al., Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case purport to represent alleged classes of -6- similarly situated persons and/or the general public, and allege that the defendants falsely advertise that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995, and was served with the Maizes complaint on January 5, 1996. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and it is anticipated that the coordinated proceedings will be held in Superior Court of California, San Francisco County. Discovery proceedings have not yet begun in either case. In the opinion of management, based on the facts known at this time, the eventual outcome of these cases is unlikely to have a material adverse effect on the results of operations or financial position of the Company. NOTE 4. BUSINESS DIVESTITURES COLOR SERVER GROUP DIVESTITURE In December 1995, the Company signed a definitive agreement pursuant to which the Company will sell its Color Server Group ("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned subsidiary of Splash Technology Holdings, Inc. (the "Parent"), a corporation formed by various investment entities associated with Summit Partners. The Company will receive approximately $21,945,175 in cash (subject to certain post-closing adjustments) and 4,282 shares of the Parent's 6% Series B Redeemable and Convertible Preferred Stock (the "Series B Preferred Stock"). The shares of Series B Preferred Stock will be convertible by the Company at any time into approximately 19.9% of the Parent's common stock outstanding as of the closing of the transaction. The shares of Series B Preferred Stock also will be redeemable by the Parent at any time, and will be subject to mandatory redemption beginning on the sixth anniversary of issuance, in each case at a redemption price of $1,000 per share plus accrued dividends. The transaction, as subsequently amended, closed in January 1996. The Company retains certain indemnification obligations in connection with the patent lawsuit brought by Electronics for Imaging, Inc. See Item 1 "Legal Proceedings". The net proceeds of the Color Server Group transaction were paid to Silicon Valley Bank ("SVB"), in order to repay the Company's indebtedness to SVB, and to IBM Credit Corp. ("ICC"), in order to reduce the Company's outstanding indebtedness to ICC. PORTRAIT DISPLAY LABS In December 1995, the Company signed a series of agreements with Portrait Display Labs, Inc. ("PDL"). The agreements assigned the Company's pivoting technology to PDL and canceled PDL's on-going royalty obligation to the Company under an existing license agreement in exchange for a one-time cash payment. PDL also granted the Company a limited license back to the pivoting technology. Under these agreements, PDL also settled its outstanding receivable to the Company by paying the Company $500,000 in cash and issuing to the Company 214,286 shares of PDL's Common Stock. These transactions closed in January 1996. DISPLAY TECHNOLOGIES ELECTROHOME INC. In December 1995, the Company signed a Business Purchase Agreement and an Asset Purchase and License Agreement with Display Technologies Electrohome Inc. ("DTE"). Pursuant to the agreements, DTE purchased Radius' monochrome display monitor business and certain assets related thereto, for approximately $200,000 in cash and cancellation of $2.5 million of the Company's indebtedness to DTE. In addition, DTE and Radius canceled outstanding contracts relating to DTE's manufacture and sale of monochrome display monitors to Radius. UMAX DATA SYSTEMS, INC. In January 1996, the Company signed a definitive agreement pursuant to which the Company will sell its MacOS compatible systems business to UMAX Computer Corporation ("UCC"), a company formed by UMAX Data Systems, Inc. ("UMAX"). The Company will receive approximately $2,250,000 in cash and debt relief, and 1,492,500 shares of UCC's Common Stock, representing approximately 19.9% of UCC's then outstanding shares of Common Stock. After the closing, the Company has a right to receive royalties based on UCC's net revenues related to the MacOS compatible systems business. The closing of this transaction is subject to certain conditions. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1995. All assumptions, anticipations, and expectations contained herein are forward- looking statements that involve uncertainty and risk. Actual results could differ materially from those projected in such forward-looking statements. Each forward-looking statement should be read in conjunction with the entire consolidated interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report, with the information contained in Item 2, including, but not limited to, Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors That May Affect Future Results, and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1995, including, but not limited to, Management's Discussion and Analysis of Financial Condition -- Certain Factors That May Affect the Company's Future Results of Operations, and Business Divestitures. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain operational data as a percentage of net sales (may not add due to rounding).
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 1995 1994 ------ ------ Net sales 100.0% 100.0% Cost of sales 87.6 71.6 ----- ----- Gross profit 12.4 28.4 ----- ----- Operating expenses: Research and development 11.1 5.2 Selling, general and administrative 30.5 20.0 ----- ----- Total operating expenses 41.6 25.2 ----- ----- Income (loss) from operations (29.2) 3.1 Other expense (0.1) (1.2) Settlement of litigation - (15.7) ----- ----- Loss before income taxes (29.4) (13.7) Provision for income taxes 0.6 0.2 ----- ----- Net loss (30.0)% (13.9)% ----- ----- ----- -----
NET SALES The Company's net sales decreased 58.8% to $32.7 million in the first quarter of fiscal 1996 from $79.2 million for the same quarter in fiscal 1995. This decline was primarily due to the Company's efforts to refocus its business which included exiting markets for high-volume low-margin displays and reduced sales of the Company's video products caused by Apple's shift from Nubus to PCI Bus computers. The Company anticipates lower revenue from its video product line in the future, at least until the Company introduces new products now under development including those which function on PCI Bus computers. These declines were partially offset by an increase in net sales from the Company's color server products. As a result of the sale by the Company of its Color Server Group (as described more fully in the Company's Annual Report on Form 10-K, Management's Discussion and Analysis of Financial Condition -- "Certain Factors That May Affect the Company's Future Results of Operations, and Business Divestitures," and below in Item 5 "Other Information"), revenue from the Company's color server products will not continue. Net sales of the Company's graphics cards was essentially unchanged despite the transition from Nubus to PCI Bus. -8- One customer, Ingram Mirco, accounted for 37.5% and 10% of the Company's net sales for the first quarter of fiscal 1996 and 1995, respectively. The Company's export sales increased to 63.4% of net sales in first quarter of fiscal 1996 from 29.2% of net sales in the same quarter of fiscal 1995 primarily due to increased sales in the Asia-Pacific sales region combined with decreased sales in the North America sales region. The Company anticipates a continued significant percentage of net sales will be attributable to the Asia-Pacific sales region even after the divestiture of the Company's Color Server Group. Export sales are subject to the normal risks associated with doing business in foreign countries such as currency fluctuations, longer payment cycles, greater difficulties in accounts receivable collection, export controls and other government regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. The Company hedges substantially all of its trade receivables denominated in foreign currency through the use of foreign currency forward exchange contracts. Gains and losses associated with currency rate changes on forward contracts are recognized in the Company's consolidated statements of operations and were not material in the first quarter of fiscal 1996 or 1995. GROSS PROFIT The Company's gross profit margin was 12.4% and 28.4% for the first quarters of fiscal 1996 and 1995, respectively. The decline in gross margin was primarily due to pricing pressure and greater competition in PCI Bus products than in Nubus products, and price declines on lower margin displays related to the Company's exit from that business. The Company anticipates continued price reductions and margin pressure within its industry. The Company is responding to these trends by focusing on higher margin products, taking further steps to reduce product costs and controlling expenses. There can be no assurance that the Company's gross margins will recover or remain at current levels. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased to $3.6 million or 11.1% of net sales in the first quarter of fiscal 1996 from $4.1 million or 5.2% of net sales in the same quarter of fiscal 1995. The Company decreased its research and development expenses primarily by reducing expenses related to headcount resulting from the Company's efforts to refocus its business. The increase in research and development expenses expressed as a percentage of net sales was primarily attributed to the decrease in net sales and the Company's refocusing on higher-end products, rather than high-volume lower-margin products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased to $10.0 million or 30.5% of net sales in the first quarter of fiscal 1996 from $15.9 million or 20.0% of net sales in the same quarter of fiscal 1995. The Company decreased its selling, general and administrative expenses primarily by reducing expenses related to headcount resulting from the Company's efforts to refocus its business. The increase in selling, general and administrative expenses expressed as a percentage of net sales was primarily attributed to the decrease in net sales and the Company's refocusing on higher-end products, rather than high-volume lower-margin products. RESTRUCTURING, MERGER AND OTHER CHARGES During fiscal 1994 and 1995, two restructuring and other charges were recorded. RADIUS FISCAL 1994 MERGER RELATED RESTRUCTURING AND OTHER CHARGES In the fourth quarter of fiscal 1994, the Company recorded charges of $43.4 million in connection with the Merger of Radius and SuperMac. These charges include the discontinuance of duplicative product lines and related assets; elimination of duplicative facilities, property and equipment and other assets; and personnel severance costs as well as transaction fees and costs incidental to the merger. The charges (in thousands) are included in: net sales ($3,095); cost of sales ($25,270); research and development ($4,331); and selling, general and administrative expenses ($10,711). The elements of the total charge as of December 31, 1995 are as follows (in thousands): -9-
Representing --------------------------------------------- Cash Outlays ------------------------ Asset Provision Write-Downs Completed Future Adjust inventory levels $22,296 $19,200 $ 3,096 $ - Excess facilities 2,790 400 2,239 151 Revision of the operations business model 9,061 7,078 1,268 715 Employee severance 6,311 - 6,311 - Merger related costs 2,949 - 2,949 - ------- ------- ------- ------- Total charges $43,407 $26,678 $15,863 $ 866
The adjustment of inventory levels reflects the discontinuance of duplicative product lines. The provision for excess facility costs represents the write-off of leaseholds and sublease costs of Radius' previous headquarters, the consolidation into one main headquarters and the consolidation of sales offices. The revision of the operations business model reflects the reorganization of the combined Company's manufacturing operations to mirror Radius' manufacturing reorganization in 1993. This reorganization was designed to outsource a number of functions that previously were performed internally, reduce product costs through increased efficiencies and lower overhead, and focus the Company on a limited number of products. Employee severance costs are related to employees or temporary employees who were released due to the revised business model. Approximately 250 employees were terminated in connection with the Merger. The provision for merger related costs is for the costs associated with the Merger transaction, such as legal, investment banking and accounting fees. The Company has spent $15.9 million of cash for restructuring through December 31, 1995. The Company expects to have substantially completed the restructuring by September 1996. During fiscal 1995, approximately $2.1 million of merger related restructuring reserves were reversed and recorded as an expense reduction due to changes in estimated requirements. RADIUS FISCAL 1995 RESTRUCTURING AND OTHER CHARGES In September 1995, Radius recorded charges of $57.9 million in connection with the Company's efforts to restructure its operations by refocusing its business on the color publishing and multimedia markets. The charges primarily included a writedown of inventory and other assets. Additionally, the charges included expenses related to the cancellation of open purchase orders, excess facilities and employee severance. The Company continues to record charges relating to its restructuring during the quarter ended December 31, 1995, and the charges included expenses related to employee severance of $448,000. The Charges (in thousands) are included in cost of sales ($47,004), and selling, general and administrative expense ($10,861). The elements of the total charge as of December 31, 1995 are as follows (in thousands):
Representing --------------------------------------------- Cash Outlays ------------ Asset Provision Write-Downs Completed Future Adjust inventory levels $ 33,138 $ 32,300 $ - $ 838 Excess facilities 2,004 404 - 1,600 Cancellation fees and asset write-offs 19,061 5,196 - 13,865 Employee severance 3,662 - 448 3,214 --------- --------- -------- --------- Total charges $ 57,865 $ 37,900 $ 448 $ 19,517
The adjustment of inventory levels reflects the discontinuance of several product lines. The provision for excess facility costs represent the write-off of leasehold improvements and the costs associated with anticipated reductions in facilities. The cancellation fees and asset write-offs reflect the Company's decision to refocus its efforts on providing solutions for the color publishing and multimedia markets. Employee severance costs are related to employees or temporary employees who have been or will be released due to the restructuring. During the quarter ended December 31, 1995, approximately 200 positions had been eliminated in connection with the restructuring. The Company had spent approximately $448,000 of cash for this restructuring during the quarter ended December 31, 1995. As of December 31, 1995, the Company had cash of $7.0 million. See the Company's Annual Report on Form 10-K, and "Management's Business Recovery Plans" at Note 1 to the Consolidated Financial Statements contained therein. The Company expects to have substantially completed the restructuring by September 1996. -10- LITIGATION SETTLEMENT In September 1992, the Company and certain of its officers and directors were named as defendants in a securities class action litigation brought in the United States District Court for the Northern District of California that sought unspecified damages, prejudgment and post judgment interest, attorneys' fees, expert witness fees and costs, and equitable relief. In July 1994, SuperMac Technology, Inc. ("SuperMac") and certain of its officers and directors, several venture capital firms and several of the underwriters of SuperMac's May 1992 initial public offering and its February 1993 secondary offering were named as defendants in a class action litigation brought in the same court that sought unspecified damages, prejudgment and post judgment interest, attorneys' fees, experts' fees and costs, and equitable relief (including the imposition of a constructive trust on the proceeds of defendants' trading activities). In June 1995, the Court approved the settlement of both litigations and entered a Final Judgment and Order of Dismissal. Under the settlement of the litigation brought in 1992 against the Company, the Company's insurance carrier paid $3.7 million in cash and the Company is to issue a total of 128,695 shares of its Common Stock to a class action settlement fund. In the settlement of the litigation brought in 1994 against SuperMac, the Company paid $250,000 in cash and is to issue into a class action settlement fund a total of 707,609 shares of its Common Stock. The number of shares to be issued by the Company will increase by up to 100,000 if the price of the Company's Common Stock is below $12 per share during the 60-day period following the initial issuance of shares. In connection with these settlements, the financial statements for the first quarter of fiscal 1995 included a charge to other income of $12.4 million, reflecting settlement costs not covered by insurance as well as related legal fees, resulting in a reduction in net income from $1.4 million to a net loss of $11.0 million or $0.78 per share for the quarter. The settlements will result in dilution to existing shareholders of the Company ranging from 4.8% to 5.4% depending on the number of shares of Radius Common Stock issued. The Company had 17,401,094 weighted average common shares outstanding as of December 31, 1995. As of December 31, 1995, the Company had issued 259,130 shares of its Common Stock due to the settlements. The Company anticipates that the remainder will be issued prior to June 30, 1996. See Note 3 of Notes to Consolidated Financial Statements contained herein. PROVISION FOR INCOME TAXES The Company recorded a tax provision of $191,000 for the first quarter of fiscal 1996 as compared to a provision for taxes for the first quarter of fiscal 1995 of $156,000. The tax provision is primarily comprised of foreign taxes. FASB Statement 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company's valuation allowance reduced the deferred tax asset to the amount realizable. The Company has provided a full valuation allowance against its net deferred tax assets due to uncertainties surrounding their realization. Due to the net losses reported in the prior three years and as a result of the material changes in operations reported in its 1995 fiscal fourth quarter, predictability of earnings in future periods is uncertain. The Company will evaluate the realizability of the deferred tax asset on a quarterly basis. FINANCIAL CONDITION The Company's cash increased approximately $2.2 million in the first quarter of fiscal 1996 to $7.0 million at December 31, 1995 as compared to the ending balance at September 30, 1995. This increase was primarily due to the revised terms of the Inventory and Working Capital Agreement, as recently amended, with IBM Credit Corp. Approximately $0.9 million of the $7.0 million of cash and cash equivalents available at December 31, 1995 was restricted under various letters of credit. At December 31, 1995, the Company's principal sources of liquidity included approximately $30.0 million in inventory and working capital financing (and an additional $20.0 million provided to finance the manufacturing of the Company's MacOS compatible computers) under an agreement with IBM Credit Corporation (the "ICC Agreement"), all of which was fully utilized. At December 31, 1995, approximately $40.1 million was outstanding to IBM Credit Corp., which was subsequently reduced by approximately $16.6 million in connection with the sale of the Company's Color Server Group to -11- Splash Merger Company, Inc. and the sale of the Company's pivoting technology to Portrait Display Labs, Inc. in the first calendar quarter of 1996. In addition, at December 31, 1995, the Company had a $5.0 million credit arrangement with Silicon Valley Bank ("SVB") which was partially utilized as of that date. Additionally, the Company's Japanese subsidiary has a revolving line of credit with a bank in Japan under which $3.0 million has been utilized as of December 31, 1995. As of December 31, 1995, IBM Credit Corp. had waived defaults of the Company with respect to its contractual obligations and financial covenants under the ICC Agreement, pursuant to an amendment to the ICC Agreement executed in December 1995 (the "ICC Amendment") which expires March 31, 1995. The ICC Amendment, among other things, also provides that IBM Credit Corp. will extend advances to the Company in an amount up to 90% of the Company's collections and fund the Company's payroll in the event that collections are insufficient to permit the advances needed for this purpose. Such advances and payroll funding, however, may be suspended by IBM Credit Corp. (i) immediately following a default of the ICC Amendment, and (ii) following thirty days notice in the event of any default of the underlying ICC Agreement. In the first calendar quarter of 1996, the Company was not in compliance with all its contractual obligations and financial covenants under its credit arrangement with ICC. As of December 31, 1995, the Company was not in compliance with all of its contractual obligations and financial covenants under its credit arrangement with SVB. As of December 31, 1995 approximately $700,000 was outstanding under this credit arrangement, all of which the Company repaid SVB during the first calendar quarter of 1996 from the proceeds of the sale of the Company's Color Server Group. The Company's limited cash resources have restricted the Company's ability to purchase inventory, which in turn has limited its ability to manufacture and sell products and has resulted in additional costs for expedited deliveries. The Company also is delinquent in its accounts payable as payments to vendors are not being made in accordance with vendor terms. Several vendors have initiated legal action to collect allegedly delinquent accounts and at least two vendors have threatened the Company with institution of insolvency and/or bankruptcy proceedings. The adverse effect on the Company's results of operations due to its limited cash resources can be expected to continue until such time as the Company is able to return to profitability, or generate additional cash from other sources. There can be no assurance that the Company will be able to do so. Additional funds will be needed to finance the Company's development plans and for other purposes, and the Company is now investigating possible financing opportunities. There can be no assurance that additional financing will be available when needed or, if available, that the terms of such financing will not adversely affect the Company's results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, the following: NET CAPITAL DEFICIENCY; CREDITOR DEMANDS AND LITIGATION As of December 31, 1995, the Company had total assets of approximately $60.6 million and total current liabilities of approximately $126.6 million. The Company is delinquent in its accounts payable as payments to certain vendors are not being made in accordance with vendor terms. In addition to the matters discussed in Part II below under "Item 1. Legal Proceedings," several vendors have initiated legal action to collect allegedly delinquent accounts. At least two vendors have orally threatened the Company with initiation of insolvency or bankruptcy proceedings. The Company has initiated the process of establishing a creditors' committee in an effort to work toward resolving the capital deficiency and creditor litigation issues outside of formal insolvency or bankruptcy proceedings. The Company anticipates formally proposing a plan under which unsecured creditors' claims will be exchanged for equity in the Company and/or in certain businesses or holdings of the Company. The Company has incurred and expects to continue to incur significant legal expense in responding to creditor demands, litigation, and the workout process. There can be no assurance that the Company will be able to reach accommodation -12- with its secured creditors and its unsecured creditors outside of bankruptcy, or that the terms of any accommodation reached will not dilute shareholder value or adversely affect the Company's result of operations. There can be no assurance that the Company will not be placed into an involuntary bankruptcy by its creditors, or that, if bankruptcy proceedings are initiated, they will not result in the liquidation of the Company or will not otherwise materially and adversely affect the Company's result of operations. Absent reaching an agreement with its creditors, the Company will require additional funding to repay its accounts payable and other indebtedness, in addition to funding its operating and product development activities. The company is investigating possible financing alternatives, although there can be no assurance that additional financing will be available when needed or, if available, that the terms of such financing will not adversely affect the Company's results of operations. CONTINUING OPERATING LOSSES The Company experienced net operating losses in the fiscal quarter ended December 31, 1995, and in each of the fiscal years ended September 30, 1993, 1994 and 1995. The Company's ability to continue operations will depend, initially, upon the Company's success in negotiating accommodations with creditors; assuming such accommodations are reached, the Company's ability to achieve and sustain profitable operations will depend upon a number of other factors, including the Company's ability to control costs; to develop innovative and cost-competitive new products and to bring those products to market in a timely manner; the continual commercial acceptance of Apple computers and the rate and mix of Apple computers and related products sold; competitive factors such as new product introductions, product enhancements and aggressive marketing and pricing practices; general economic conditions; and other factors. The Company has faced and expects to continue to face increased competition in graphic cards as a result of Apple's transition of its product line to the PCI Bus. In addition, the Company anticipates significantly lower revenue and gross profit from its digital video products primarily due to lower than anticipated sell through rates for Radius Telecast and the delayed debut of PCI Bus compatible video products. For these and other reasons, there can be no assurance that the Company will be able to achieve profitability in the near term. FLUCTUATIONS IN OPERATING RESULTS The Company has experienced substantial fluctuations in operating results. The Company's customers generally order on an as-needed basis, and the Company has historically operated with relatively small backlogs. Quarterly sales and operating results depend heavily on the volume and timing of bookings received during the quarter, which are difficult to forecast. A substantial portion of the Company's revenues are derived from sales made late in each quarter, which increases the difficulty in forecasting sales accurately. Recently, shortages of available cash have delayed the Company's receipt of products from suppliers and increased shipping and other costs. The Company recognizes sales upon shipment of product, and allowances are recorded for estimated uncollectable amounts, returns, credits and similar costs, including product warranties and price protection. Due to the inherent uncertainty of such estimates, there can be no assurance that the Company's forecasts regarding bookings, collections, rates of return, credits and related matters will be accurate. A significant portion of the operating expenses of the Company are relatively fixed in nature, and planned expenditures are based primarily on sales forecasts which, as indicated above, are uncertain. Any inability on the part of the Company to adjust spending quickly enough to compensate for any failure to meet sales forecasts or to receive anticipated collections, or any unexpected increase in product returns or other costs, could also have an adverse impact on the Company's operating results. DEPENDENCE ON AND COMPETITION WITH APPLE Historically, substantially all of the Company's products have been designed for and sold to users of Apple personal computers, and it is expected that sales of products for such computers will continue to represent substantially all of the net sales of the Company for the foreseeable future. The Company's operating results would be adversely affected if Apple should lose market share, if Macintosh sales were to decline or if other developments were to adversely affect Apple's business. Furthermore, any difficulty that may be experienced by Apple in the development, manufacturing, marketing or sale of its computers, or other disruptions to, or uncertainty in the market regarding, Apple's business, resulting from these or other factors could result in reduced demand for Apple computers, which in turn could materially and adversely affect sales of the Company's products. As software applications for the color publishing and multimedia markets become more available on platforms other than Macintosh, it is likely that these other platforms will continue to gain acceptance in these markets. For example, recently introduced versions of the Windows operating environment support high performance graphics and video applications similar to those offered on the Macintosh. There is a risk that this trend will reduce the -13- support given to Macintosh products by third party developers and could substantially reduce demand for Macintosh products and peripherals over the long term. A number of the Company's products compete with products marketed by Apple. As a competitor of the Company, Apple could in the future take steps to hinder the Company's development of compatible products and slow sales of the Company's products. The Company's business is based in part on supplying products that meet the needs of high-end customers that are not fully met by Apple's products. As Apple improves its products or bundles additional hardware or software into its computers, it reduces the market for Radius products that provide those capabilities. For example, the Company believes that the on-board performance capabilities included in Macintosh Power PC products have reduced and continue to reduce overall sales for the Company's graphics cards. In the past, the Company has developed new products as Apple's progress has rendered existing Company products obsolete. However, in light of the Company's current financial condition there can be no assurance that the Company will continue to develop new products on a timely basis or that any such products will be successful. In order to develop products for the Macintosh on a timely basis, the Company depends upon access to advance information concerning new Macintosh products. A decision by Apple to cease sharing advance product information with the Company would adversely affect the Company's business. New products anticipated from and introduced by Apple could cause customers to defer or alter buying decisions due to uncertainty in the marketplace, as well as presenting additional direct competition for the Company. For example, the Company believes that Apple's transition during 1994 to Power PC products caused delays and uncertainties in the market place and had the effect of reducing demand for the Company's products. In addition, sales of the Company's products have been adversely affected by Apple's revamping of its entire product line from Nubus-based to PCI Bus-based computers. In the past, transitions in Apple's products have been accompanied by shortages in those products and in key components for them, leading to a slowdown in sales of those products and in the development and sale by the Company of compatible products. In addition, it is possible that the introduction of new Apple products with improved performance capabilities may create uncertainties in the market concerning the need for the performance enhancements provided by the Company's products and could reduce demand for such products. COMPETITION The markets for the Company's products are highly competitive, and the Company expects competition to intensify. Many of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. The Company believes that its ability to compete will depend on a number of factors, including the amount of financial resources available to the Company, whether the Company can reach an accommodation with its creditors, success and timing of new product developments by the Company and its competitors, product performance, price and quality, breadth of distribution and customer support. There can be no assurance that the Company will be able to compete successfully with respect to these factors. In addition, the introduction of lower priced competitive products could result in price reductions that would adversely affect the Company's results of operations. DEPENDENCE ON SUPPLIERS The Company outsources the manufacturing and assembly of its products to third party suppliers. Although the Company uses a number of manufacturer/assemblers, each of its products is manufactured and assembled by a single supplier. The failure of a supplier to ship the quantities of a product ordered by the Company could cause a material disruption in the Company's sales of that product. In the past, the Company has at times experienced substantial delays in its ability to fill customer orders for displays and other products, due to the inability of certain suppliers to meet their volume and schedule requirements and, more recently, due to the Company's shortages in available cash. Such shortages have caused some suppliers to put the Company on a cash basis, and there is a risk that suppliers will discontinue their relationship with the Company. In the past, the Company has been vulnerable to delays in shipments from suppliers because the Company has sought to manage its use of working capital by, among other things, limiting the backlog of inventory it purchases. More recently, this vulnerability has been exacerbated by the Company's shortages in cash reserves. Delays in shipments from suppliers can cause fluctuations in the Company's short term results and contribute to order cancellations. The Company currently has arranged payment terms for certain of its major suppliers such that certain of the Company's major customers pay these suppliers directly for products ordered and shipped. The Company is also dependent on sole or limited source suppliers for certain key components used in its products, including certain digital to analog converters, digital video chips, and other products. Certain other semiconductor -14- components and molded plastic parts are also purchased from sole or limited source suppliers. The Company purchases these sole or limited source components primarily pursuant to purchase orders placed from time to time in the ordinary course of business and has no guaranteed supply arrangements with sole or limited source suppliers. The Company expects that these suppliers will continue to meet its requirements for the components, but there can be no assurance that they will do so. The introduction of new products presents additional difficulties in obtaining timely shipments from suppliers. Additional time may be needed to identify and qualify suppliers of the new products. Also, the Company has experienced delays in achieving volume production of new products due to the time required for suppliers to build their manufacturing capacity. An extended interruption in the supply of any of the components for the Company's products, regardless of the cause, could have an adverse impact on the Company's results of operations. The Company's products also incorporate components, such as VRAMs, DRAMs and ASICs that are available from multiple sources but have been subject to substantial fluctuations in availability and price. Since a substantial portion of the total material cost of the Company's products is represented by these components, significant fluctuations in their price and availability could affect its results of operations. TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS The personal computer industry in general, and the color publishing and video applications within the industry, are characterized by rapidly changing technology, often resulting in short product life cycles and rapid price declines. The Company believes that its success will be highly dependent on its ability to develop innovative and cost-competitive new products and to bring them to the marketplace in a timely manner. Should the Company fail to introduce new products on a timely basis, the Company's operating results could be adversely affected. Technological innovation is particularly important for the Company, since its business is based on its ability to provide functionality and features not included in Apple's products. As Apple introduces new products with increased functionality and features, the Company's business will be adversely affected unless it develops new products that provide advantages over Apple's latest offerings. Continued reduction in the available cash resources of the Company could result in the interruption or cancellation of research and product development efforts. The Company anticipates that the video editing industry will follow the pattern of the professional publishing industry in which desktop publishing products, including those produced by Radius, replaced more expensive, proprietary products, and the Company also anticipates that this evolution will lead to a significant increase in the purchase and use of video editing products. There is a risk that this evolution will not occur in the video editing industry as expected by the Company, or that it will occur at a slower pace than anticipated. The introduction of new products is inherently subject to risks of delay. Should the Company fail to introduce new products on a timely basis, the operating results of the Company could be adversely affected. The introduction of new products and the phasing out of older products will require the Company to carefully manage its inventory to avoid inventory obsolescence and may require increases in inventory reserves. The long lead times -- as much as three to five months -- associated with the procurement of certain components (principally displays and ASICs) exposes the Company to greater risk in forecasting the demand for new products. There can be no assurance that the Company's forecasts regarding new product demand and its estimates of appropriate inventory levels will be accurate. Moreover, no assurance can be given that the Company will be able to cause all of its new products to be manufactured at acceptable manufacturing yields or that the Company will obtain market acceptance for these products. DISTRIBUTION The Company's primary means of distribution is through a limited number of third-party distributors and master resellers. As a result, the Company's business and financial results are highly dependent on the amount of the Company's products that is ordered by these distributors and resellers. Such orders are in turn dependent upon the continued viability and financial condition of these distributors and resellers as well as on their ability to resell such products and maintain appropriate inventory levels. Due in part to the historical volatility of the personal computer industry, certain of the Company's resellers have from time to time experienced declining profit margins, cash flow shortages and other financial difficulties. The future growth and success of the Company will continue to depend in large part upon its reseller channels. If its resellers were to experience financial difficulties, the Company's results of operations could be adversely affected. -15- INTERNATIONAL SALES The Company's international sales are primarily made through distributors and the Company's subsidiary in Japan. The Company expects that international sales will represent a significant portion of its net sales and that it will be subject to the normal risks of international sales such as currency fluctuations, longer payment cycles, export controls and other governmental regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. In addition, fluctuations in exchange rates could affect demand for the Company's products. If for any reason exchange or price controls or other restrictions on foreign currencies are imposed, the Company's business and operating results could be materially adversely affected. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continued contributions of its key management, marketing, product development and operational personnel and the Company's ability to retain and continue to attract highly skilled personnel. Competition for employees in the computer industry is intense, and there can be no assurance that the Company will be able to attract and retain qualified employees. The Company has recently made a number of management changes, including the appointment of a new Chief Financial Officer and has had substantial layoffs and other employee departures. If the Company continues to experience financial difficulties, it may become increasingly difficult for it to hire new employees and retain current employees. The Company does not carry any key person life insurance with respect to any of its personnel. DEPENDENCE ON PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright, trademark and trade secret protection, nondisclosure agreements and licensing arrangements to establish and protect its proprietary rights. The Company has a number of patents and patent applications and intends to file additional patent applications as it considers appropriate. There can be no assurance that patents will issue from any of these pending applications or, if patents do issue, that any claims allowed will be sufficiently broad to protect the Company's technology. In addition, there can be no assurance that any patents that may be issued to the Company will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide proprietary protection to the Company. The Company has a number of trademarks and trademark applications. There can be no assurance that litigation with respect to trademarks will not result from the Company's use of registered or common law marks, or that, if litigation against the Company were successful, any resulting loss of the right to use a trademark would not reduce sales of the Company's products in addition to the possibility of a significant damages award. Although, the Company intends to defend its proprietary rights, policing unauthorized use of proprietary technology or products is difficult, and there can be no assurance that the Company's efforts will be successful. The laws of certain foreign countries may not protect the proprietary rights of the Company to the same extent as do the laws of the United States. The Company has received, and may receive in the future, communications asserting that its products infringe the proprietary rights of third parties, and the Company is engaged and has been engaged in litigation alleging that the Company's products infringe others' patent rights. As a result of such claims or litigation, it may become necessary or desirable in the future for the Company to obtain licenses relating to one or more of its products or relating to current or future technologies, and there can be no assurance that it would be able to do so on commercially reasonable terms. VOLATILITY OF STOCK PRICE; DILUTION The price of the Company's Common Stock has fluctuated widely in the past. Management believes that such fluctuations may have been caused by announcements of new products, quarterly fluctuations in the results of operations and other factors, including changes in conditions of the personal computer industry in general and changes in the Company's results of operations and financial condition. Stock markets, and stocks of technology companies in particular, have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of securities issued by the Company and other high technology companies, often for reasons unrelated to the operating performance of the specific companies. Due to the factors referred to herein, the dynamic nature of the Company's industry, general economic conditions and other factors, the Company's future operating results and stock prices may be subject to significant volatility in the future. Such stock price volatility for the Common Stock has in the past provoked securities litigation, and future volatility could provoke litigation in the future that could divert substantial management resources and have an adverse effect on the Company's results of operations. The Company's Common Stock is listed on the NASDAQ market pursuant -16- to an agreement containing certain financial requirement with which the Company is currently not in compliance. In its attempt to restructure its debt to creditors, the Company may propose exchanging equity in the Company in full or partial satisfaction of creditor claims. Although the Company has no current agreements with respect to the issuance of additional equity securities, the issuance of any additional equity in the Company could exert downward pressure on the price of the Company's Common Stock. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (a) In November 1995, Electronics for Imaging, Inc. ("EFI") filed a suit in the United States District Court in the Northern District of California alleging that the Company infringes a patent allegedly owned by EFI. Although the complaint does not specify which of the Company's products allegedly infringe the patent, subsequent pleading indicates that EFI alleges that the Company's Color Server products allegedly infringe. As of December 31, 1995, the Company's Color Server products were material to its business. In January 1996, the Company completed its divestiture of the Color Server Group. The Company has certain indemnification obligations relating to this litigation. See Item 5 Other Information - Color Server Group Divestiture. The Company has filed an answer denying all material allegations, and has filed amended counterclaims against EFI alleging causes of action for interference with prospective economic benefit, antitrust violations, and unfair business practices. EFI has filed a motion to dismiss or sever the Company's amended counterclaims. The Company believes it has meritorious defenses to EFI's claims and is defending them vigorously. In addition, the Company believes it may have indemnification rights with respect to EFI's claims. In the opinion of management, based on the facts known at this time, the eventual outcome of this case is unlikely to have a material adverse effect on the results of operations or financial position of the Company. (b) The Company was named as one of approximately 42 defendants in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara County, case no. CV751685, filed August 14, 1995. Radius was named as one of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al., Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case purport to represent alleged classes of similarly situated persons and/or the general public, and allege that the defendants falsely advertise that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995, and was served with the Maizes complaint on January 5, 1996. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and it is anticipated that the coordinated proceedings will be held in Superior Court of California, San Francisco County. Discovery proceedings have not yet begun in either case. In the opinion of management, based on the facts known at this time, the eventual outcome of these cases is unlikely to have a material adverse effect on the results of operations or financial position of the Company. ITEM 5. OTHER INFORMATION COLOR SERVER GROUP DIVESTITURE In December 1995, the Company signed a definitive agreement pursuant to which the Company will sell its Color Server Group ("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned subsidiary of Splash Technology Holdings, Inc. (the "Parent"), a corporation formed by various investment entities associated with Summit Partners. The Company will receive approximately $21,945,175 in cash (subject to certain post- closing adjustments) and 4,282 shares of the Parent's 6% Series B Redeemable and Convertible Preferred Stock (the "Series B Preferred Stock"). The shares of Series B Preferred Stock will be convertible by the Company at any time into approximately 19.9% of the Parent's common stock outstanding as of the closing of the transaction. The shares of Series B Preferred Stock also will be redeemable by the Parent at any time, and will be subject to mandatory redemption beginning on the sixth anniversary of issuance, in each case at a redemption price of $1,000 per share plus accrued dividends. The transaction, as subsequently amended, closed in January 1996. The Company retains certain indemnification obligations in connection with the patent lawsuit brought by -17- Electronics for Imaging, Inc. See Item 1 "Legal Proceedings". The net proceeds of the Color Server Group transaction were paid to Silicon Valley Bank ("SVB"), in order to repay the Company's indebtedness to SVB, and to IBM Credit Corp. ("ICC"), in order to reduce the Company's outstanding indebtedness to ICC. PORTRAIT DISPLAY LABS In December 1995, the Company signed a series of agreements with Portrait Display Labs, Inc. ("PDL"). The agreements assigned the Company's pivoting technology to PDL and canceled PDL's on-going royalty obligation to the Company under an existing license agreement in exchange for a one-time cash payment. PDL also granted the Company a limited license back to the pivoting technology. Under these agreements, PDL also settled its outstanding receivable to the Company by paying the Company $500,000 in cash and issuing to the Company 214,286 shares of PDL's Common Stock. These transactions closed in January 1996. UMAX DATA SYSTEMS, INC. In January 1996, the Company signed a definitive agreement pursuant to which the Company will sell its MacOS compatible systems business to UMAX Computer Corporation ("UCC"), a company formed by UMAX Data Systems, Inc. ("UMAX"). The Company will receive approximately $2,250,000 in cash and debt relief, and 1,492,500 shares of UCC's Common Stock, representing approximately 19.9% of UCC's then outstanding shares of Common Stock. After the closing, the Company has a right to receive royalties based on UCC's net revenues related to the MacOS compatible systems business. The closing of this transaction is subject to certain conditions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS See attached exhibit index. (b) REPORTS ON FORM 8-K No report on Form 8-K was filed during the three months ended December 31, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: February 13, 1996 RADIUS INC. By: /s/ Dennis J. Dunnigan ____________________________________ Dennis J. Dunnigan Chief Financial Officer -18- EXHIBIT INDEX Exhibit Sequentially Number Title Numbered Page - ------- ----- ------------- 2.09 Merger Agreement Dated as of December 21, 1995 among Radius Inc., Splash Technology, Inc., Summit Subordinated Debt Fund, L.P., Summit Ventures IV, L.P., Summit Investors II, L.P., Splash Technology Holdings, Inc., and Splash Merger Company, Inc. 2.10 Amendment No. 1 to Merger Agreement among Radius Inc., Splash Technology, Inc., Splash Technology Holdings, Inc., Splash Merger Company, Inc. et al., dated January 30, 1996. 10.03 B Form of Stock Option Grant as currently in effect under Registrant's 1995 Stock Option Plan. 10.04 Employee Stock Purchase Plan, as amended on July 20, 1995. 11.01 Computation of per share earnings 20 -19- EXHIBIT 11.01 COMPUTATION OF NET LOSS PER SHARE (in thousands, except per share data)
THREE MONTHS ENDED DECEMBER 31, 1995 1994 ----- ----- Primary: Average common shares outstanding . . . . 17,248 14,215 Net effect of dilutive stock options - based on the modified treasury stock method using average market price . . . . . . . . . . . . . -- -- ------ ------ Totals . . . . . . . . . . . . . . . . . 17,248 14,215 Net loss . . . . . . . . . . . . . . . . $(9,783) $(11,021) Per share amount . . . . . . . . . . . . $(0.57) $(0.78) Fully diluted: Average common shares outstanding . . . 17,248 14,215 Net effect of dilutive stock options - based on the modified treasury stock method using quarter end market price which is greater than average market price . . . . . . . . . . . . . . . . -- -- ------ ------ Totals . . . . . . . . . . . . . . . . . 17,248 14,215 ------ ------ ------ ------ Net loss . . . . . . . . . . . . . . . . $(9,783) $(11,021) ------ ------ ------ ------ Per share amount* . . . . . . . . . . . $(0.57) $(0.78)
* The primary net loss per share is shown in the statements of operations. Net loss per share under the primary and fully diluted calculations are equivalent. -20- EXHIBIT INDEX Exhibit Sequentially Number Title Numbered Page - ------- ----- ------------- 2.09 Merger Agreement Dated as of December 21, 1995 among Radius, Inc., Splash Technology, Inc., Summit Subordinated Debt Funds, L.P. Summit Ventures IV, L.P., Summit Investors II, L.P., Splash Technology Holdings, Inc., and Splash Merger Company, Inc. 2.10 Amendment No. 1 to Merger Agreement among Radius Inc., Splash Technology, Inc., Splash Technology Holdings, Inc., Splash Merger Company, Inc. et al., dated January 30, 1996. 10.03 B Form of Stock Option Grant as currently in effect under Registrant's 1995 Stock Option Plan. 10.04 Employee Stock Purchase Plan, as amended on July 20, 1995. 11.01 Computation of per share earnings. EX-2.09 2 EXHIBIT 2.09 MERGER AGREEMENT DATED AS OF DECEMBER 21, 1995 AMONG RADIUS INC., SPLASH TECHNOLOGY, INC., SUMMIT SUBORDINATED DEBT FUND, L.P., SUMMIT VENTURES IV, L.P., SUMMIT INVESTORS II, L.P., SPLASH TECHNOLOGY HOLDINGS, INC. AND SPLASH MERGER COMPANY, INC. TABLE OF CONTENTS PAGE ARTICLE I THE MERGER; EXCHANGE OF SECURITIES. . . . . . . . . . . . . . . . . . . . 2 1.1 CONTRIBUTION OF CSG ASSETS TO COMPANY. . . . . . . . . . . . . . . . 2 1.2 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . 3 1.4 THE CLOSING OF THE MERGER. . . . . . . . . . . . . . . . . . . . . . 3 1.5 POST-CLOSING CONTRIBUTION BY SELLER. . . . . . . . . . . . . . . . . 4 ARTICLE II REPRESENTATIONS AND WARRANTIES OFTHE INVESTORS, HOLDCO AND HOLDCO SUB . . 5 2.1 HOLDCO AND HOLDCO SUB. . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 INVESTOR AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 FINDERS OR BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER AND COMPANY. . . . . . . . . . . 8 3.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE COMPANY . . . . 8 ARTICLE IV CONDITIONS PRECEDENT TO THE OBLIGATIONS . . . . . . . . . . . . . . . . .20 4.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . .20 4.2 ABSENCE OF LITIGATION. . . . . . . . . . . . . . . . . . . . . . . .20 4.3 PERFORMANCE OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . . .20 4.4 DOCUMENTATION AT CLOSING . . . . . . . . . . . . . . . . . . . . . .20 4.5 MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . . . . . .23 4.6 CONDUCT OF BUSINESS; REVENUES. . . . . . . . . . . . . . . . . . . .23 4.7 CONSENTS, WAIVERS, ETC.. . . . . . . . . . . . . . . . . . . . . . .23 4.8 ACCOUNTING REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . .24 4.9 PERFORMANCE UNDER RESTRICTED STOCK PURCHASE AGREEMENT. . . . . . . .24 4.10 HART-SCOTT-RODINO WAITING PERIOD . . . . . . . . . . . . . . . . . .24 4.11 ASSETS TRANSFER. . . . . . . . . . . . . . . . . . . . . . . . . . .24 4.12 ELECTION UNDER SECTION 338(H)(10). . . . . . . . . . . . . . . . . .24 4.13 NUBUS EQUIPPED COMPUTERS.. . . . . . . . . . . . . . . . . . . . . .25 -i- ARTICLE V CONDITIONS PRECEDENT TO SELLER'S AND COMPANY'S OBLIGATIONS. . . . . . . .25 5.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . .25 5.2 ABSENCE OF LITIGATION. . . . . . . . . . . . . . . . . . . . . . . .25 5.3 PERFORMANCE OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . . .25 5.4 FAIRNESS OPINION . . . . . . . . . . . . . . . . . . . . . . . . . .25 5.5 CONSENTS, WAIVERS, ETC.. . . . . . . . . . . . . . . . . . . . . . .25 5.6 BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . .26 5.7 HOLDCO CASH. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 5.8 HART-SCOTT RODINO WAITING PERIOD . . . . . . . . . . . . . . . . . .26 5.9 DOCUMENTATION AT CLOSING . . . . . . . . . . . . . . . . . . . . . .26 5.10 PERFORMANCE UNDER RESTRICTED STOCK PURCHASE AGREEMENT. . . . . . . .28 ARTICLE VI POST-CLOSING COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . .28 6.1 AFFIRMATIVE COVENANTS OF HOLDCO OTHER THAN REPORTING REQUIREMENTS. .28 6.2 NEGATIVE COVENANTS OF HOLDCO . . . . . . . . . . . . . . . . . . . .30 6.3 REPORTING REQUIREMENTS OF HOLDCO . . . . . . . . . . . . . . . . . .32 6.4 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . .33 6.5 COVENANTS OF SELLER. . . . . . . . . . . . . . . . . . . . . . . . .34 ARTICLE VII OBLIGATIONS PENDING THE CLOSING . . . . . . . . . . . . . . . . . . . . .35 7.1 ACCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 7.2 CONDUCT OF COMPANY'S BUSINESS. . . . . . . . . . . . . . . . . . . .36 7.3 CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 7.4 NOTICE OF BREACH . . . . . . . . . . . . . . . . . . . . . . . . . .38 7.5 SELLER AND INVESTORS AS STOCKHOLDERS . . . . . . . . . . . . . . . .39 7.6 RETENTION OF CSG EARNINGS. . . . . . . . . . . . . . . . . . . . . .39 ARTICLE VIII OBLIGATIONS AT OR PRIOR TO THE CLOSING. . . . . . . . . . . . . . . . . .40 8.1 EXCLUSIVITY/OTHER OFFERS . . . . . . . . . . . . . . . . . . . . . .40 8.2 OTHER DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . . . .40 -ii- ARTICLE IXNATURE AND SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS . .41 9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . .41 ARTICLE XINDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . .41 10.1 INDEMNIFICATION BY THE SELLER FOR BREACH OF THIS AGREEMENT . . . . .41 10.2 INDEMNIFICATION BY THE SELLER FOR EFI LITIGATION . . . . . . . . . .41 10.3 CLAIMS FOR INDEMNIFICATION OF INVESTORS. . . . . . . . . . . . . . .42 10.4 DEFENSE BY SELLER. . . . . . . . . . . . . . . . . . . . . . . . . .42 10.5 TIME LIMITATION ON INDEMNIFICATION OF INVESTORS, HOLDCO AND COMPANY.43 10.6 MONETARY LIMITATION ON INDEMNIFICATION OF INVESTORS, HOLDCO AND COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 10.7 DAMAGES TO INVESTORS . . . . . . . . . . . . . . . . . . . . . . . .43 10.8 NO WAIVER BY INVESTORS, HOLDCO AND COMPANY. . . . . . . . . . . . .44 10.9 MATERIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .44 10.10 INDEMNIFICATION BY HOLDCO AND INVESTORS. . . . . . . . . . . . . . .44 10.11 CLAIMS FOR INDEMNIFICATION OF SELLER . . . . . . . . . . . . . . . .44 10.12 DEFENSE BY HOLDCO AND INVESTORS. . . . . . . . . . . . . . . . . . .44 10.13 TIME LIMITATION ON INDEMNIFICATION OF SELLER . . . . . . . . . . . .45 10.14 MONETARY LIMITATION ON INDEMNIFICATION OF SELLER . . . . . . . . . .45 10.15 NO WAIVER BY SELLER. . . . . . . . . . . . . . . . . . . . . . . . .45 ARTICLE XIDEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . .46 11.1 CERTAIN DEFINED TERMS. . . . . . . . . . . . . . . . . . . . . . . .46 11.2 ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . .52 ARTICLE XIIMISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . .52 12.1 NO WAIVER; CUMULATIVE REMEDIES . . . . . . . . . . . . . . . . . . .52 12.2 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 -iii- 12.3 AMENDMENTS, WAIVERS AND CONSENTS. . . . . . . . . . . . . . . . . .52 12.4 ADDRESSES FOR NOTICES, ETC. . . . . . . . . . . . . . . . . . . . .53 12.5 COSTS, EXPENSES AND TAXES . . . . . . . . . . . . . . . . . . . . .54 12.6 BINDING EFFECT; ASSIGNMENT. . . . . . . . . . . . . . . . . . . . .54 12.7 PRIOR AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . .54 12.8 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .54 12.9 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . .54 12.10 HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 12.11 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .54 12.12 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . .54 12.13 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . .55 12.14 PRESS RELEASE . . . . . . . . . . . . . . . . . . . . . . . . . . .55 12.15 INDEMNIFIED PARTIES. . . . . . . . . . . . . . . . . . . . . . . .55 -iv- EXHIBITS EXHIBIT EXHIBIT NAME NUMBER - ------------ -------- CSG Assets 1.1A Company Certificate of Incorporation 1.1B Company By-Laws 1.1C Assumed Liabilities 1.1D Holdco Certificate of Incorporation 2.1A Holdco By-Laws 2.1B Form of Subordinated Note 2.1C Invention Assignment and Non-Disclosure Agreement 4.4A Registration Rights Agreement 4.4B Stockholders Agreement 4.4C Consents and Waivers for CSG Asset Transfer 4.7 Projected CSG Financial Statements 7.6 Restricted GAAP Principles 11.0 -i- MERGER AGREEMENT THIS MERGER AGREEMENT (the "Agreement") is made and entered into as of December 21, 1995, by and among RADIUS INC., a California corporation (the "Seller"), SPLASH TECHNOLOGY, INC., a Delaware corporation (the "Company"), SPLASH TECHNOLOGY HOLDINGS, INC., a Delaware corporation ("Holdco"), SPLASH MERGER COMPANY, INC., a Delaware corporation, ("Holdco Sub") and the entities listed as Investors on the signature page(s) hereof (the "Investors"). RECITALS A. The Seller currently operates a Color Server Group ("CSG") which is engaged in the business of the design, manufacture and sale of color servers for the color printing market, which such color servers are comprised of computer software, computer hardware, hardware interfaces to computers and color photocopying, scanning and printing devices, and the integration of such elements with computers, computer networks, software and color photocopying, scanning and printing devices. B. Immediately prior to the Merger described below, Seller shall contribute the assets and certain liabilities of CSG to the Company, which shall be a wholly-owned subsidiary of Seller. Immediately prior to the closing of the Merger described below, all of Holdco's capital stock shall be held by the Investors and Holdco Sub shall be a wholly-owned subsidiary of Holdco. C. Immediately following the transfer of the assets and certain liabilities of CSG to the Company described above, Holdco Sub shall merge into and with the Company, with the Company surviving, and the Seller shall receive from Holdco Series B Redeemable and Convertible Preferred Stock, par value $0.001, of the Company ("Series B Preferred Stock") convertible into approximately 19.9% of Holdco Common Stock (post-closing and without considering dilution by management options) and $21,945,175 in cash. Prior to such Merger, the management of the Company shall have purchased approximately 6.1% of Holdco Common Stock (post-closing and without considering dilution by management options) from Holdco pursuant to a Restricted Stock Purchase Agreement, thus leaving approximately 74% of Holdco Common Stock (post-closing and without considering dilution by management options) in the hands of the Investors. D. The respective boards of directors and stockholders of Holdco Sub and the Company have approved the merger (the "Merger") of Holdco Sub into and with the Company pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and agreements herein, and subject to the terms and conditions hereinafter set forth, the parties hereby agree as follows: ARTICLE I THE MERGER; EXCHANGE OF SECURITIES 1.1 CONTRIBUTION OF CSG ASSETS TO COMPANY. Immediately prior to the Effective Time (as hereinafter defined), the Seller shall transfer, assign and deliver to the Company, and the Company shall accept and receive from the Seller, all right, title and interest of the Seller, free and clear of all Liens, other than as specified on Exhibit 1.1A or in the Disclosure Letter (as hereinafter defined), in and to those tangible and intangible rights, properties and assets set forth on Exhibit 1.1A hereto (the "Assets"). Immediately prior to the Effective Time, the Certificate of Incorporation of the Company shall be in the form of Exhibit 1.1B hereto, and the By-Laws of the Company shall be in the form of Exhibit 1.1C hereto. The Company shall assume from the Seller all of its obligations under the contracts, commitments and undertakings which are specifically identified on Exhibit 1.1A as Contracts (the "Contracts"). Other than the Company's obligations under the Contracts, the Company shall assume and agree to perform or discharge, when and as due, only those obligations, claims and liabilities described on Exhibit 1.1D hereto (the "Assumed Liabilities"). Exhibit 1.1D sets forth all employees and consultants of the Seller that are realted to CSG and the Business and who will become employees and consultants of the Company. As part of the same transaction, the Company and the Seller shall enter into a Corporate Services Agreement mutually agreeable in form and substance to the Seller and the Investors. Such Corporate Services Agreement shall specify that the Seller provide the Company with certain tax, accounting, legal, logistics, shipping, receiving, storage, warehousing, inventory management, transportation, repair, field support, maintenance, purchasing, payroll, information services, human resources and other services (consistent with Past Practices and the provision of all services and other items provided by the Seller to CSG immediately prior to the date hereof) for a period extending for 3 months after the date of the Closing. The consideration to be provided by the Company shall be based on the level of use of services and market rates for similar services. Such Corporate Services Agreement shall allow for termination by the Company with respect to any services or part thereof upon 30 days prior notice to the Seller. Holdco shall use reasonable efforts to become independent of the Seller with respect to such services within 30 days of the Closing. The Corporate Services Agreement also will provide for payment of consideration to the Seller for such services, if any, provided by the Seller to CSG from January 1, 1996 to the date of the Closing, to the extent that the Seller was not compensated for such services previously. Further, as part of the same transaction, the Company and the Seller shall enter into a Sub-Lease mutually agreeable in form and substance to the Seller and the Investors. Such Sub-Lease shall specify that the Seller provide the Company with rental of the real property owned or leased by the Seller that is to be occupied by the Company for a period extending for 3 months after the date of the Closing. The consideration to be provided by the Company shall be based on the amount of rental space actually occupied by the Company and the rent paid by the Seller for such rental space. Such Sub-Lease shall allow for termination by the Company with respect to any rental space or part thereof upon 30 days prior notice to the Seller. The Sub-Lease also will provide for payment of consideration to the Seller for such rental space, if any, provided by the Seller to CSG from January 1, 1996 to the date of the Closing, to the extent that the Seller was not compensated for such rental previously. In addition, as part of the same transaction, the Company and the Seller shall have entered into a Trademark License Agreement, mutually agreeable in form and substance to the Seller and the Investors, which shall permit the Company to use certain Seller trademarks that have been and are expected to be used in the Business for a period -2- extending 18 months after the date of the Closing. Such Trademark License Agreement shall be in full force and effect and binding upon the parties thereto. Any sales, use or transfer Taxes or permit or license transfer fees and expenses relating to the transfer of the Assets from the Seller to the Company or otherwise due as a result of the transactions contemplated by this Agreement shall be paid by the Seller. 1.2 THE MERGER. (a) SURVIVING CORPORATION. Subject to the conditions contained herein and in accordance with the provisions of this Agreement and the DGCL, at the Effective Time (as hereinafter defined), Holdco Sub shall be merged with and into the Company, which, as the corporation surviving in the Merger (the "Surviving Corporation"), shall continue unaffected and unimpaired by the Merger to exist under and be governed by the laws of the State of Delaware. At the Effective Time, the separate existence of Holdco Sub shall cease except to the extent provided by law in the case of a corporation after its merger into another corporation. (b) EFFECTS OF THE MERGER. The Merger shall have the effects set forth in Sections 259 through 261 of the DGCL. (c) CERTIFICATE OF INCORPORATION, BY-LAWS, OFFICERS AND DIRECTORS. The Certificate of Incorporation and By-Laws of the Company, as in effect immediately prior to the Effective Time, shall continue in full force and effect as the Certificate of Incorporation and By-Laws of the Surviving Corporation. The initial board of directors of the Surviving Corporation shall consist of the initial directors of Holdco Sub and the initial officers of the surviving corporation shall be as mutually agreed to by the Seller and the Investors, who all shall serve until their respective successors are duly elected and qualified. 1.3 CONVERSION OF SHARES. As of the Effective Time, by virtue of the Merger and without any action on the part of the Seller as the sole stockholder of the Company or Holdco as the sole stockholder of Holdco Sub: (a) Each share of common stock, par value of $0.001, of the Company (the "Company Common Stock") outstanding immediately prior to the Effective Time shall be converted into (i) 4.282 shares of Series B Preferred Stock and (ii) the right to receive $21,945.175, payable by wire transfer of federal clearing house funds. (b) Each share of the common stock, par value $0.001, of Holdco Sub (the "Holdco Sub Common Stock") outstanding immediately prior to the Effective Time shall be converted into one share of Company Common Stock. 1.4 THE CLOSING OF THE MERGER. The closing of the Merger (the "Closing") shall be held at the office of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304-1050, on such date and at such time as may be mutually agreed upon, but on or prior to January 31, 1996, unless the parties agree otherwise. At the Closing, subject to the fulfillment or waiver of the conditions -3- set forth in Articles IV and V hereof, (a) the parties shall cause the Merger to be consummated by the filing of a certificate of merger, executed and acknowledged in accordance with the DGCL, with the Secretary of State of Delaware, (b) the Seller shall deliver, assign, convey and transfer each share of Company Common Stock to Holdco, (c) Holdco shall deliver, assign, convey and transfer to the Seller the shares of Series B Preferred Stock that the Seller is entitled to pursuant to Section 1.3 hereof, and (d) Holdco shall transfer to the Seller (or an agent of the Seller, if previously designated in writing by the Seller) by wire of federal clearing house funds to such account or accounts as shall have been previously designated in writing by the Seller, the amount of cash (the "Cash Purchase Price") that the Seller is entitled to pursuant to Section 1.3 hereof; PROVIDED that an amount equal to $4,700,000 shall be wired to the escrow account subject to the Escrow Agreement referred to in Section 4.4(h) rather than directly to an account of the Seller. The date and time of the effectiveness of the Merger pursuant to the DGCL shall be herein called the "Effective Time." 1.5 POST-CLOSING CONTRIBUTION BY SELLER. (a) DELIVERY OF YEAR-END BALANCE SHEET. As soon as practicable (but in no event later than 60 days) after the date of the Closing, the Investors shall deliver to the Seller a balance sheet for the Company, prepared by the Investors' Accountants at the expense of Holdco, as of the close of business on December 31, 1995 (the "Year-End Balance Sheet") that is prepared in accordance with Restricted GAAP and, to the extent in accordance with Restricted GAAP, on a consistent basis with the Interim Balance Sheet. (b) REVIEW BY SELLER; DISPUTE RESOLUTION. (i) Promptly following receipt of the Year-End Balance Sheet, Seller and Seller's Accountants may review the same and, within 30 days after the date of such receipt, may deliver to the Investors a certificate signed by a duly authorized officer of the Seller setting forth its objections to the Year-End Balance Sheet (set forth in reasonable detail), together with a summary of the reasons therefor and calculations and modifications which, in its view, are necessary to eliminate such objections. In the event the Seller does not so object within such 30-day period, the Year-End Balance Sheet shall be final and binding for the purposes of this Agreement. (ii) In the event the Seller so objects within such 30-day period, then the Seller and the Investors shall jointly select a national accounting firm acceptable to each of the Seller and the Investors (or if they cannot agree on such selection, a national "big-six" accounting firm will be selected by lot after eliminating the Seller's Accountants and the Investors' Accountants) and the firm so selected (the "Additional Accounting Firm") shall be directed by the Seller and the Investors to conduct a review of the objections of the Seller to the Year-End Balance Sheet as promptly as reasonably practicable (and the Seller and the Investors shall use reasonable efforts to allow and cause the Additional Accounting Firm to conduct such review as promptly as reasonably practicable) and, upon completion of such review, to deliver written notice to each of the Seller and the Investors setting forth a summary of all adjustments to the Year-End Balance Sheet determined necessary by the Additional Accounting Firm to resolve the objections of the Seller to the Year-End Balance Sheet (such written notice and related summary being -4- herein called the "Additional Report"). The Year-End Balance Sheet as adjusted by any adjustments as set forth in the Additional Report shall be final and binding, for purposes of this Agreement. (iii) Each of the Seller, the Investors, the Seller's Accountants and the Investors' Accountants and, if applicable, the Additional Accounting Firm, shall promptly make available to any of the foregoing Persons such books, records and other information (including work papers) as may be reasonably requested by any such Person to audit or review the Year-End Balance Sheet or any objections thereto. The fees and expenses of the Investors' Accountants related to its services under Section 1.5(a) shall be paid by Holdco, the fees and expenses of the Investors' Accountants related to its services under Section 1.5(b) shall be paid by the Investors, the fees and expenses of the Seller's Accountants related to its services under this Section 1.5 shall be paid by Seller and the fees and expenses, if applicable, of the Additional Accounting Firm related to its services under this Section 1.5 shall be paid 50% by the Seller and 50% by the Investors. (c) CONTRIBUTION BY SELLER. If the Working Capital of the Business and the Company as of the date of the Closing as reported in the final and binding Year-End Balance Sheet, is less than negative $554,825, then within five (5) days of the date that the Year-End Balance Sheet becomes final and binding in accordance with Section 1.5(b), the Seller shall pay to the Company by wire transfer of federal clearing house funds the amount by which such Working Capital is less than negative $554,825. If Seller does not pay any amounts due under this Section in accordance with the terms of this Section, then the Company, Holdco and the Investors shall receive indemnification from the Seller in accordance with Article X and, at their sole election, shall receive payments for such amounts from the escrow fund described in Section 4.4(h). (d) PAYMENT BY THE COMPANY. If the Working Capital of the Business and the Company as of the date of the Closing as reported in the final and binding Year-End Balance Sheet, is greater than negative $554,825, then within five (5) days of the date that the Year-End Balance Sheet becomes final and binding in accordance with Section 1.5(b), the Company shall pay to the Seller by wire transfer of federal clearing house funds the amount by which such Working Capital is greater than negative $554,825; provided that, in any event, such payment by the Company to the Seller shall not exceed $1,554,825. If Company does not pay all amounts due under this Section in accordance with the terms of this Section, then the Seller shall receive indemnification from the Investors, Holdco and the Company in accordance with Article X hereof. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE INVESTORS, HOLDCO AND HOLDCO SUB 2.1 HOLDCO AND HOLDCO SUB. Holdco, Holdco Sub and each Investor, jointly and severally, represent and warrant to the Seller and the Company that (as of the date hereof, as of the date of the Closing and as of the Effective Time): -5- (a) ORGANIZATION AND UNDERSTANDING. Each of Holdco and Holdco Sub is a duly organized and validly existing corporation in good standing under the laws the State of Delaware. The Certificate of Incorporation and the By-Laws of Holdco are in the form of Exhibit 2.1A and 2.1B, respectively. (b) CORPORATE ACTION. Holdco has all necessary corporate power and authority and have taken all corporate action required to make all the provisions of this Agreement, and any other agreements and instruments executed in connection herewith, the valid and enforceable obligations of Holdco. Holdco Sub has all necessary corporate power and authority and has taken all corporate action required to make all the provisions of this Agreement, and any other agreements and instruments executed in connection herewith, the valid and enforceable obligations of the Holdco Sub. (c) CAPITALIZATION. Immediately prior to the Effective Time, the authorized capital stock of Holdco shall consist of 10,000,000 shares of common stock, par value $0.001, of Holdco ("Holdco Common Stock"), 2,002,500 shares of which shall be outstanding and issued, 15,426 shares of Series A Redeemable Preferred Stock, par value $0.001, of Holdco ("Series A Preferred Stock"), 15,426 shares of which shall be outstanding and issued, and 4,282 shares of Series B Preferred Stock, none of which shares shall be issued and outstanding. Immediately prior to the Effective Time, all such issued shares shall be validly issued, fully paid and non-assessable and free and clear of all Liens. Immediately prior to the Effective Time, there will be no options, warrants or rights to purchase shares of capital stock or other securities authorized, issued or outstanding, nor will Holdco be obligated in any other manner to issue shares of its capital stock or other securities. None of the Investors has, and as of the Closing none of them shall have, granted or sold, and none of the Investors is, or at the time of Closing neither will be, a party to any agreement, commitment or understanding, written or oral, providing for the grant or sale of, options or other rights to purchase or restricting the transfer of, and none of them is, and at the Closing none will be, obligated to sell or otherwise transfer, any of securities or capital stock of Holdco to any person or entity. Immediately prior to the Effective Time, there shall be sufficient authorized but unissued shares of Holdco Common Stock reserved for issuance to Seller upon conversion of all shares of Series B Preferred Stock then held by the Seller into shares of Holdco Common Stock pursuant to the terms of Holdco's Certificate of Incorporation. Immediately prior to the Effective Time, the 4,282 shares of Series B Preferred Stock to be issued to the Seller shall be convertible into 497,465 shares of Holdco Common Stock (approximately 19.9% of the issued and outstanding Holdco Common Stock), which shares have been reserved for issuance pursuant to the terms of the Certificate of Incorporation of Holdco. When issued to the Seller, the 4,282 shares of Series B Preferred Stock will be validly issued, fully paid and non-assessable, and free and clear of all Liens and will be issued in accordance with the registration and qualification requirements of federal and any applicable state securities laws. The authorized capital stock of Holdco Sub consists of 1,000 shares of Holdco Sub Common Stock, 1,000 shares of which are outstanding and issued to Holdco. Immediately prior to the Effective Time, Investors shall be the owners of 1,850,000 shares of Holdco Common Stock, 15,426 shares of Series A Preferred Stock and certain Subordinated Notes of Holdco having a face value of $8,000,000 (the "Subordinated Notes," together with such shares of Series A Preferred Stock held by the Investors and the shares of Series B Preferred Stock to be received by the Seller pursuant to the Merger, are sometimes collectively referred to as the "Securities") substantially in the form in Exhibit 2.1C. Immediately prior to the Effective Time, members of the management of the Company -6- shall be the owners of 152,500 shares of Holdco Common Stock, which shares will have been purchased pursuant to the Restricted Stock Purchase Agreement referenced in Sections 5.9(h) and 5.10 hereof, assuming delivery, execution and performance thereunder by the management of the Company of such Restricted Stock Purchase Agreement and satisfaction of the conditions specified in Sections 5.9(h) and 5.10 hereof. (d) GOVERNMENT APPROVAL. No authorization, consent, approval, permits, licenses, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with the execution or delivery by the Investors, Holdco or Holdco Sub of, or for the performance by the Investors, Holdco or Holdco Sub of their obligations under this Agreement except for filings to be made, if any to comply with exemptions from registration or qualification under federal and state security laws and the expiration of any applicable waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (e) LIABILITIES. Neither Holdco nor Holdco Sub has any material Liabilities, except as contemplated herein. 2.2 INVESTOR AUTHORIZATION. Each Investor further represents that: (a) Each Investor has duly authorized, executed and delivered this Agreement and any other agreements and instruments executed in connection herewith and has all necessary power and authority to do so. (b) This Agreement and such other agreements and instruments constitute the valid and binding obligations of each Investor, enforceable against it in accordance with their respective terms, and all such action to make such agreements so has been taken. (c) No consent or approval of any Person is required in connection with the execution, delivery and performance of this Agreement and such other agreements and instruments by each Investor which has not heretofore been obtained. (d) Execution and performance of this Agreement shall not result in a material default of other agreements or instruments or any Law by any Investor. 2.3 FINDERS OR BROKERS. Each Investor, Holdco and Holdco Sub represent that no Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or valid claim upon or against the Company, Holdco or the Seller for any commission, fee or other compensation as a finder or broker because of any act or omission by such Investor, Holdco or Holdco Sub, and each Investor agrees to indemnify and hold the Seller and the Company harmless against any such commissions, fees or other compensation. ARTICLE III -7- REPRESENTATIONS AND WARRANTIES OF SELLER AND COMPANY 3.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE COMPANY. Except as disclosed in a letter delivered by the Company to the Seller prior to the date hereof (the "Disclosure Letter," which Disclosure Letter shall, when qualifying a representation or warranty, refer specifically to the Section number herein of the representation or warranty so qualified), the Seller and the Company, jointly and severally, represent and warrant to the Investors that (as of the date hereof, as of the date of the Closing, and as of the Effective Time): (a) ORGANIZATION AND STANDING. Each of the Seller and the Company is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction in which it is organized and has all requisite corporate power and authority for the ownership and operation of its properties and for the carrying on its business, including, without limitation, the Business as now conducted by CSG and as now proposed to be conducted by the Company. The Seller, in relation to CSG and the operation of the Assets, is, and the Company is, or will be as of the Closing, duly qualified and in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the property owned or leased, or the nature of the activities conducted, by it makes such qualification necessary other than where failure to so qualify would not have a material adverse effect upon CSG, the Business, the Company or the Assets. (b) CORPORATE ACTION. The Seller has all necessary corporate power and authority and has taken all corporate action required to make all the provisions of this Agreement, and any other agreements and instruments executed by it in connection herewith, the valid and enforceable obligations of the Seller. The Company has all necessary corporate power and authority and has taken all corporate action required to make all the provisions of this Agreement, and any other agreements and instruments executed by it in connection herewith the valid and enforceable obligations of the Company. (c) GOVERNMENTAL APPROVAL. No authorization, consent, approval, permits, licenses, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with the execution or delivery by the Seller or the Company of, or for the performance by the Seller or the Company of their obligations under this Agreement except for filings to be made, if any, to comply with exemptions from registration or qualification under federal and state securities laws and the expiration of any applicable waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (d) LITIGATION. There is no litigation or governmental proceeding or investigation pending or, to the best knowledge of the Seller and the Company, threatened against the Seller, the Company or the Assets affecting any of the Assets or the Business, or, to the best knowledge of the Seller or the Company, pending or threatened against any officer or key employee of the Seller whose duties relate to the Business, or the Company that might reasonably be expected to result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs or conditions of CSG, the Company, the Business, or the Assets taken as a whole, or that might reasonably be expected to call into question the validity of this Agreement or any action taken or to be taken pursuant hereto. -8- (e) COMPLIANCE WITH OTHER INSTRUMENTS. The Seller and the Company are in compliance (i) in all respects with the terms and provisions of their certificate or articles of incorporation or bylaws, (ii) in all respects with the terms and provisions of each mortgage, indenture, lease, agreement and other instrument relating to obligations of the Seller with respect to CSG and the Company in excess of $50,000 individually or $100,000 in the aggregate, and, (iii) with all international, foreign, federal, state or local judgments, decrees, governmental orders, statutes, rules, regulations, permits or licenses by which either the Company or the Seller (with respect to CSG, the Assets or the Business) is bound or to which the Assets are subject that, in the case of any of clauses (ii) or (iii) the default or violation of which might have a material adverse effect on the Business, the Assets, the Company or CSG or that might reasonably be expected to call into question the validity of this Agreement, or any action taken or to be taken pursuant hereto. There is no term or provision in any of the foregoing documents and instruments and judgments, orders, statutes, rules, regulations, permits or licenses that materially adversely affects the Business, the Assets, or the financial condition of CSG or the Company. Neither the execution and delivery of this Agreement nor the consummation of any transaction contemplated hereby, has constituted or resulted in or will constitute or result in a material violation of any term or provision in the certificate or articles of incorporation or bylaws of the Seller or the Company or has constituted or resulted in a material default or violation of any term or provision in any document or instrument to which they are subject. (f) NO BROKERS OR FINDERS. No Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or valid claim upon or against the Investors, the Company or Holdco for any commission, fee or other compensation or as a finder or broker because of any act or omission by the Seller or the Company or, to the knowledge of the Seller and the Company, by any other Person. (g) CAPITALIZATION; STATUS OF CAPITAL STOCK. Immediately preceding the Effective Time, the Company will have a total authorized capitalization consisting of 1,000 shares of Company Common Stock, of which 1,000 shares will be issued to the Seller and outstanding. There will be no options, warrants or rights to purchase shares of capital stock or other securities authorized, issued or outstanding, nor will the Company be obligated in any other manner to issue shares of its capital stock or other securities. Neither of the Seller or the Company, and as of the Closing neither of them shall have, granted or sold, and neither of the Seller or the Company is, or at the time of Closing neither will be, a party to any agreement, commitment or understanding, written or oral, providing for the grant or sale of, options or other rights to purchase or restricting the transfer of, and neither of them is, and at the Closing neither will be, obligated to sell or otherwise transfer, any of securities or capital stock of the Company to any person or entity except to Holdco pursuant to this Agreement. (h) FINANCIAL STATEMENTS. The unaudited pro forma, after giving effect to the transfer of the Assets to the Company and the assumption by the Company of the Contracts and the Assumed Liabilities, income statement of CSG and the Company for the year ended September 30, 1995 (the "Financial Statements"), and the unaudited pro forma balance sheet of CSG and the Company as of December 8, 1995 (the "Interim Balance Sheet"), copies of which Financial Statements and Interim Balance Sheet, along with any officers reports, have heretofore been delivered to Investors and are attached to the Disclosure Letter, were prepared in accordance with GAAP throughout the periods -9- involved, and, to the extent consistent with GAAP, in accordance with the Past Practice, subject to normal year-end adjustments with respect to the Interim Balance Sheet, and fairly present the financial position and results of operations of CSG, and on a pro forma basis, the Company for the periods covered. Notwithstanding the foregoing, the Interim Balance Sheet was prepared in accordance with Restricted GAAP and fairly presents, as of its date, the Working Capital of CSG, the Company and the Business, including all liabilites of CSG, the Company and the Business. The unaudited income statements and cash flow statements have been presented on a pro forma basis to reflect recurring results of the Business on a stand-alone basis. All pro forma adjustments to the Financial Statements and Interim Balance Sheet are set forth in the Disclosure Letter. The balance sheets within the Financial Statements and Interim Balance Sheet reflect all of the assets and liabilities which are necessary to conduct, operate and maintain the Business, and the related income statements originated from the books, records and accounts of the Seller and the Company described in Section 3.1(j). (i) INVENTORY. Except as would not have a material adverse effect on the Business, the Assets, the Company or CSG, all inventory of the Seller and the Company used in the conduct of the Business, including, without limitation, raw materials, work-in-process and finished goods, reflected on the Interim Balance Sheet or acquired since the date thereof was acquired and has been maintained in the ordinary course of the Business consistent with Past Practice, is of good and merchantable quality, consists substantially of a quality, quantity and condition usable, leasable or saleable in the ordinary course of the Business, is valued at reasonable amounts based on the ordinary course of the Business during the past six months, and is not subject to any material write-down or write-off in excess of the inventory reserves set forth on the Interim Balance Sheet. Neither the Seller nor the Company is under any liability or obligation with respect to the return of the inventory used in the conduct of the Business in the possession of wholesalers, retailers or other customers. (j) BOOKS OF ACCOUNT. The books, records and accounts of the Seller and the Company maintained with respect to the Business accurately and fairly reflect, in reasonable detail and in all material respects, the transactions and the assets and liabilities of the Seller and the Company related to the Business and being transferred to the Company in accordance with Section 1.1 hereof. (k) ACCOUNTS RECEIVABLE. The accounts receivable of the Seller and the Company arising from the Business as set forth on the Interim Balance Sheet or arising since the date thereof are valid and genuine, have arisen solely out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with Past Practice and, to the best knowledge of the Seller and the Company, are not subject to valid defenses, set-offs or counterclaims. The allowance for doubtful accounts has been determined in accordance with Restricted GAAP and, to the extent consistent with Restricted GAAP, in accordance with the Past Practice. The Disclosure Letter provides true and complete information with respect to the accounts receivable of the Seller with respect to the Business as of December 8, 1995. All of the accounts receivable included in the Assets (i) have arisen in the normal course of business, (ii) represent bona fide indebtedness incurred by the applicable account debtors in the stated amounts reflected on the books of Seller, subject to collection and (iii) will be subject on the date of the Closing, to the best knowledge of the Seller and the Company, to no prior assignment, lien, set-off or security interest. To the best of Seller's and the Company's knowledge, such accounts are not, and as of the date of the Closing will not be, (i) owed by -10- a person or entity that has sought the protection of any bankruptcy or insolvency laws, or (ii) the subject of any dispute as to payment. (l) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Seller has furnished to the Investors a true and complete copy of each statement, report, registration statement, definitive proxy statement and other filing filed with the Securities and Exchange Commission ("SEC") pursuant to the Exchange Act by Seller since September 30, 1992, and, prior to the Effective Time, the Seller will have furnished the Investors with true and complete copies of any additional documents filed with the SEC by the Seller prior to the Effective Time (collectively, the "Seller SEC Documents"). In addition, the Seller has made available to the Investors all exhibits to the Seller SEC Documents filed prior to the date hereof, and will promptly make available to the Investors all exhibits to any additional Seller SEC Documents filed or incorporated by reference prior to the Effective Time, in each case limited to those exhibits which relate to or otherwise affect the Assets and the Business. All documents required to be filed as exhibits to the Seller SEC Documents and which relate to or otherwise affect the Assets or the Business have been so filed. As of their respective filing dates, the Seller SEC Documents complied in all material respects as to form with the requirements of the Exchange Act and the Securities Act, and as of their respective filing dates, none of the Seller SEC Documents contain or contained any untrue statement of a material fact, or omit or omitted to state a material fact required to be stated therein or necessary to make the statements made therein relating to CSG, the Assets or the Business, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a subsequently filed Seller SEC Document. The financial statements, including the notes thereto, of Seller that relate in any way to CSG, the Assets or the Business included in the Seller SEC Documents (the "Seller Financial Statements") were and are complete and correct in all material respects as of their respective dates, complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as of their respective dates, and have been prepared in accordance with GAAP applied on a basis consistent throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto or, in the case of unaudited statements included in Quarterly Reports on Form 10-Qs, as permitted by Form 10-Q of the SEC). The Seller Financial Statements fairly present the consolidated financial condition and operating results of the Seller and its subsidiaries with respect to CSG and the Business at the dates and during the periods indicated therein (subject, in the case of unaudited statements, to normal, recurring year-end adjustments). There has been no change in the Seller accounting policies with respect to CSG, the Assets, or the Business except as described in the notes to the Seller Financial Statements. (m) ABSENCE OF CHANGES. Since December 8, 1995 there has not been any event, occurrence, circumstance, state of facts or condition of any type, whether or not in the ordinary course of business and whether or not covered by insurance, that has materially and adversely affected, or might reasonably be expected to materially and adversely effect, the Business, the Assets, or the business, properties, Prospects, or financial condition of CSG or the Company, taken as a whole, except for any change resulting from general economic conditions. (n) GOOD AND MARKETABLE TITLE. Each of the Seller, in relation to the Business, CSG and the Assets (as of the date hereof) has, and the Company (as of the date of the Closing) will have, good and marketable title to, or a valid leasehold interest in, the Assets, free and clear of all Liens and -11- Claims and have the right to use all the Assets in the operation of the Business, or that CSG used in the operation of the Business immediately prior to the transactions contemplated by Section 1.1 hereof. The Assets are in all material respects in good condition and repair, ordinary wear and tear excepted, and are in operating condition for the purpose for which they are currently being used. The Seller has, and, as of the Closing, the Company will have, legal rights to all of the intangible Assets, including the Contracts, free and clear of any Lien. (o) SUBSIDIARIES. The Company does not control, directly or indirectly, any other corporation, association, partnership, limited liability company or other business entity or own any shares of capital stock or other securities of any other Person. The Company has no subsidiaries. (p) TAXES AND TAX RETURNS. (i) (A) the Seller and the Company have duly filed all Tax Returns which are required by law to be filed by them; (B) the Company and the Seller, in relation to CSG and the operation of the Business and the Assets, have duly paid all Taxes due from them (whether or not shown on any Tax Return), and there are no assessments or claims for payment of Taxes now pending or, to the best knowledge of the Seller and the Company, threatened, nor is there any audit of the records of the Company or the Seller, in relation to CSG and operation of the Business and the Assets, being made or, to the best knowledge of the Company and the Seller, threatened by any taxing authority; (C) to the best knowledge of the Company, there are no facts or circumstances which could reasonably be expected to constitute a valid basis for assessments or claims for the payment of additional Taxes with respect to such Tax Returns; (D) each Tax Return of the Company and the Seller, in relation to CSG and the operation of the Business and the Assets, previously filed, or to be filed in the future relating to any period up to the date of Closing, is or will be (as the case may be) correct and complete in all material respects; and (E) the Company and the Seller, in relation to CSG and the operation of the Business and the Assets, are not currently the beneficiary of any extension of time within which to file any Tax Return. The amounts set up as provisions for Taxes, if any, on the pro forma September 30, 1995 and December 8, 1995 balance sheets of the Company included in the Financial Statements and Interim Balance Sheet are sufficient for the payment of all unpaid Taxes of the Company accrued for or applicable to the periods ended on such date and all years and periods prior thereto and for which the Company or the Seller in relation to CSG and operation of the Business and the Assets, at those dates, may have been or is liable. The Company and the Seller, in relation to CSG and the operation of the Business and the Assets, have properly withheld and paid, or accrued for payment, when due, to appropriate state and/or federal authorities, all sales and use taxes, if any, and all amounts required to be withheld from payments made to its employees, independent contractors, creditors, stockholders, shareholders or other third parties and has also paid all employment taxes as required under applicable laws. (ii) The Company and the Seller, in relation to CSG, the Business and the operation of the Assets, have not waived any statute of limitation in respect of any Taxes or assessments by any federal, state, county, local, foreign or other taxing jurisdiction or agreed to any extension of time with respect to an assessment or deficiency in any Tax. -12- (iii) The Company has not made any payments, and is not obligated to make any payments, nor is the Company a party to any agreement that under any circumstances could obligate it to make any payments, that would not be deductible under Section 280G of the Code. The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(a)(ii) of the Code. The Company is not a party to any tax allocation or tax sharing agreement. (iv) The Company (A) is not and never has been required to file a consolidated or combined state or federal income Tax Return with any other person or entity and (B) is not liable for the Taxes of any person under Treas. Reg. Section 1. 1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract or otherwise. (v) There are no Tax Liens (other than any Lien for current Taxes not yet due and payable) on any of the Assets. Neither the Company nor Holdco has or will become liable for any Taxes of CSG, the Seller or any present or former Affiliate of Seller as a result of the consummation of the transactions contemplated by this Agreement. (vi) Seller shall treat the transfer of the Assets described in Section 1.1 hereof as a taxable transaction for federal and state income tax purposes. (q) INSURANCE. Included in the Disclosure Letter is a complete list of all insurance policies currently maintained by the Company or by the Seller on behalf of CSG or the Company and in effect, and, with respect to each of such policies, a general description of the risks covered and claims insured; copies of all of such policies have been furnished or made available to Investors. (r) CERTAIN TRANSACTIONS. The Company is not indebted, either directly or indirectly, to any of the officers, directors, or stockholders of the Company, or, to their respective spouses or children, in any amount whatsoever, other than for payment of salary for services rendered and reasonable expenses, and none of said officers, directors, stockholders or any members of their immediate families, are indebted to the Company. To the best knowledge of the Seller and the Company, no officer, director or stockholder of the Company has any direct or indirect ownership interest in (other than ownership interests of one percent (1%) or less in companies whose securities are publicly traded), or any contractual relationship with, any firm, corporation or other Person with which the Company is Affiliated or with which the Company has a business relationship, or any firm, corporation or other Person which competes with the Company. To the best knowledge of the Seller and the Company, no officer, director or stockholder or shareholder (with respect to the Seller, only if such shareholder holds greater than 1% of the Seller's voting securities) of the Seller or the Company, or any member of their immediate families, are a party to or otherwise an interested party with respect to any material contract with the Company. (s) CONTRACTS AND COMMITMENTS. (i) Except as expressly contemplated by this Agreement, neither the Seller, in relation to CSG, the Assets or the Business, nor the Company is and will be, as of the Closing, a party to, or bound by, any currently effective and executory written or oral: -13- (A) collective bargaining agreement with any labor union; (B) contract for the employment of any officer, individual employee, or other person or entity on a full-time, part-time, consulting or other basis which, in any way, restricts or limits its right to terminate such contract at will (other than the existence of any law, public policy, or any oral discussions, or oral statements of policy which might, under current law, be interpreted as imposing upon the Company any covenant of good faith and fair dealing, or otherwise generally restrict the Company's ability to terminate its employees other than on an "at-will" basis or within sixty (60) days following delivery of such notice); (C) agreement or indenture relating to the borrowing of money in excess of $50,000 (in aggregate) or to the mortgaging, pledging, transfer of a security interest, or otherwise placing a Lien on any Asset or on any material asset or material group of assets of the Company or the Seller, in relation to CSG, the Assets or the Business; (D) guarantee of any obligation in excess of $50,000 (in aggregate); (E) lease or agreement under which it is the lessee of or holds or operates any property, real or personal, owned by any other party other than leases or agreements under which the aggregate annual rental payments of the Company or the Seller, in relation to CSG, the Assets or the Business, do not, in the aggregate, exceed $25,000; (F) agreement or group of related agreements with the same party or any group of parties who, to the best knowledge of the Seller and the Company, are Affiliated, which requires an aggregate payment by or to the Company or the Seller, in relation to CSG, the Assets or the Business, in an amount in excess of (x) with respect to purchase or sales orders in the ordinary course of business, $25,000, and (y) with respect to any other contracts, $50,000; (G) warranty agreement of the Company or the Seller, in relation to CSG, the Assets or the Business, with respect to services provided or products sold, licensed or leased by the Company or the Seller, in relation to CSG, the Assets or the Business, as seller, licensor or lessor; (H) contract or agreement prohibiting it from freely engaging in any business or competing anywhere in the world; (I) agreement which has not been fully performed and involves consideration in excess of $25,000 which in the best judgment of the Seller or the Company is material to the Business; (J) Contract; or (K) instrument, document, or written agreement relating to any of the Assumed Liabilities and to which the Seller or the Company is a party. -14- (ii) The Seller, in relation to CSG, the Business and the Assets, and the Company have performed in all material respects all obligations required to be performed by them and are not in material default under, or in material breach of, or after due inquiry by the officers of the Seller and the Company, in receipt of any claim of default under or breach of, any material agreement, all of which are described in the Disclosure Letter, to which any of them are a party or to which the Assets are subject; the Seller and the Company have no present expectation or intention of not fully performing all such obligations; the Seller in relation to CSG, the Business and the Assets, and the Company do not have any knowledge of any material breach or anticipatory breach by the other parties to any material contract or commitment, all of which are described in the Disclosure Letter, to which it is a party or to which any of CSG or the Assets are subject; and neither the Seller, in relation to CSG, the Business and the Assets, nor the Company is a party to any contract or contracts which, either individually or in the aggregate, are reasonably likely to result in a material loss to CSG, the Business or the Company. There are no warranty claims or other uninsured claims under completed contracts with respect to the Business which might involve a material monetary liability which is not reserved against in the Financial Statements. (iii) To the best knowledge of the Seller and the Company, no officer of the Company is a party to any oral or written contract which prohibits, or materially restricts or limits, or will prohibit or materially restrict or limit his performance of his duties or the fulfillment of his obligations as an employee and an officer of the Company. (iv) a true and correct copy of each of the written contracts and other documents and a description of the oral contracts which are referred to in the Disclosure Letter, together with any amendments or written waivers thereto, have been supplied to the Investors' counsel, Wilson Sonsini Goodrich & Rosati, P.C. (t) ERISA. (i) The Company does not and has not at any time maintained any employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar fringe or benefit plans, programs or arrangements (collectively, the "Employee Plans"). Other than as shown in the Disclosure Letter, neither Seller with respect to the Business nor any ERISA Affiliate of Seller maintains or has at any time maintained any Employee Plan for the benefit of any active, retired or former employee of the Business or their spouses or dependents. For purposes of this Agreement, the term "ERISA Affiliate" shall refer to all members of the group consisting of all corporations and all trades or businesses (whether or not incorporated) under common control with the Seller and/or the Company within the meaning of Section 414 of the Code. (ii) No Employee Plan maintained by the Seller or any ERISA Affiliate of Seller is subject to either Title IV of ERISA or Section 412 of the Code, and no such Employee Plan which is subject to such provisions has been terminated within the last six years. No Employee Plan of Seller with respect to the Business or any ERISA Affiliate of Seller has been administered in -15- violation of any of the health care continuation coverage requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Each Employee Plan of Seller with respect to the Business or any ERISA Affiliate of Seller intended to be qualified under Section 401(a) of the Code has either obtained a current favorable determination letter as to its qualified status (including its compliance with the Tax Reform Act of 1986) from the Internal Revenue Service or still has a remaining period of time under applicable Treasury Regulations in which to apply for such determination letter and make amendments necessary to obtain a favorable determination. To the best knowledge of the Seller, there are no pending or anticipated claims (other than claims for benefits incurred in the ordinary course of plan adminstration) or suits brought by or on behalf of any of the employees of the Business against or otherwise involving Seller's Employee Plans, and no event has occurred that would likely lead to any such claims or suits. All contributions, premiums or other payments due from the Company to (or under) any such Employee Plan have been fully paid or adequately provided for on the Company's most recent financial statements. (u) INTELLECTUAL PROPERTY. (i) The Disclosure Letter contains a list and description (showing in each case any product, device, process, service, business or publication covered thereby, the registered or other owner, expiration date and number, if any) of all Copyrights, Patent Rights and Trademarks (including all assumed or fictitious names under which the Seller or the Company is conducting the Business) owned by, licensed to or used by the Seller or the Company that are material to the conduct of the Business. (ii) The Disclosure Letter contains a list and description (showing in each case any owner, licensor or licensee) of all Software owned by, licensed to or used by the Seller or the Company that is material to the conduct of the Business other than "off the shelf" Software obtained for less than $5,000 individually which are subject to shrink wrap licenses. (iii) The Disclosure Letter contains a list and description (showing in each case the parties thereto) of all agreements, contracts, licenses, sublicenses and assignments which relate to (A) any Copyrights, Patent Rights or Trademarks listed in the Disclosure Letter, (B) any Trade Secrets owned by, licensed to or used by the Seller or the Company that are material to the conduct of the Business or (C) any Software listed in the Disclosure Letter. (iv) Except for existing licenses or as disclosed in the Disclosure Letter, the Seller, as of the date hereof, and the Company, as of the closing date either: (A) owns or will own the entire right, title and interest (subject to such exceptions as do not materially adversely affect CSG, the Assets, the Business, or the Company) in and to the Intellectual Property and Software listed in the Disclosure Letter free and clear of any Lien, except as would not have a material adverse effect on the Business, the Assets, CSG or the Company, or (B) has or will have the necessary right and license to use the same, and which (together with the services to be provided by the Seller to the Company pursuant to the License Agreement described in Section 4.4) will enable the Company to conduct the Business as it has been conducted in the past and as currently conducted, without restrictions that materially adversely affect the Business as it has been conducted and without additional material cost. -16- The Seller's Software which is used in the conduct of the Business, as of the date hereof, and the Company's Software, as of the date of the Closing, includes those flow charts, diagrams, coding sheets, source code listings and annotations, programmers' notes, information and work papers that the Seller or the Company is using to maintain, modify, develop and enhance such Software. (v) (A) All registrations for Copyrights, Patent Rights and Trademarks identified in the Disclosure Letter are valid and in force, and all applications to register any unregistered copyrights, Patent Rights and Trademarks so identified are pending and in good standing, and, to the best knowledge of the Seller and the Company, are all without challenge of any kind; (B) the Intellectual Property owned by the Seller, in respect of the Assets, the Business and CSG, and by the Company is valid and enforceable; and (C) the Seller has, as of the date hereof, and the Company will have, as of the Closing Date, the sole and exclusive right to bring actions for infringement or unauthorized use of the Intellectual Property and Software owned by the Seller or the Company and used in the Business, and, to the best knowledge of the Seller and the Company, there is no valid basis for any such action, subject, in the case of each of clause (A), (B) and (C), to such exceptions as do not materially adversely affect the Business, CSG, the Assets or the Company. Correct and complete copies of registrations for all registered Copyrights, Patent Rights and Trademarks identified in the Disclosure Letter (together with any subsequent correspondence with the U.S. Copyright Office or the U.S. Patent and Trademark Office, as applicable, or filings relating to the foregoing) have already been delivered or made available by the Seller to the Investors. (vi) (A) No infringement by the Seller with respect to the conduct of the Business or the Company of any Intellectual Property of any other Person has occurred within the past five years or results in any way from the operations of the Business and (B) neither the Seller nor the Company has had notice of, nor, to the best knowledge of the Seller and the Company, is there a valid basis for, a claim against it that the operations, activities, products, Software, equipment, machinery or processes of the Business infringe any Intellectual Property of any other Person, other than, in each case, any infringement which does not have a material adverse effect on the Business, CSG, the Assets or the Company. (vii) (A) No proceedings are pending or, to the best knowledge of the Seller and the Company, threatened against the Seller or the Company that challenge the validity or ownership of any Copyright, Patent Right or Trademark described in the Disclosure Letter; and (B) to the knowledge of the Seller and the Company, there is no infringing use of any of the same by any other Person. (v) ENVIRONMENTAL MATTERS. (i) Other than Hazardous Materials reasonably necessary for the conduct of the Business which are properly stored in material compliance with applicable Environmental Laws, no Hazardous Material is present on any Company Facility now owned or leased by the Company or the Seller during the time such property was owned or leased by the Company or the Seller and which is or was used for the conduct of the Business. -17- (ii) The Hazardous Material Activities of the Company, and the Seller, with respect to the operations of CSG, the Business and the Assets, have been conducted in material compliance with applicable Environmental Laws. (iii) The Disclosure Letter accurately describes all of the material Environmental Permits currently held by the Company, and by the Seller, with respect to the operations of CSG, the Business and the Assets, and, to the best knowledge of the Seller and the Company, such Environmental Permits are all of the Environmental Permits necessary for the continued conduct of any Hazardous Material Activities associated with CSG, the Business and the Assets as such activities are currently being conducted. All such Environmental Permits are valid, in full force and effect, and will survive the Closing. Except as would not have a material adverse effect on the Business, the Assets, the Company or CSG, to the best knowledge of the Seller and the Company, no circumstances exist which could cause any Environmental Permit to be revoked, modified, or rendered non-renewable upon payment of the permit fee or which could impose upon the Company the obligation to obtain any additional Environmental Permit. Except as would not have a material adverse effect on the Business, the Assets, the Company or CSG, all Environmental Permits and all other consents and clearances required by any Environmental Law or any agreement to which the Company is bound as a condition to the performance and enforcement of this Agreement or which are required by any Governmental Authority in connection with the transactions contemplated by this Agreement have been obtained or will be obtained prior to the Closing at no cost to the Investors or Holdco. (iv) The Company and the Seller, with respect to the operations of CSG, the Business and the Assets, have transferred or released Hazardous Materials only to those Disposal Sites described in the Disclosure Letter. To the best knowledge of the Seller and the Company, no action, proceeding, liability or claim by a private party or any Governmental Authority, exists or is threatened, against any Disposal Site or against the Seller or the Company with respect to any transfer or release of Hazardous Materials to a Disposal Site in connection with the operations of CSG, the Business and the Assets and there is no valid basis for such claim except for those actions, proceedings, liabilities or claims which, if adversely determined would not have a material adverse effect on the Business, the Assets, the Company or CSG. (w) COMPLIANCE WITH LAWS. The Company, and the Seller, with respect to the operation of CSG, the Business and the Assets, have complied in all respects with all Laws promulgated by any Governmental Authority, except for such noncompliance as would not have a material adverse effect on the Business, the Assets, the Company or CSG. (x) DISCLOSURE. No representation, warranty or statement by the Seller or the Company in this Agreement (including the Exhibits hereto), in the Disclosure Letter, in that certain Business Plan Summary of CSG dated September 18, 1995 (the "Business Plan," which is in the form previously furnished to the Investors and is included in the Disclosure Letter), in the Seller SEC Dcouments (taken as a whole), in the Seller Financial Statements (taken as a whole) or in any written certificate required by this Agreement to be furnished to the Investors or their counsel pursuant to this Agreement contains or will contain any untrue statement of material fact or, omits or will omit to -18- state a material fact necessary to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading, it being understood that Investors have not received or been provided with a "prospectus" (as defined in the Securities Act) with respect the Company, the Seller, CSG or the Business. To the extent that the foregoing representation and warranty is interpreted as relating to any projections which may have been delivered by the Seller or the Company to Investors, the Seller and the Company represent only that any such projections were prepared in good faith, that the Seller and the Company believe that there was at the time of the preparation of such projections a reasonable basis for such projections, and that the Seller and the Company are not aware of any change in their circumstances or other fact that has occurred that causes them to believe that CSG and the Company will be unable to meet the sales and income forecasts set forth in such projections. Seller has not failed to disclose to the Investors or the Company any fact or circumstance known to Seller that could reasonably be expected to have a material adverse effect on CSG, the Business, the Company or the Assets. (y) NO THIRD PARTY OPTIONS. Other than this Agreement, there are no existing agreements, options, commitments or rights with, of or to any person to acquire all or any portion of the Business or any of the Assets or any interest therein, except for those contracts entered into in the normal course of business consistent with Past Practice for the sale of inventory of Seller with respect to CSG. (z) NECESSARY ASSETS. The Assets are sufficient (and on the date of the Closing will be sufficient) to permit the Company to conduct, operate and maintain the Business in all material respects consistent with Past Practice and as contemplated by the Business Plan. (aa) CONDITIONS AFFECTING SELLER. To the best knowledge of Seller and the Company, there is no fact or development with respect to the products, services, customers, facilities, computer software, data bases, suppliers, operations or assets of CSG, the Business or the Assets which could materially adversely affect the Business. Seller has used all commercially reasonable efforts to keep available for the Company the services of the employees, customers and suppliers of Seller active in the conduct of the Business and the maintenance and operation of the Assets whose activities are material to the Business. To the best of Seller's and the Company's knowledge, the consummation of the transactions contemplated hereby will not result in any materially adverse loss of any customer or supplier of the Business. (bb) PERMITS, LICENSES. (i) There are no governmental permits necessary for or used by Seller to carry on the Business as now being conducted or to use and occupy the premises leased or owned by the Seller and used by CSG or for the Business as now being used, which governmental permits are required by currently effective laws, rules and regulations which have not yet been obtained, or if not obtained, would not have a material adverse effect on the Business, the Assets, the Company or CSG; (ii) all such governmental permits are in full force and effect and no proceeding is pending or, to the best knowledge of Seller and the Company, threatened, to revoke or limit any such governmental permit except for such revocations or limitations which would not have a material adverse effect on the Business, the Assets, the Company or CSG and (iii) Seller is in compliance in all respects with the terms and conditions of all such governmental permits except for -19- such non-compliance as could not reasonably be expected to have a material adverse effect on the Business. No action by Seller, the Investors or the Company is required in order that all such governmental permits will remain in full force and effect following the consummation of the transactions provided for herein. (cc) SELLER INTENT. The Seller has no present intent to transfer the Holdco Common Stock that it shall hold after the Closing. (dd) RETENTION OF CSG EARNINGS. As of the date of the Closing and the Effective Time, the Seller and the Company have complied in all respects with all terms of Section 7.6 hereof. ARTICLE IV CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE INVESTORS, HOLDCO AND HOLDCO SUB The obligations of the Investors, Holdco and Holdco Sub to effect the Merger at the Closing shall be subject to the fulfillment, or the waiver by the Investors and Holdco, at or prior to the Closing, of each of the following conditions (provided that any such waiver, to be effective, must be in writing and signed by Holdco and each of the Investors): 4.1 REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the Seller and the Company set forth in Article III hereof shall be true in all respects on the date of the Closing. The Disclosure Letter delivered to the Investors by the Seller prior to the date hereof shall not have been altered or withdrawn. 4.2 ABSENCE OF LITIGATION. There shall be no litigation, whether brought against the Seller, the Company, Holdco, Holdco Sub, or any of the Investors, seeking to prevent the consummation of the transactions contemplated by this Agreement, and, to the best knowledge of the Seller and the Company, no such litigation shall have been threatened. There shall not be in effect any order restraining or prohibiting the consummation of the transactions contemplated by this Agreement and there shall be no proceedings pending with respect thereto. Other than the EFI Litigation, there shall be no pending or, to the best knowledge of the Seller, the Company, Holdco, Holdco Sub and the Investors, threatened litigation, or asserted or unasserted claims, assessments, or other loss contingencies, materially affecting CSG, the Company, the Business, their Prospects, or the Assets other than as disclosed in the Exhibits delivered pursuant hereto as of the date of this Agreement. 4.3 PERFORMANCE OF OBLIGATIONS. The Company and the Seller shall have performed and complied, in all material respects, with all covenants, conditions and obligations required by this Agreement to have been performed by the Company and the Seller at or prior to the Closing. 4.4 DOCUMENTATION AT CLOSING. The Investors shall have received prior to or at the Closing all of the following, each in form and substance satisfactory to the Investors and their -20- counsel, and all of the following events shall have occurred prior to or simultaneous with the Closing hereunder: (a) A copy of all charter documents of the Seller and the Company certified by the Secretary of State of their respective states of incorporation, a certified copy of the resolutions of the board of directors and, if required, the shareholders of the Seller and stockholders of the Company, evidencing approval of this Agreement and all other matters contemplated hereby, a certified copy of the bylaws of the Seller and the Company, and certified copies of all documents evidencing other necessary corporate or other action and governmental approvals, if any, with respect to this Agreement and the Merger. (b) An opinion of Fenwick & West, counsel for the Seller, as to such matters as counsel to the Investors may reasonably request. (c) A certificate of the Secretary or an Assistant Secretary of the Seller stating the names of the officers of the Seller authorized to sign this Agreement and the other documents or certificates to be delivered pursuant to this Agreement by the Seller or any of its officers, together with the true signatures of such officers. A certificate of the Secretary or an Assistant Secretary of the Company stating the names of the officers of the Company authorized to sign this Agreement and the other documents or certificates to be delivered pursuant to this Agreement by the Company or any of its officers, together with the true signatures of such officers. The Investors, Holdco and Holdco Sub may conclusively rely on such certificates until they shall receive a further certificate of the Secretary or Assistant Secretary of the Seller or the Company, as the case may be, canceling or amending a prior certificate and submitting the signatures of the officers named in such further certificate. (d) A certificate from the Chief Executive Officer of the Seller stating that the representations and warranties of the Seller and the Company contained in Article III hereof and otherwise made by the Seller or the Company in writing in connection with the transactions contemplated hereby are true and correct as of the date hereof and as of the date of Closing, as if such representations and warranties were made on the date of Closing, and that all conditions required to be performed by the Seller or the Company prior to or at the Closing have been performed, and, to the best of such Person's knowledge, that no condition or event has occurred or is continuing or will result from the execution and delivery of this Agreement, which is a breach by the Seller or the Company of a material term hereof or would constitute a breach by the Seller or the Company of a material term hereof but for the requirement that notice be given or time elapse or both. A certificate from the President of the Company stating that the representations and warranties of the Company contained in Article III hereof and otherwise made by the Company in writing in connection with the transactions contemplated hereby are true and correct as of the date hereof and as of the date of Closing, as if such representations and warranties were made on the date of Closing, and that all conditions required to be performed by the Company prior to or at the Closing have been performed, and, to the best of such Person's knowledge, that no condition or event has occurred or is continuing or will result from the execution and delivery of this Agreement, which is a breach by the Company of -21- a material term hereof or would constitute a breach by the Company of a material term hereof but for the requirement that notice be given or time elapse or both. (e) An Invention Assignment and Non-Disclosure Agreement between each Key Employee of the Company and the Company in the form set forth in Exhibit 4.4A hereto shall have been executed and delivered by such Key Employee and the Company and shall be in full force and effect and binding upon the parties thereto. (f) A Registration Rights Agreement in the form set forth in Exhibit 4.4B hereto shall have been executed and delivered by the Seller and the management of the Company and shall be in full force and effect and binding upon the parties thereto, assuming execution and delivery thereof by the Investors and Holdco. (g) A Stockholders Agreement in the form set forth in Exhibit 4.4C hereto shall have been executed and delivered by the Seller and the management of the Company and shall be in full and effect and binding upon the parties thereto, assuming execution and delivery thereof by the Investors and Holdco. (h) An Escrow Agreement, mutually acceptable in form and substance to the Seller and the Investors and providing for an escrow of $4,700,000 for satisfaction of any claim for indemnification by the Investors, the Company and Holdco against the Seller pursuant to Article X hereof, shall have been executed and delivered by the Seller. Subject to any indemnification paid to Holdco, the Company or the Investors pursuant to Article X hereof, such Escrow Agreement shall specify that the escrow funds be released to the Seller, and not any other Person, as follows: (i) 50% of the amount initially placed in escrow shall be released after both (A) the Year-End Balance Sheet becomes final and binding in accordance with Section 1.5(b) and (B) the payment of any amount due to the Investors in accordance with Section 1.5(c) and (ii) the remainder of the amount initially placed in escrow (the "Escrow Remainder") shall be released to the Seller, and not any other Person, on the later of (C) the date six months after the date of the Closing and (D) the date of a final, non-appealable order dismissing with prejudice the EFI Litigation. Notwithstanding the foregoing, the Escrow Remainder shall be released to the Seller, and not to any other Person, if, at any time after the first anniversary of the date of the Closing, each of the three following conditions are true: (X) the consolidated net worth of the Seller, as determined in accordance with GAAP, is greater than $5,000,000, (Y) the Seller has reported positive net income in each of its two most recently regularly prepared quarterly financial statements, and (Z) to the best knowledge of the Seller, there are no facts or circumstances that have occurred or that are reasonably likely to occur, that, taken in aggregate, that could reasonably be expected to reduce the consolidated net worth of the Seller, as determined in accordance with GAAP, to an amount less than $5,000,000 within the next twelve months. In addition, if the Investors reasonably and in good faith determine that the maximum potential Investor Damages (as defined in Section 10.1 hereof) that could result from the EFI Litigation is less than $2,000,000, then the amount of the Escrow Remainder exceeding such maximum potential Investor Damages shall be released to the Seller, and not to any other Person. The terms of such Escrow Agreement shall provide that the escrow amount be kept under the possession and control of an independent financial institution in a separate account of such institution, and that Holdco have a -22- perfected security interest in the escrow account and the status of a first-priority secured creditor with respect to the escrow account. Such Escrow Agreement shall be in full force and effect and binding on the parties thereto, assuming execution and delivery by the Investors and Holdco. (i) A Restricted Stock Purchase Agreement, providing for the purchase of 152,500 shares of Holdco Common Stock by the management of the Company at a purchase price of $0.04 per share prior to the Effective Time, subject to vesting and otherwise mutually agreeable in form and substance to the Seller and the Investors, shall have been executed and delivered by the management of the Company. Such Stock Purchase Agreement shall specify vesting of 50% of the shares purchased by each member of management on the first anniversary of purchase, and straight-line monthly vesting for the remainder of shares over the following two years. Such agreement shall be in full force and effect and binding upon the parties thereto, assuming execution and delivery thereof by Holdco. (j) An opinion of patent counsel, addressed to Holdco, the Company and the Seller, of non-infringement by the Seller and the Company of U.S. Patent No. 4,941,038, in form and substance acceptable to the Investors and their legal counsel, which acceptance shall not be unreasonably withheld. (k) Such UCC financing statements shall have been filed with respect to the escrow account established pursuant to the Escrow Agreement referenced in clause (h) above, as may be necessary to ensure that Holdco has obtained the status of a secured creditor with respect thereto. (l) To the extent considered reasonably necessary by the Investors, consents of the creditors of the Seller and any other consents to the transactions contemplated hereby shall have been obtained. 4.5 MATERIAL ADVERSE CHANGE. There shall not have been, subsequent to December 8, 1995, any material adverse change in the financial condition of the Business, CSG's or the Company's assets, liabilities, business, results of operations, Prospects or customer, supplier or employee relations, or the Assets. 4.6 CONDUCT OF BUSINESS; REVENUES. The Business shall have been conducted up until the date of the Closing as usual and consistent with the practices of the Company prior to December 8, 1995. All practices of CSG, the Company and the Business, including procurement of inventory and raw materials, payment of accounts payable, and fulfillment of customer orders shall have been conducted to the date of Closing in the ordinary course of business. The revenues of CSG and the Company for the calendar quarter ending on December 31, 1995 shall have been at least $7,000,000. 4.7 CONSENTS, WAIVERS, ETC. Prior to the Closing, the Seller, the Investors, Holdco, Holdco Sub and the Company shall have obtained all consents or waivers, if any, necessary to transfer assets to the Company in accordance with Section 1.1 hereof (including, but not limited to, those consents or waivers listed on Exhibit 4.7 hereto), to issue the Securities, to effect the Merger, and to -23- carry out the transactions contemplated hereby, and all such consents and waivers shall be in full force and effect. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement, all transactions contemplated by this Agreement (including the transactions described in Section 1.1) and other agreements and instruments executed and delivered by the Seller, the Investors, Holdco, Holdco Sub and the Company in connection herewith shall have been made or taken, except for any post-sale filing that may be required under federal and state securities laws. In addition to the documents set forth above, the Seller and the Company shall have provided or made available to the Investors any other information or copies of documents that they may reasonably request. 4.8 ACCOUNTING REVIEW. The Investors shall have received, at Holdco's expense, an accounting review by the Investors' Accountants of all financial statements relating to CSG, the Business and the Company provided to the Investors by the Seller or its representatives. Investors' Accountants, at Holdco's expense, shall have determined that audited financial statements of the Company, prepared in accordance with GAAP and Regulation S-X promulgated under the Securities Act throughout the periods involved and fairly presenting the financial position and result of operations of CSG, and, on a pro forma basis, the Company for the periods covered, for the years ended September 30, 1993, 1994 and 1995 (the "Audited Financial Statements"), could be readily produced by the Company from its records within 60 days after the Closing. 4.9 PERFORMANCE UNDER RESTRICTED STOCK PURCHASE AGREEMENT. Prior to the Effective Time, the management of the Company shall have purchased from Holdco, in accordance with the terms of a Restricted Stock Purchase Agreement entered into in accordance with Section 4.4(i), 152,500 shares of Holdco Common Stock at $0.04 per share, assuming performance by Holdco of its obligations under such Restricted Stock Purchase Agreement. 4.10 HART-SCOTT-RODINO WAITING PERIOD. Any applicable waiting period with respect to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired. 4.11 ASSETS TRANSFER. All documentation pursuant to which the transactions described in Section 1.1 shall have been presented to the Investors and Investors' counsel for review and shall have been consistent with this Agreement and satisfactory in form and substance to the Investors and their counsel prior to the consummation of such transactions. The consummation of the transaction pursuant to such documentation shall have been satisfactory in form and substance to the Investors and their legal counsel. All of the Assets, including the Contracts, shall have been transferred or assigned to the Company free and clear of all Liens, other than the Assumed Liabilities, and the Investors and their counsel shall have received evidence of such transfers reasonably satisfactory to them. 4.12 ELECTION UNDER SECTION 338(H)(10). The Seller shall have executed the Form 8023A prepared in accordance with Section 6.5(d) hereof. -24- 4.13 NUBUS EQUIPPED COMPUTERS. The Investors shall have received assurances reasonably satisfactory to them that the Company has been allocated by Apple Computer, Inc., for sale to the Company, 400 Nubus Apple computers consistent with the needs of the Company. ARTICLE V CONDITIONS PRECEDENT TO SELLER'S AND COMPANY'S OBLIGATIONS The obligations of the Seller and the Company to cause the consummation by the Company of the Merger at the Closing, of the Seller to contribute the Assets to the Company prior thereto, and of the Seller and the Company to perform their other obligations under this Agreement shall be subject to the fulfillment, or the waiver by the Seller and the Company, at or prior to the Closing, of each of the following conditions (provided that any such waiver, to be effective, must be in writing and signed by the Seller and the Company): 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Investors, Holdco and Holdco Sub in this Agreement shall have been true and correct at and as of the date hereof, and they shall be true and correct at and as of the Closing with the same force and effect as though made at and as of that time. 5.2 ABSENCE OF LITIGATION. There shall be no litigation, whether brought against the Seller, the Company, Holdco, Holdco Sub or any of the Investors, seeking to prevent the consummation of the transactions contemplated by this Agreement, and, to the best knowledge of Holdco, Holdco Sub, the Investors, the Seller and the Company, no such litigation shall have been threatened. There shall not be in effect any order restraining or prohibiting the consummation of the transactions contemplated by this Agreement and there shall not be any proceedings pending with respect thereto. There shall be no pending or, to the best knowledge of the Investors, Holdco and Holdco Sub, threatened litigation, asserted claims, assessments or other loss contingencies, materially affecting Holdco other than as set forth in this Agreement. 5.3 PERFORMANCE OF OBLIGATIONS. Investors, Holdco and Holdco Sub shall have performed and complied, in all material respects, with all of their covenants, conditions and obligations required by this Agreement to be performed or complied with by them at or prior to the Closing. 5.4 FAIRNESS OPINION. Prior to the Closing, the Seller shall have obtained an opinion by Broadview Associates, L.P. stating that the transactions contemplated hereby shall be fair to the shareholders of the Seller from a financial point of view. 5.5 CONSENTS, WAIVERS, ETC. Prior to the Closing, the Seller, the Investors, Holdco, Holdco Sub, and the Company shall have obtained all consents or waivers, if any, necessary for the Seller to contribute the Assets to the Company, for the Company to accept and receive the Assets and assume the Contracts from the Seller, for the Company to consummate the Merger, for Holdco to -25- issue the Securities and to carry out the transactions contemplated hereby, and all such consents and waivers shall be in full force and effect. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement, and other agreements and instruments executed and delivered by the Seller, the Investors, Holdco, Holdco Sub, and the Company in connection herewith shall have been made or taken, except for any post-sale filing that may be required under federal and state securities laws. 5.6 BOARD OF DIRECTORS. The number of members of the board of directors of Holdco Sub shall have been fixed at five and no less than four of these five members shall have been appointed as follows: (i) Mr. Charles Berger (as the initial designee of the Seller); (ii) two designees of the Investors (one such designee as a Series A Director, as defined in the Certificate of Incorporation of Holdco); and (iii) Kevin Macgillivray (as the initial designee of the management of the Company). 5.7 HOLDCO CASH. Holdco's accounts shall contain approximately $23,500,000 in cash and Holdco shall have no Liabilities other than as set forth in or contemplated by this Agreement and Holdco's authorized officers shall have executed a certificate to that effect. 5.8 HART-SCOTT RODINO WAITING PERIOD. Any applicable waiting period with respect to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired. 5.9 DOCUMENTATION AT CLOSING. The Seller and the Company shall have received prior to or at the Closing all of the following, each in form and substance satisfactory to the Seller and the Company and their counsel, and all of the following events shall have occurred prior to or simultaneous with the Closing hereunder: (a) A copy of all charter documents of Holdco and Holdco Sub certified by the Secretary of their respective states of incorporation, a certified copy of the resolutions of the board of directors and, if required, the stockholders of Holdco and Holdco Sub, evidencing approval of this Agreement, and other matters contemplated hereby, a certified copy of the bylaws of Holdco and Holdco Sub, and certified copies of all documents evidencing other necessary corporate or other action and governmental approvals, if any, with respect to this Agreement, the Merger and the transactions contemplated by this Agreement. (b) An opinion of Wilson Sonsini Goodrich & Rosati, P.C., counsel for Investors, as to such matters as counsel to the Seller may reasonably request. (c) A certificate of the Secretary or an Assistant Secretary of Holdco stating the names of the officers of Holdco authorized to sign this Agreement and the other documents or certificates to be delivered pursuant to this Agreement by Holdco or any of its officers, together with the true signatures of such officers. A certificate of the Secretary or an Assistant Secretary of Holdco Sub stating the names of the officers of Holdco Sub authorized to sign this Agreement and the other documents or certificates to be delivered pursuant to this Agreement by Holdco Sub or any of its officers, together with the true signatures of such officers. The Seller and the Company may -26- conclusively rely on such certificates until they shall receive a further certificate of the Secretary or Assistant Secretary of Holdco or Holdco Sub, as the case may be, canceling or amending a prior certificate and submitting the signatures of the officers named in such further certificate. (d) A certificate from the Chief Executive Officer of Holdco stating that the representations and warranties of Holdco and Holdco Sub contained in Article II hereof and otherwise made by Holdco or Holdco Sub in writing in connection with the transactions contemplated hereby are true and correct as of the date hereof and as of the date of Closing, as if such representations and warranties were made on the date of Closing and that all conditions required to be performed by Holdco or Holdco Sub prior to or at the Closing have been performed, and that, to the best of such Person's knowledge, no condition or event has occurred or is continuing or will result from the execution and delivery of this Agreement, which is a breach by Holdco or Holdco Sub of a material term hereof or would constitute a breach by Holdco or Holdco Sub of a material term hereof but for the requirement that notice be given or time elapse or both. A certificate from the Chief Executive Officer of Holdco Sub stating that the representations and warranties of Holdco Sub contained in Article II hereof and otherwise made by Holdco Sub in writing in connection with the transactions contemplated hereby are true and correct as of the date hereof and as of the date of Closing, as if such representations and warranties were made on the date of Closing and that all conditions required to be performed by Holdco Sub prior to or at the Closing have been performed, and that, to the best of such Person's knowledge, no condition or event has occurred or is continuing or will result from the execution and delivery of this Agreement, which is a breach by the Company of a material term hereof or would constitute a breach by the Company of a material term hereof but for the requirement that notice be given or time elapse or both. (e) A Registration Rights Agreement in the form set forth in Exhibit 4.4B hereto shall have been executed and delivered by the Investors and Holdco and shall be in full force and effect and binding upon the parties thereto, assuming execution and delivery thereof by Seller and the management of the Company. (f) A Stockholders Agreement in the form set forth in Exhibit 4.4C hereto shall have been executed and delivered by the Investors and Holdco and shall be in full and effect and binding upon the parties thereto, assuming execution and delivery thereof by the Seller and the management of the Company. (g) Holdco shall have adopted a Management Stock Option Plan mutually agreeable in form and substance to the Seller and the Investors, which plan shall reserve for issuance options for 261,758 shares of Holdco Common Stock. Such plan either shall specify that the board of directors of Holdco shall specify appropriate vesting for each option granted under the plan, or shall specify specific vesting provisions for each option issued thereunder that are mutually agreeable to the Seller and the Investors. (h) A Restricted Stock Purchase Agreement, providing for the purchase of 152,500 shares of Holdco Common Stock by the management of the Company at a purchase price of $0.04 per share, subject to vesting and otherwise mutually agreeable in form and substance to the -27- Seller and the Investors, shall have been executed and delivered by Holdco. Such Stock Purchase Agreement shall specify vesting of 50% of the shares purchased by each member of management on the first anniversary of purchase, and straight-line monthly vesting for the remainder of shares over the following two years. Such agreement shall be in full force and effect and binding upon the parties thereto, assuming execution and delivery thereof by the management of the Company. 5.10 PERFORMANCE UNDER RESTRICTED STOCK PURCHASE AGREEMENT. Holdco shall have performed all of its obligations under a Restricted Stock Purchase Agreement entered into in accordance with Section 5.9(h), unless the management of the Company has not performed all of their obligations thereunder. ARTICLE VI POST-CLOSING COVENANTS 6.1 AFFIRMATIVE COVENANTS OF HOLDCO OTHER THAN REPORTING REQUIREMENTS. Without limiting any other covenants and provisions hereof, Holdco covenants and agrees that, after the Closing and for so long as (i) shares of either series of Preferred Stock or (ii) the Subordinated Notes remain outstanding, Holdco will perform and observe the following covenants and provisions and will cause each of its subsidiaries to perform and observe such of the following covenants and provisions as are applicable to such subsidiaries, and will not, without approval of the holders of a majority of the shares of Preferred Stock and of a majority in interest in principal amount of the holders of the Subordinated Notes, amend or revise any terms of this Section: (a) PAYMENT OF TAXES AND TRADE DEBT. Pay and discharge, and cause each of its subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or business, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims, which, if unpaid, might become a lien or charge upon any properties of Holdco or any of its subsidiaries, provided that neither Holdco nor any subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim that is being contested in good faith and by appropriate proceedings if Holdco or its subsidiary concerned shall have set aside on its books adequate reserves with respect thereto as shall be determined by its board of directors. Pay on a timely basis the Subordinated Notes as and when due. Pay and cause each of its subsidiaries to pay, when due, or in conformity with customary trade terms, all lease obligations, all trade debt, and all other Indebtedness incident to the operations of Holdco or its subsidiaries, except such as are being contested in good faith and by appropriate proceedings so long as the Company or the subsidiary concerned shall have set aside on its books adequate reserves with respect thereto as shall be determined by its board of directors. (b) MAINTENANCE OF INSURANCE. Maintain, and cause each of its subsidiaries to maintain, with responsible and reputable insurance companies or associations, insurance in such amounts and covering such risks as is usually carried by companies of similar size engaged in similar businesses and owning similar properties in the same general areas in which Holdco or such subsidiary -28- operates, but in any event in amounts sufficient to allow Holdco or subsidiaries to replace any of their properties that might be damaged or destroyed without additional expenditures by Holdco and its subsidiaries except for reasonable deductibles. Within sixty (60) days of the date of this Agreement, Holdco shall use all commercially reasonable efforts to obtain and thereafter maintain term life insurance payable to Holdco in the amount of $1,000,000 on the life of Kevin Macgillivray. (c) PRESERVATION OF CORPORATE EXISTENCE. Except as permitted by Section 6.2(a), Preserve and maintain, and cause each of its subsidiaries to preserve and maintain, its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each of its subsidiaries to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership of its properties. Preserve and maintain, and cause each of its subsidiaries to preserve and maintain, all material licenses and other rights to use patents, processes, licenses, trademarks, trade names, inventions, intellectual property rights or copyrights owned or possessed by it and necessary to the conduct of its business; PROVIDED, HOWEVER, that nothing contained in this Section 6.1(c) shall require Holdco to bring or maintain a cause of action with respect to the foregoing. (d) COMPLIANCE WITH LAWS. Comply, and cause each of its subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders of any United States' federal or state governmental authority, noncompliance with which could materially adversely affect its business or condition, financial or otherwise, except non-compliance being contested in good faith through appropriate proceedings so long as Holdco or its subsidiary concerned shall have set up sufficient reserves required under GAAP with respect to such items and except for such noncompliance as would not have a material adverse effect on Holdco, its subsidiaries or its business taken as a whole. Use its best efforts to comply, and cause each of its subsidiaries to comply, in all material respects with all applicable foreign laws, rules, regulations and orders of any foreign governmental authority, noncompliance with which could materially adversely affect its business or condition, financial or otherwise, except non-compliance being contested in good faith through appropriate proceedings so long as Holdco or its subsidiary concerned shall have set up sufficient reserves required under GAAP with respect to such items and except for such noncompliance as would not have a material adverse effect on Holdco, its subsidiaries or its business taken as a whole. (e) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep, and cause each of its subsidiaries to keep, adequate records and books of account, in which complete entries will be made in accordance with GAAP, reflecting all financial transactions of Holdco and such subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection within its business shall be made. (f) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve, and cause each of its subsidiaries to maintain and preserve, all of its properties necessary or useful in the proper conduct of its business, in good repair, working order and condition, ordinary wear and tear excepted. -29- (g) BUDGETS AND BOARD APPROVAL. Prior to the commencement of each fiscal year, prepare and submit to, and obtain the approval of a majority of the board of directors of Holdco of a budget and operating plan for the upcoming fiscal year, including projections or forecasts of capital and operating expenses, cash flow, and profits and losses, all itemized in reasonable detail and obtain the approval of such budget and plan not more than sixty (60) days following the end of the prior fiscal year. (h) AGREEMENTS. Use its best efforts to cause each officer, Key Employee, consultant and other personnel, including employees, agents and contractors who have contributed to or participated in the conception and development of the intellectual property on behalf of CSG, the Company or Holdco and all employees now or hereafter employed by Holdco or any of its subsidiaries promptly to execute an Invention Assignment and Non-Disclosure Agreement substantially in the form of Exhibit 4.4A hereto or in a form approved by the board of directors of Holdco. (i) BOARD OF DIRECTORS; INDEMNIFICATION. The board of directors of Holdco initially shall consist of five (5) directors. The certificate of incorporation or bylaws of Holdco and its subsidiaries shall at all times provide for the indemnification of the board of directors of Holdco and its subsidiaries to the full extent provided by the law of the jurisdiction in which Holdco or its concerned subsidiary, as the case may be, is organized. Holdco and its subsidiaries shall use all commercially reasonable efforts to obtain and maintain directors and officers liability insurance with coverage and premium levels consistent with policies carried by companies of similar size. Holdco and its subsidiaries shall pay for reasonable travel and living expenses of the members of their board of directors who are not employees of Holdco or its subsidiaries in attending meetings of their board of directors and committees thereof and in conducting other business on behalf of Holdco or its concerned subsidiary, as the case may be. (j) RESERVATION FOR SERIES B PREFERRED STOCK. As long as any shares of Series B Preferred Stock remain outstanding, Holdco shall keep reserved sufficient shares of Holdco Common Stock to allow all of such outstanding shares of Series B Preferred Stock to convert into the number of shares of Holdco Common Stock specified by the terms of the Certificate of Incorporation of Holdco. 6.2 NEGATIVE COVENANTS OF HOLDCO. Without limiting any other covenants and provisions hereof, Holdco covenants and agrees that, after the Closing and for so long as either shares of Preferred Stock or the Subordinated Notes remain outstanding, it will not without the consent of a majority in interest in principal amount of the Subordinated Notes and the holders of a majority of the shares of Preferred Stock take the actions contained in the following covenants and provisions, and will cause each subsidiary of Holdco to not, without the consent of a majority in interest in principal amount of the Subordinated Notes and the holders of a majority of the shares of Preferred Stock take actions contained in the following covenants and provisions as are applicable to such subsidiary, and will not, without the approval of the holders of a majority of the Preferred Stock and of a majority in interest in principal amount of the holders of the Subordinated Notes, amend or revise any terms of this Section: -30- (a) MERGER, SALE OF ASSETS, ETC. Merge or consolidate with, or sell, assign, lease or otherwise dispose of or voluntarily part with the control of (whether in one transaction or in a series of transactions), a material portion of its assets (whether now owned or hereinafter acquired) to any Person, or permit any of its subsidiaries to do any of the foregoing, except for sales or other dispositions of assets in the ordinary course of business and except that (1) any wholly-owned subsidiary of Holdco may merge into or consolidate with or transfer assets to any other wholly-owned subsidiary of Holdco, (2) any wholly-owned subsidiary of Holdco may merge into or transfer assets to Holdco, and (3) Holdco may merge any Person into it or otherwise acquire such Person so long as Holdco is the surviving entity, the holders of voting stock of Holdco immediately prior to such merger are the holders of more than 50% of Holdco immediately following such merger, such merger or acquisition does not result in the violation of any of the provisions of this Agreement and no such violation exists at the time of such merger or acquisition. The foregoing shall not prohibit Holdco or any of its subsidiaries from pledging or granting a security interest in a material portion of its assets, provided that such transaction has been approved by the board of directors of Holdco. (b) MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES. Create any subsidiary that is not a wholly-owned subsidiary, sell or otherwise dispose of any shares of capital stock of any of its subsidiaries, except to Holdco or another of its subsidiaries, or permit any of its subsidiaries to issue, sell or otherwise dispose of any shares of its capital stock or the capital stock of any of its subsidiaries except to Holdco or another of its subsidiaries; provided, however, that nothing herein contained shall prevent any merger, consolidation or transfer of assets permitted by subsection 6.2(a). (c) DEALINGS WITH AFFILIATES AND OTHERS. Enter into any transaction, including, without limitation, any loans or extensions of credit or royalty agreements, with any officer or director of Holdco or any officer or director of any of its subsidiaries or holder of any class of capital stock of Holdco, or any member of their respective immediate families or any corporation or other entity directly or indirectly controlled by one or more of such officers, directors or stockholders or members of their immediate families (other than any such transactions in the ordinary course of business which are in an amount not in excess of $50,000 and loans for purchases of Holdco securities by employees, officers, directors or consultants and housing loans to officers and directors, so long as approved by a majority of the disinterested members of the board of directors of Holdco). (d) CHANGE IN NATURE OF BUSINESS. Make, or permit any of its subsidiaries to make, any material change in the nature of its business as carried on at the date hereof by CSG or the Company or as contemplated in written materials delivered to the Investors prior to the date hereof. (e) DIVIDENDS. While the Preferred Stock is outstanding, declare or pay any dividends on any class of Holdco's or any of its subsidiaries' capital stock now or hereafter outstanding (other than dividends on the Preferred Stock, dividends payable in Holdco Common Stock or dividends payable by any of Holdco's subsidiaries to either Holdco or another subsidiary that is the parent of the paying subsidiary), or purchase, redeem or otherwise acquire or retire any of Holdco's or any of its subsidiaries capital stock of any class now or hereafter outstanding or otherwise return capital or make distributions of assets to stockholders as such, other than redemption of the Series A Preferred Stock and the Series B Preferred Stock pursuant to the Certificate of -31- Incorporation of Holdco and repurchases of capital stock under other agreements providing for the repurchase of Holdco stock from employees, officers, directors or consultants on termination of their relationship with Holdco. (f) AGREEMENTS WITH EMPLOYEES FOR THE PURCHASE OF SECURITIES. Except as set forth herein, without approval of a majority of the disinterested members of the board of directors of Holdco, accelerate or terminate the vesting schedules under which restrictions on transfer of capital stock of Holdco lapse over a period of time with respect to capital stock held by employees, officers, directors or consultants of Holdco, increase the number of shares (such number to be equitably adjusted in the event of any stock split, combination, reclassification or other similar event occurring on or after the date of this Agreement) currently available for exercise under Holdco's stock option plan or otherwise, or issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange to directors, officers, employees and/or consultants shares of Holdco Common Stock, or options exercisable therefor, except as issued at fair market value, or granted with an exercise price equal to fair market value, at the time of issuance or grant, to directors, officers, employees or consultants of Holdco and any of its subsidiaries. (g) ISSUANCES OF SECURITIES AND EMPLOYEE STOCK OPTIONS. Except as set forth herein, issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, (i) any equity security of Holdco (other than Holdco Common Stock), including, without limitation, shares of Preferred Stock, (ii) any debt security of Holdco that by its terms is convertible into or exchangeable for any equity security of Holdco, (iii) any security of Holdco that is a combination of debt and equity, or (iv) any option, warrant or other right to subscribe for, purchase or otherwise acquire any equity security or any such debt security, except for (x) Holdco Common Stock issued as a stock dividend to holders of Holdco Common Stock or upon any subdivision or combination of shares of Holdco Common Stock, and (y) shares of Holdco Common Stock (or options to purchase such stock), issued pursuant to stock plans or arrangements approved by all of the disinterested members of the board of directors of Holdco. 6.3 REPORTING REQUIREMENTS OF HOLDCO. Holdco will furnish the following to each holder of the Subordinated Notes, to each holder who owns of record or beneficially any Preferred Stock, and to each holder of at least 10% of the issued and outstanding Holdco Common Stock: (a) as soon as available and in any event within thirty (30) days after the end of each fiscal month of Holdco, unaudited Consolidated balance sheets of Holdco and its subsidiaries as of the end of such month and Consolidated statements of income and of statements of cash flow of Holdco and its subsidiaries for the period ending with such month, setting forth in each case in comparative form the corresponding figures for the corresponding period of the prior fiscal year, all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief executive officer or chief financial officer of Holdco as having been prepared in accordance with GAAP except for a lack of customary year end disclosures, footnotes and year end adjustments; (b) as soon as available and in any event within ninety (90) days after the end of each fiscal year of Holdco, a copy of the annual audit report for such year for Holdco and its -32- subsidiaries, including therein consolidated balance sheets of Holdco and its subsidiaries as of the end of such fiscal year and consolidated statements of income and retained earnings and of statements of cash flow of Holdco and its subsidiaries for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, all duly certified by a "Big Six" independent public accounting firm selected by Holdco's board of directors; (c) at the time of delivery of each monthly and annual statement, a certificate, executed by the chief executive officer or chief financial officer of Holdco in the case of monthly statements, and Holdco's independent public accountants in the case of annual statements, stating that such officer or accountants, as the case may be, has caused Sections 6.1(a) (insofar as it relates to payment of federal and state income taxes), 6.2(b), 6.2(c), 6.2(f) and 6.2(g) to be reviewed and has no knowledge of any default by Holdco or any of its subsidiaries in the performance or observance of any of the provisions of this Agreement or, if such officer or accountant has such knowledge, specifying such default and the nature thereof; (d) promptly upon the request of any holder of at least $250,000 in principal amount of Subordinated Notes or any Person holding an aggregate of at least 250 shares of Preferred Stock, any written report submitted to Holdco by independent public accountants in connection with an annual or interim audit of the books of Holdco and its subsidiaries made by such accountants; (e) promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, materially affecting Holdco and its subsidiaries when considered as a whole; (f) at least thirty (30) days prior to the commencement of each fiscal year of Holdco, a copy of the operating plan and budget provided for in Section 6.1(g); (g) upon request, to any holder of at least $250,000 in principal amount of Subordinated Notes or any Person holding an aggregate of at least 250 shares of Preferred Stock, copies of all materials provided to the committees of the board of directors of Holdco, and to any such holder or Person who is not a member of the board of directors of Holdco copies of all materials provided to the board of directors of Holdco and all other information respecting the business, properties or the condition or operations, financial or otherwise, of Holdco or any of its subsidiaries that any Investor may from time to time reasonably request; PROVIDED, HOWEVER, that Holdco shall not be required to deliver any such information to the extent that such action would, in the opinion of counsel to Holdco, be deemed to constitute a waiver of the attorney-client privilege. Any person receiving the information distributed pursuant to subsections (f) and (g) above agrees to hold such information in confidence to the same extent that would be required of a member of Holdco's board of directors. 6.4 CONFIDENTIALITY. Any confidential information obtained by any holder of the Subordinated Notes or the Preferred Stock pursuant to this Agreement shall be treated as confidential -33- and shall not be disclosed to a third party without the consent of the board of directors of Holdco, except that such information shall not be deemed confidential for the purpose of enforcement of this Agreement or valuation of the Preferred Stock or Subordinated Notes and except that any such holder may otherwise disclose such information to its partners if such partners agree to be bound by the restrictions contained in this Section. At the request of the board of directors of Holdco, any Person to receive or receiving any information pursuant to this Agreement shall execute and deliver a reasonable confidentiality agreement in form and substance reasonably satisfactory to the board of directors of Holdco. 6.5 COVENANTS OF SELLER. (a) FURTHER ASSET TRANSFER. From and after the date of the Closing, the Seller agrees to convey, transfer, and assign to the Company, free and clear of all Liens, any tangible or intangible rights, properties or assets then held by the Seller (i) that are necessary to permit the Company to conduct, operate and maintain the Business consistent with Past Practice and as it is proposed to be conducted, (ii) that are among the Assets, including without limitation, the Contracts, (iii) the conveyance, transfer or assignment of which would have been necessary for representations and warranties of the Seller herein to be true and correct as of the date of the Closing, or (iv) the conveyance, transfer or assignment of which was or is required by the covenants of the Seller contained in this Agreement. To the extent that any Contract was not assigned to the Company because of a limit on assignability of such Contract, the Seller shall take all actions necessary to pass through to the Company all benefits of such Contracts and the Company shall perform all obligations of the Seller thereunder and shall indemnify the Seller with respect to such obligations; PROVIDED that such indemnification shall be contingent on the passing of all benefits of such Contracts to the Company; PROVIDED, FURTHER, that compliance of the Seller with this sentence shall not excuse the Seller from any breach of the representations, warranties and covenants of the Seller, resulting from such non-assignment. (b) EFI NON-INFRINGEMENT OPINION. The Seller shall use its best efforts to cause the opinion of patent counsel described in Section 4.4(j) to be updated and delivered to Holdco and the Company if reasonably requested to do so by Holdco or the Company. YEAR-END BALANCE SHEET. The Seller shall cooperate with and give assistance to the Investors and the Investors' Accountants in relation to the preparation of the Year-End Balance Sheet and the Audited Financial Statements. Until the Year-End Balance Sheet is final and binding in accordance with Section 1.5(b) and until the Audited Financial Statements have been prepared and finalized, the Seller shall give to the Additional Accounting Firm, the Investors, Holdco, the Company and their counsel, accountants and other authorized representatives, on prior request therefor from the Additional Accounting Firm, the Investors, Holdco, the Company or such representatives, such access during normal business hours to copies of the Seller's financial statements, books and records so as to allow the Investors' Accountants to prepare the Year-End Balance Sheet, so as to allow the Additional Accounting Firm to resolve disputes as specified in Section 1.5(b), and so as to allow Holdco, the Company and their accountants to prepare the Audited Financial Statements. -34- (d) ELECTION UNDER SECTION 338(H)(10). Seller shall join with Holdco in preparing a protective joint election on Form 8023A for the Company under Section 338(h)(10) of the Code and under any applicable similar provisions of state law with respect to the Merger. The Form 8023A shall be prepared by advisers of Holdco and executed by those parties hereto required to execute such form within 90 days after the date of the Closing and filed by Holdco if it so elects in its sole discretion. Information accompanying the Form 8023A will reflect the purchase price allocation determined by Holdco; the parties hereto agree to take no position for any tax or reporting purposes which is contrary to such allocation. (e) TAX TREATMENT. The Seller shall treat the formation of the Company and the transfer of the Assets described in Section 1.1 hereof as a taxable transaction for federal and state income tax purposes. ARTICLE VII OBLIGATIONS PENDING THE CLOSING Between the date hereof and the Closing, unless this Agreement is terminated sooner, pursuant to Section 12.2 hereof: 7.1 ACCESS. The Seller shall give to the Investors and their counsel, accountants and other authorized representatives from and after the date of execution of this Agreement, on prior request therefor from the Investors or such representatives, such access during normal business hours to the premises, employees, agents and consultants of the Seller relating to CSG, the Business or the Assets, and of the Company, and such copies of the Seller's financial statements, books and records, and contracts and leases and other documentation relating to CSG, the Business, the Assets or the Company, so as to enable the Investors to inspect and evaluate all aspects of the business and operations, assets, operating results, financial condition, future Prospects, capitalization, ownership, and legal and regulatory affairs of CSG, the Business and the Company and to verify the accuracy of the information heretofore furnished to the Investors and the representations and warranties made in this Agreement by the Seller or the Company with respect to the foregoing matters. The Seller agrees that it will take no action to prevent or delay CSG or the Company from furnishing or making available all information reasonably requested by the Investors. Each of the Investors agrees to conduct its review in a manner designed to minimize any disruption of the Seller's and the Company's operations. All information and records obtained by the Investors pursuant to this Agreement shall be maintained as confidential prior to the Closing and shall not be disclosed to any third party prior to the Closing without the prior written consent of the Seller, except (i) in response to legal process; PROVIDED that Investors shall notify the Seller of such legal process so as to provide the Seller with a reasonable opportunity to contest the validity thereof or (ii) to the extent required to comply with applicable law; PROVIDED, HOWEVER, that prior to making such disclosure, Investors shall use their best efforts to have such information and records afforded confidential treatment. Seller may require, as a condition to providing the access described in Section 7.1, that each Investor and its representatives execute and deliver a confidentiality agreement in form and substance reasonably satisfactory to the -35- Seller. The Investors shall not be obligated to maintain as confidential any information obtained from the Seller or the Company which is publicly available, readily available from public sources, known to it at the time the information was disclosed, or which was rightly obtained from a third party. In the event that this Agreement is terminated prior to the date of the Closing, Investors shall return all information (and any copies thereof) received by them (from the Seller or its agents or representatives) and relating to the Seller, the Company, the Assets, the Business or CSG to the Seller. 7.2 CONDUCT OF COMPANY'S BUSINESS. Unless the Investors give their prior written consent for actions to be taken to the contrary, from the date of this Agreement and until the Closing or termination of this Agreement, whichever first occurs, the Seller and the Company shall, and the Seller shall take no action to prevent or delay CSG or the Company from being able to (except that from and after December 31, 1995, all dollar amounts shown in this Section 7.2 shall be considered to be $0): (a) OPERATION OF BUSINESS. Operate and conduct CSG's and the Company's business and operations diligently and only in the ordinary course of business consistent with Past Practice. The Business shall be conducted up until the date of the Closing as usual and consistent with the practices of the Seller with respect to the Business prior to December 8, 1995. All practices of CSG, the Company and the Business, including procurement of inventory and raw materials, payment of accounts payable, and fulfillment of customers order, shall be conducted to the date of Closing in the ordinary course of business consistent with Past Practice. Neither CSG nor the Company shall (i) incur any new indebtedness or increase the amount due and owing to any lender for borrowed money, except it may incur indebtedness for up to $50,000 for purposes of financing equipment purchases or leases, or (ii) increase the compensation or benefits of an employee, independent contractor or agent or adopt or amend any commission plan or arrangement or any employee benefit plan or arrangement of any type which results or may result in an increase in costs or liabilities thereunder of more than $10,000 per month, in the aggregate, above those existing on the date hereof, or otherwise lend or advance any sum or extend credit to any employee, director, shareholder or stockholder or any of their respective affiliates; (b) ORGANIZATION. Preserve intact CSG's and the Company's organization and use its reasonable best efforts to retain all employees of and consultants to the Seller, relating to CSG, the Business and the Assets, and the Company, commensurate with the requirements of the Business; (c) VENDORS. Use its reasonable best efforts to retain services of all vendors, suppliers, agents and consultants used in the Business, commensurate with the requirements of the Business; (d) INSURANCE. Maintain insurance (either directly or through the Corporate Services Agreement described in Section 1.1), including liability and efforts and omissions insurance, consistent with Past Practice and, unless comparable insurance is substituted therefor or is not generally available to businesses of the type conducted by CSG and the Company, not take any action to terminate or modify, nor permit the lapse or termination of, the present insurance policies and -36- coverages of the Seller, relating to CSG, the Business and the Assets, and the Company as set forth in the Disclosure Letter; (e) LAWSUITS, CLAIMS. Promptly notify the Investors of, and if requested by the Investors, diligently defend against, all lawsuits, claims, proceedings or investigations that are, or which any officers of the Company or the Seller, as a result of events or circumstances known to them, has reason to believe may be, threatened, brought, asserted or commenced against the Seller in relation to CSG or the Company or any of their officers or directors, involving or affecting in any way CSG's or the Company's operations, or any of the Assets, or the Business or the transactions contemplated hereby; and, without the prior written consent of the Investors, not settle any action or proceeding which would materially and adversely affect the Business, the Assets, CSG or the Company, their business, financial condition or operating results and, without the prior written consent of the Investors, not release, settle, compromise or relinquish any claims, causes of action or rights involving more than $50,000 individually or $100,000 in the aggregate which the Company or the Seller may have against any other persons, including, without limitation, claims or rights to reimbursement or payment for services rendered by the Company, CSG or the Seller, in relation to CSG, the Business and the Assets; (f) CERTAIN CHANGES. Not sell or otherwise dispose, or enter into any agreement for the sale, of any of the Assets, except for sales of inventory and obsolete equipment in the ordinary course of business and consistent with Past Practice, and not permit or allow, or enter into any agreements providing for or permitting, any of its assets or properties to be subjected to any option or Lien other than Liens in existence on the date hereof and statutory liens to secure Taxes that are not yet due and payable, all of which are listed on the Disclosure Letter; (g) CONDITION OF ASSETS. Maintain in good working order and condition, ordinary wear and tear excepted, and in compliance in all material respects with all applicable laws and regulations, all of the tangible Assets, wherever located, that are used, leased or owned by the Seller or by the Company; (h) AGREEMENTS. Observe and perform all terms, conditions, covenants and obligations contained in all existing material agreements between the Seller, in relation to CSG, or the Company and third parties the violation of which would have, individually or in the aggregate, a material adverse effect on the Business, the Assets, CSG or the Company or their business, financial condition, operating results or future Prospects; and, except as required by any existing agreements, not enter into any new agreements or transactions with respect to the Company, the Business, the Assets or CSG, or incur any expenditures, liabilities or obligations, involving more than $50,000 individually or $100,000 in the aggregate, or renew, extend, amend or modify any existing agreement involving any commitments, obligations, liabilities or requiring any expenditures that would exceed $50,000 individually or $100,000 in the aggregate with respect to the Company, the Business, the Assets or CSG; not take any action which would cause a material breach or violation of or material default under any material agreement, lease, contract, or other written instrument, commitment or arrangement, or under any material permit, license, franchise, judgment, writ or order, applicable to or affecting the Seller in relation to CSG, or the Company or the Business, and promptly notify the -37- Investors in writing of the occurrence of any such breach or default; and not enter into any transaction with respect to the Company, the Business, the Assets or CSG with any stockholder, shareholder, director or officer or any person or entity related to or affiliated with any such person other than those transactions that are described in the Disclosure Letter, if any; (i) TAXES. Pay, when due, and prior to the imposition or assessment of any interest, penalties or liens by reason of the non-payment of, all Taxes assessed against the Seller (as related to the Assets, the Business, CSG or the Company) or the Company, any of its assets or its operations other than Taxes, the validity of which is being contested in good faith and for which adequate reserves have been established in accordance with GAAP; (j) DIVIDENDS, ETC. Except as contemplated by this Agreement not: (i) declare or pay any dividends or make any distributions with respect to or redeem any shares of the Company's capital stock; (ii) accelerate the payment of or prepay any indebtedness or other obligations of the Company; (iii) approve or effect any reclassification or recapitalization of the Company or its authorized or outstanding shares; (iv) merge or consolidate the Seller or the Company with or sell any of their assets to a third party other than sales of assets in the ordinary course of business and consistent with Past Practice; (v) approve or commence any proceedings for the liquidation of the Seller or the Company; or (vi) enter into any agreement to do any of the foregoing; (k) CORPORATE MATTERS. Except as expressly contemplated by this Agreement, not: (i) amend in any manner the Certificate of Incorporation or Bylaws of the Company; (ii) alter the composition or membership of the Company's board of directors; (iii) except for shares purchased upon exercise of outstanding options, authorize or issue any shares of capital stock of the Company of any class or series; (iv) create or issue any warrants, obligations, subscriptions, options, convertible securities or other commitments under which any additional shares of the capital stock of any class or other equity securities of the Company may be directly or indirectly authorized, issued or transferred; or (v) agree to do any of the above; and (l) LIABILITIES AND EXPENSES. Not: with respect to CSG, the Assets, the Business or the Company, create or incur (whether as principal, surety or otherwise) any actual or contingent liabilities or expenses in excess of $25,000 in the aggregate other than liabilities and expenses incurred in the ordinary course of business consistent with Past Practice. 7.3 CONSENTS. Each party to this Agreement shall use its reasonable best efforts to obtain or cause to be obtained at the earliest practicable date, and prior to the Closing, all consents, approvals and licenses, if any, which such party requires to permit it to consummate the transactions contemplated hereby without violating any material agreement, contract, instrument or applicable law or regulation, license or permit, to which it is a party or to which it or its assets are subject. The parties hereto shall cooperate with each other in their efforts to obtain all such consents, approvals and licenses. 7.4 NOTICE OF BREACH. Each party to this Agreement will immediately give notice to the other parties of the occurrence of any event, or the failure of any event to occur, that results in a -38- breach by it of any representation or warranty or a failure by it to comply with or fulfill any covenant, condition or agreement contained herein. 7.5 SELLER AND INVESTORS AS STOCKHOLDERS. The Seller agrees, as the sole stockholder of the Company prior to the Closing, to cause the Company, and the Investors agree as the controlling stockholders of Holdco prior to the Closing, to cause Holdco and Holdco Sub to comply with all of their respective obligations hereunder to be fulfilled prior to the Closing. 7.6 RETENTION OF CSG EARNINGS. It is the intent of the parties hereto that all assets and liabilities shown on the Year-End Balance Sheet, all proceeds and obligations relating to such assets and liabilities, and all earnings, revenues, income and profits earned by CSG and the Business from and after December 31, 1995 shall be transferred to the Company immediately prior to the Effective Time. In addition, it is the intent of the parties hereto that CSG and the Business be run separately from the remainder of the business of the Seller for the benefit of Holdco and those who will be Holdco's stockholders immediately after the Effective Time. In furtherance of these purposes, from and after December 31, 1995, the Seller shall keep and hold all assets and liabilities related to, and all revenue and income attributable to, CSG, the Business and the Assets, including but not limited to those assets and liabilities shown on the Year-End Balance Sheet, separate from other Seller assets, revenue, income and liabilities. As of December 31, 1995, all assets related to, and all revenue and income attributable to CSG, the Business and the Assets, including but not limited to those assets and liabilities shown on the Year-End Balance Sheet and all assets, receivables, income and revenue received by the Seller that relates to CSG, the Business and the Assets, shall be held in trust for transfer to the Company pursuant to this Agreement. From and after December 31, 1995, the Seller shall not cause or allow the Company, CSG, the Business, and the Assets to assume any Liability or to become subject to any Lien other than pursuant to the assumption of trade payables of CSG and the Business in the ordinary course of business. From and after December 31, 1995, any increases in the Working Capital of CSG and any additional receivables received by the Seller in relation to CSG, the Business and the Assets shall be held in trust by the Seller for transfer to the Company. From and after December 31, 1995, all cash shown (or to be shown) on the Year-End Balance Sheet shall be placed in an account separate from that of all other funds of the Seller. All cash received by the Seller in relation to CSG, the Business and the Assets from and after December 31, 1995, as income, conversion of accounts receivable or otherwise, shall be placed in such separate account and held there in trust until transferred to the Company pursuant to Section 1.1. No cash shall be paid out of this separate account except for (x) payments (other than those set forth in clauses (y) and (z) of this sentence) in the ordinary course of business not exceeding $10,000 in the aggregate, (y) payment in the ordinary course of business of trade payables shown on (or to be shown on) the final and binding Year-End Balance Sheet, and (z) payment of the amounts of salary (at the level shown on Exhibit 1.1D), accruing after December 31, 1995 in the ordinary course of business, of those employees and consultants of the Seller that are listed on Schedule 1.1D as to be employees or consultants of the Company. In no event shall cash from such separate account be used to pay obligations accruing on or before December 31, 1995 that are not shown on the Year-End Balance Sheet, and, to the extent that any such obligations exist, such obligations shall remain obligations only of the Seller after the Effective Time. The Company shall not transfer assets or cash, whether as a dividend, an assumption of liabilities, a payment for deemed or actual federal or state income taxes, a loan or otherwise, or -39- obligate itself to transfer any assets or cash, to the Seller (and the Seller shall not receive such from the Company), prior to the Effective Time. As of and after December 31, 1995, the Seller and its directors shall owe the Investors the same fiduciary duties with respect to CSG, the Assets and the Business that the Company and its directors will owe the holders of Company Common Stock and that Holdco and its directors will owe the holders of Holdco Common Stock after the Closing. From and after December 31, 1995 and until the Effective Time, the Seller shall use its best efforts to cause CSG and the Business to achieve the financial results for the period from January 1, 1996 to the Effective Time shown in the projected financial statements set forth in Exhibit 7.6 hereto. From and after December 31, 1995 and until the Effective Time, the Seller shall not take any action that, and shall not fail to take any action that the failure to take, could reasonably be expected to have a material adverse effect on the ability of the Company to achieve the financial results for the period from and after the Effective Time shown in the projected financial statements set forth in Exhibit 7.6 hereto. The Seller shall take all actions necessary to insure, that, as of the moment immediately prior to the Effective Time, the Company shall hold all profits, earnings, revenue, and cash held by the Seller as of December 31, 1995 and shown or to be shown and the Year-End Balance Sheet, or received by the Seller from and after December 31, 1995 in relation to the operation of CSG, the Business, the Assets, and the Company or related to any of the items shown on the Year-End Balance Sheet including, with limitations, accounts receivable. Any of the requirements of this Section 7.6 may be waived with the prior written consent of the Investors. In the event of any conflict between this Section 7.6 and any other provision of this Article VII, the provisions of this Section 7.6 shall control. ARTICLE VIII OBLIGATIONS AT OR PRIOR TO THE CLOSING 8.1 EXCLUSIVITY/OTHER OFFERS. Unless and until this Agreement has been terminated in accordance with Section 12.2 below, none of the Investors, Holdco, Holdco Sub, the Company, or the Seller, or any of their respective representatives, agents, officers, directors, shareholders, stockholders, partners or employees, will solicit or accept offers from, provide information or assistance to, or negotiate or enter into any agreement or understanding (written or oral) with, any other person or entity regarding (i) the sale, merger, initial public offering or reorganization of the Company; the sale or other disposition of, or the granting of any security interest, lien or encumbrance on, any of the Assets, the Business or CSG other than dispositions of inventory in the ordinary course of business; or (iii) any other transaction which would cause or result in any change, other than of an immaterial nature, in or adversely affect the Business, the Assets, or the business of CSG or the Company or otherwise interfere with the consummation of the transactions contemplated herein. 8.2 OTHER DELIVERIES. At the Closing, the parties hereto shall also execute and deliver all agreements and instruments referred to in Articles IV, V and otherwise provided herein. -40- ARTICLE IX NATURE AND SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS 9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made by Holdco, Holdco Sub and the Investors in Section 2.1(c) hereof and by the Seller in this Agreement or any other instrument or document delivered in connection herewith, including the documents contained the Exhibits hereto and the Disclosure Letter, shall survive until the date one year after the date of the Closing. Other than as set forth above, all representations and warranties made by the Investors, Holdco, Holdco Sub, and the Company in this Agreement or any other instrument or document delivered in connection herewith shall terminate upon the Closing and shall not survive the Closing. All covenants made in the Agreement and any other instrument or document delivered in connection with the Agreement shall survive indefinitely unless this Agreement or such instrument or document specifically specifies otherwise. ARTICLE X INDEMNIFICATION 10.1 INDEMNIFICATION BY THE SELLER FOR BREACH OF THIS AGREEMENT. Subject to the limitations set forth in this Article, the Seller shall indemnify and hold harmless the Investors, the Company, Holdco and their respective officers, directors, employees, successors and assigns (the "Indemnified Investor Parties") in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) incurred by, imposed on or borne by the Indemnified Investor Parties ("Investor Damages") resulting from the breach of any of the representations, warranties or covenants (including, but not limited to, the covenant in Section 1.5 hereof) made by the Seller in this Agreement, the Disclosure Letter, or any agreement, instrument or document that is attached as an Exhibit to this Agreement. Investor Damages shall exclude (i) any amount with respect to which the Indemnified Investor Parties shall be entitled to receive and shall have received payment under any insurance policy which provides coverage for the liability to which such amount relates and (ii) the amount of any tax benefit actually received by the Indemnified Investor Parties as a result of such Investor Damages, after taking into account the tax consequences of the indemnification payment for such Investor Damages. 10.2 INDEMNIFICATION BY THE SELLER FOR EFI LITIGATION AND BULK SALES VIOLATIONS. The Seller shall indemnify and hold harmless the Indemnified Investor Parties in respect of any and all Investor Damages resulting from the EFI Litigation and from any violation by the Seller or the Company of the requirements and provisions of any "bulk-transfer" laws of any jurisdiction in connection with any of the transactions contemplated herein. Investor Damages shall exclude any amount with respect to which the Indemnified Investor Parties shall be entitled to receive and shall have received payment under any insurance policy which provides coverage for the liability to which such amount relates. Investor Damages shall exclude (i) any amount with respect to which the Indemnified Investor Parties shall be entitled to receive and shall -41- have received payment under any insurance policy which provides coverage for the liability to which such amount relates and (ii) the amount of any tax benefit actually received by the Indemnified Investor Parties as a result of such Investor Damages, after taking into account the tax consequences of the indemnification payment for such Investor Damages. 10.3 CLAIMS FOR INDEMNIFICATION OF INVESTORS. Whenever any claim shall arise for indemnification hereunder, the Indemnified Investor Parties making such claim shall promptly notify the Seller in writing of the claim and, when known, the facts constituting the basis for such claim and use its reasonable efforts to cooperate with the Seller to mitigate the Investor Damages suffered or to be suffered by the such Indemnified Investor Parties; PROVIDED that failure to give such notice shall not affect any rights or remedies of the Indemnified Investor Parties hereunder with respect to indemnification for Investor Damages except to the extent that the Seller is materially prejudiced thereby. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a third party, the notice to the Seller shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. None of the Indemnified Investor Parties shall settle or compromise any claim by a third party for which they are entitled to indemnification hereunder, without the prior written consent of the Seller (which shall not be unreasonably withheld). 10.4 DEFENSE BY SELLER. In connection with any claim giving rise to indemnity hereunder or resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the Seller at its sole cost and expense may, upon written notice to the Indemnified Investor Parties, assume the defense of any such claim or legal proceeding if it acknowledges to the Indemnified Investor Parties in writing its obligation to indemnify the Indemnified Investor Parties with respect to all elements of such claim, and thereafter diligently conduct the defense thereof with counsel reasonably acceptable to the Indemnified Investor Parties. The Indemnified Investor Parties shall be entitled to participate in (but not control) the defense of any such action with their counsel and at their own expense. If the Seller does not assume or fails to conduct in a diligent manner the defense of any such claim or litigation resulting therefrom, (a) the Indemnified Investor Parties may defend against such claim or litigation, in such manner as they may deem appropriate, including, but not limited to, settling such claim or litigation, after giving reasonable notice of the same to the Seller, on such terms as the Indemnified Investor Parties may deem appropriate (with the Seller's prior written consent, which consent shall not be unreasonably withheld), and (b) the Seller shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If the Seller thereafter seeks to question the manner in which the Indemnified Investor Parties defended such third party claim or the amount or nature of any such settlement, the Seller shall have the burden to prove by a preponderance of the evidence that the Indemnified Investor Parties did not defend or settle such third party claim in a reasonably prudent manner. Notwithstanding the foregoing, no party shall consent to entry of any judgment or enter into any settlement (or have any liability for Investor Damages with respect thereto) which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified and indemnifying party of a release -42- from all liability in respect to such Claim. Each party agrees to cooperate fully with the other, with such cooperation to include, without limitation, attendance at depositions and the provision of relevant documents as may be reasonably requested by the Seller, provided that the Seller will hold the Indemnified Investor Parties harmless from all of their reasonable expenses, including reasonable attorneys' fees, incurred in connection with such cooperation by the Indemnified Investor Parties. 10.5 TIME LIMITATION ON INDEMNIFICATION OF INVESTORS, HOLDCO AND COMPANY. Except for indemnification claims for Investor Damages resulting from (a) the EFI litigation, (b) the violation of "bulk-transfer" laws of any jurisdiction by the Seller or the Company in connection with any of the transactions contemplated hereby, (c) the violation of any covenants of the Seller made in this Agreement, the Disclosure Letter, or any agreement, instrument or document that is attached as an Exhibit to this Agreement, or (d) the failure of the Seller to pay any obligation greater than $2,000,000 pursuant to Section 1.5(c) hereof (collectively the "Unlimited Claims"), no claim for indemnification under this Article may be made or suit instituted by the Indemnified Investor Parties after the date one year after the date of the Closing. Notwithstanding the foregoing, this Agreement shall place no such limitation on the Unlimited Claims. 10.6 MONETARY LIMITATION ON INDEMNIFICATION OF INVESTORS, HOLDCO AND COMPANY. With respect to any indemnification claims, except for any Unlimited Claims, made by the Indemnified Investor Parties under this Article, the Seller shall have no obligation to indemnify the Indemnified Investor Parties for any Investor Damages which exceed an aggregate cumulative amount equal to the amount, at the time of such claim, in the escrow fund established in accordance with the terms of the Escrow Agreement described in Section 4.4(h). Further, with respect to any indemnification claims, except for the Unlimited Claims, made by the Indemnified Investor Parties under this Article, the Seller have no obligation to indemnify the Indemnified Investor Parties until the aggregate cumulative amount of Investor Damages exceeds $250,000; provided that if the aggregate cumulative amounts of Investor Damages exceeds $250,000, this Article X shall provide for payment of indemnification claims for all Investor Damages. Payment of indemnification pursuant to this Article (except for the Unlimited Claims, which claims may be made directly against the Seller or the such escrow fund at the option of the Indemnified Investor Parties, as the case may be, seeking indemnification), shall be made only from such escrow fund. Notwithstanding the foregoing, there shall be no limit on the amount of the Unlimited Claims that may be recovered by the Investors, Holdco and the Company from the Seller. 10.7 DAMAGES TO INVESTORS. The Seller acknowledges and agrees that, if the Company suffers, incurs or otherwise becomes subject to any Investor Damages as a result of or in connection with any inaccuracy in or breach of any representation, warranty, covenant or obligation of the Seller or as a result of the EFI Litigation or violation by the Seller or the Company of "bulk-transfer" laws, then Holdco and the Investors also shall be deemed, by virtue of their ownership of the stock of the Company, to have incurred Investor Damages as a result of or in connection with such inaccuracy or breach in the same amount and to the same extent as has the Company; PROVIDED that the terms of this Section 10.7 shall not permit the Company, Holdco and the Investors to receive from the Seller, pursuant to this Article X, an aggregate of indemnification payments greater than such Investor Damages. -43- 10.8 NO WAIVER BY INVESTORS, HOLDCO AND COMPANY. The Indemnified Investor Parties shall not be barred from receiving indemnification under this Article X because any of them had knowledge, prior to the date of Closing or at any other time, of a breach of representation, warranty or covenant of the Seller or a violation by the Seller or the Company of any "bulk-transfer" laws by the Seller or the Company. 10.9 MATERIALITY. For the purposes of determining the amount of Investor Damages under this Article X, all representations and warranties of the Seller contained herein or in any instrument, document or agreement contemplated hereby shall be deemed to be without any materiality or material adverse effect exceptions or qualifications or any similar exceptions or qualifications that may be present in such representations and warranties. 10.10 INDEMNIFICATION BY HOLDCO AND INVESTORS. Subject to the limitations set forth in this Article, the Holdco and the Investors shall indemnify and hold harmless the Seller and its officers, directors, employees successors and assigns (the "Indemnified Seller Parties") in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) incurred by, imposed on or borne by the Indemnified Seller Parties ("Seller Damages") resulting from the breach of any of the representations or warranties of Holdco and the Investors contained in Section 2.1(c) hereof or of any of the covenants set forth in Section 1.5(d) hereof. Seller Damages shall exclude (i) any amount with respect to which the Indemnified Seller Parties shall be entitled to receive and shall have received payment under any insurance policy which provides coverage for the liability to which such amount relates and (ii) the amount of any tax benefit actually received by the Indemnified Seller Parties as a result of such Seller Damages, after taking into account the tax consequences of the indemnification payment for such Seller Damages. 10.11 CLAIMS FOR INDEMNIFICATION OF SELLER. Whenever any claim shall arise for indemnification hereunder, the Indemnified Seller Parties making such claim shall promptly notify Holdco and the Investors in writing of the claim and, when known, the facts constituting the basis for such claim and use its reasonable efforts to cooperate with the indemnifying party to mitigate the Seller Damages suffered or to be suffered by such Indemnified Seller Parties; PROVIDED that failure to give such notice shall not affect any rights or remedies of the Indemnified Seller Parties hereunder with respect to indemnification for Seller Damages except to the extent that Holdco and the Investors are materially prejudiced thereby. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a third party, the notice to Holdco and the Investors shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The Indemnified Seller Parties shall settle or compromise any claim by a third party for which they are entitled to indemnification hereunder, without the prior written consent of Holdco and the Investors (which shall not be unreasonably withheld). 10.12 DEFENSE BY HOLDCO AND INVESTORS. In connection with any claim giving rise to indemnity hereunder or resulting from or arising out of any claim or legal proceeding by a person who -44- is not a party to this Agreement, Holdco and the Investors at their sole cost and expense may, upon written notice to the Indemnified Seller Parties, assume the defense of any such claim or legal proceeding if they acknowledge to the Indemnified Seller Parties in writing their obligation to indemnify the Indemnified Seller Parties with respect to all elements of such claim, and thereafter diligently conduct the defense thereof with counsel reasonably acceptable to the Indemnified Seller Parties. The Indemnified Seller Parties shall be entitled to participate in (but not control) the defense of any such action with its counsel and at its own expense. If Holdco and the Investors do not assume or fails to conduct in a diligent manner the defense of any such claim or litigation resulting therefrom, (a) the Indemnified Seller Parties may defend against such claim or litigation, in such manner as they may deem appropriate, including, but not limited to, settling such claim or litigation, after giving reasonable notice of the same to Holdco and the Investors, on such terms as the Indemnified Seller Parties may deem appropriate (with the prior written consent of Holdco and the Investors, which consent shall not be unreasonably withheld), and (b) Holdco and the Investors shall be entitled to participate in (but not control) the defense of such action, with their counsel and at their own expense. If Holdco and the Investors thereafter seek to question the manner in which the Indemnified Seller Parties defended such third party claim or the amount or nature of any such settlement, Holdco and the Investors shall have the burden to prove by a preponderance of the evidence that the Indemnified Seller Parties did not defend or settle such third party claim in a reasonably prudent manner. Notwithstanding the foregoing, no party shall consent to entry of any judgment or enter into any settlement (or have any liability for Seller Damages with respect thereto) which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified and indemnifying party of a release from all liability in respect to such Claim. Each party agrees to cooperate fully with the other, with such cooperation to include, without limitation, attendance at depositions and the provision of relevant documents as may be reasonably requested by Holdco and the Investors, provided that Holdco and the Investors will hold the Indemnified Seller Parties harmless from all of their reasonable expenses, including reasonable attorneys' fees, incurred in connection with such cooperation by the Indemnified Seller Parties. 10.13 TIME LIMITATION ON INDEMNIFICATION OF SELLER. No claim for indemnification under this Article may be made or suit instituted by the Indemnified Seller Parties after the date one year after the date of the Closing. 10.14 MONETARY LIMITATION ON INDEMNIFICATION OF SELLER. With respect to any indemnification claims made by the Indemnified Seller Parties under this Article, Holdco and the Investors shall have no obligation to indemnify the Indemnified Seller Parties for any Seller Damages which exceed an aggregate cumulative amount equal to the $4,282,000. Further, with respect to any indemnification claims made by the Indemnified Seller Parties under this Article, Holdco and the Investors have no obligation to indemnify the Indemnified Seller Parties until the aggregate cumulative amount of Seller Damages exceeds $250,000; provided that if the aggregate cumulative amounts of Seller Damages exceeds $250,000, this Article X shall provide for payment of indemnification claims for all Seller Damages. 10.15 NO WAIVER BY SELLER. The Indemnified Seller Parties shall not be barred from receiving indemnification under this Article X because any of them had knowledge, prior to the date -45- of Closing or at any other time, of a breach of the representations and warranties of Holdco and the Investors made in Section 2.1(c). ARTICLE XI DEFINITIONS AND ACCOUNTING TERMS 11.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Additional Accounting Firm" has the meaning specified in Section 1.5. "Additional Report" has the meaning specified in Section 1.5. "Affiliate" (and, with a correlative meaning, "Affiliated") shall mean, with respect to any Person, any other Person that directly, or through one or more intermediaries, controls or is controlled by or is under common control with such first Person, and, if such a Person is an individual, any member of the immediate family of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "control" (including, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), and "immediate family" shall mean parents, spouse and children. "Agreement" means this Merger Agreement as from time to time amended and in effect between the parties hereto. "Assets" has the meaning specified in Section 1.1. "Assumed Liabilities" has the meaning specified in Section 1.1. "Audited Financial Statements" has the meaning specified in Section 4.8. "Business" means the business of CSG as operated as of December 8, 1995 and the business of the Company as now proposed or contemplated, including the operations of the Assets. "Business Plan" has the meaning specified in Section 3.1. "Cash Purchase Price" has the meaning specified in Section 1.4. -46- "Claims" means any and all personal injury, property damage, nuisance, tort, contract or other claims, actions or demands brought at any time by any Person, any and all demands, actions or claims for investigation, remediation, removal, closure or other action with respect to Hazardous Materials, and any and all other investigations, suits, demands, actions, fines, penalties, claims, enforcement actions, Liens, Liabilities, damages, deficiencies, injunctions, reasonable attorneys' fees, reasonable experts' fees, costs and expenses actually paid, imposed or incurred. "Closing" has the meaning specified in Section 1.4. "COBRA" has the meaning specified in Section 3.1. "Code" has the meaning specified in Section 3.1. "Company" means and shall include Splash Technology, Inc., a Delaware corporation, and its successors and assigns. "Company Common Stock" has the meaning specified in Section 1.3. "Company Facility" shall mean any real property asset (including the land, the improvements and fixtures thereon, and the ambient air ground water and surface water thereof and including, but not limited to, the Assets), that the Seller, the Company or any of their past or present subsidiaries has at any time owned, operated, occupied, controlled or leased in connection with CSG, the Business or the Assets. "Consolidated" when used with reference to any term defined herein shall mean that term as applied to the accounts of the Company or Holdco, as appropriate in the context, and its subsidiaries consolidated in accordance with GAAP after eliminating intercompany items and minority interests. "Contracts" has the meaning specified in Section 1.1. "Copyrights" mean U.S. and foreign copyrights, whether registered or unregistered, and pending applications to register the same. "CSG" has the meaning specified in the Recitals. "DGCL" means the State of Delaware General Corporation Law, as amended. "Disclosure Letter" has the meaning specified in Section 3.1. "Disposal Site" shall mean a landfill, incinerator, disposal agent, waste hauler or recycler of Hazardous Materials. "Effective Time" has the meaning specified in Section 1.4. -47- "EFI Litigation" means any and all litigation or other claims arising out of or related to U.S. Patent No. 4,941,038 and any divisionals, continuations in part, or reissues thereof, to case number C95-04110 DLG pending in United States District Court in the Northern District of California and any amendments thereto, and any claims for indemnification related to the foregoing. "Employee Plans" has the meaning specified in Section 3.1. "Environmental Law" means any Law pertaining to land use, air, soil, surface water, groundwater (including the protection, cleanup, removal, remediation or damage thereof), public or employee health or safety or any other environmental matter, including, without limitation, the following laws as in effect on the date of the Closing: (a) Clean Air Act (42 U.S.C. Section 7401, et seq.); (b) Clean Water Act (33 U.S.C. Section 1251, et seq.); (c) Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.); (d) Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Section 9601, et seq.); (e) Safe Drinking Water Act (42 U.S.C. Section 300f, et seq.); (f) Toxic Substances Control Act (15 U.S.C. Section 2601, et seq.); (g) Rivers and Harbors Act (33 U.S.C. Section 401, et seq.); (h) Endangered Species Act (16 U.S.C. Section 1531, et seq.); and (i) Occupational Safety and Health Act (29 U.S.C. Section 651, et seq.); together with any other foreign or domestic laws (federal, state, provincial or local) relating to Hazardous Materials of Hazardous Materials Activities. "Environmental Permit" shall mean any approval, permit, license, clearance or consent required to be obtained from any Person or any Governmental Authority with respect to a Hazardous Materials Activity which is or was conducted by the Seller in relation to CSG, the Business, the Assets or the Company, by the Company or by any of their past or present subsidiaries. "ERISA" has the meaning specified in Section 3.1. "ERISA Affiliate" has the meaning specified in Section 3.1. "Escrow Remainder" has the meaning specified in Section 4.4. "Exchange Act" means the Securities Exchange Act of 1934, or any similar federal statute, and the rules and regulations of the Securities and Exchange Commission (or of any other Federal Agency then administering the Exchange Act) thereunder, all as the same shall be in effect at the time. "Financial Statements" has the meaning specified in Section 3.1. "GAAP" means generally accepted accounting principles, consistently applied. "Governmental Authority" means any local, state, federal, foreign or international governmental authority, agency or entity, including, but not limited to, any court, commission, tribunal or panel having jurisdiction over the matter at issue. -48- "Hazardous Materials Activity" shall mean the handling transportation, transfer, recycling, storage, use, treatment, manufacture, investigation, removal, remediation, release, exposure of others to, sale, or distribution of any Hazardous Material or any product containing a Hazardous Material. "Hazardous Material" shall mean any material or substance that is prohibited or regulated by any Environmental Law or that has been designated by any Governmental Authority to be radioactive, toxic, hazardous or otherwise a danger to health, reproduction or the environment, including without limitation asbestos, petroleum, radon gas, and radioactive matter. "Holdco" has the meaning specified in the Preamble. "Holdco Common Stock" has the meaning specified in Section 2.1. "Holdco Sub Common Stock" has the meaning specified in Section 1.3. "Holdco Sub" has the meaning specified in the Preamble. "Indemnified Investor Parties" has the meaning specified in Section 10.1. "Indemnified Seller Parties" has the meaning specified in Section 10.10. "Intellectual Property" means Copyrights, Patent Rights, Trademarks and Trade Secrets. "Interim Balance Sheet" has the meaning specified in Section 3.1. "Investor Damages" has the meaning specified in Section 10.1. "Investors" has the meaning specified in the Preamble. "Investors' Accountants" means Coopers & Lybrand, L.L.P. "Key Employee" means and includes the Chairman of the board of directors, the President, any Vice-President and the Chief Financial Officer of the Company, Holdco, or any of their subsidiaries, or any person who is not an officer of Company, Holdco or any of their subsidiaries and is in charge of one or more of the following functions: sales, marketing, production, or engineering and technical development or any employee with access to the confidential information of Holdco or the Company. "Law" means any national, international, state, or local law, statute, rule, regulation, ordinance, requirement for approval or permit, judgment, injunction, decree of any court of applicable jurisdiction, or any treaty, international understanding, or other rule which has the force of law, including, without limitation, any Environmental Law. -49- "Liability" means any direct or indirect liability, indebtedness, obligation, guarantee or endorsement, either accrued, absolute, contingent or otherwise, as determined in accordance with GAAP. "Lien" means any mortgage, deed of trust, pledge, hypothecation, security interest, encumbrance, lien, charge or Claim of any kind, whether voluntarily incurred or arising by operation of Law or otherwise, including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and/or the filing of or agreement to give any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction. "Merger" has the meaning specified in Recitals. "Past Practice" shall mean the Past Practice of the Seller with respect to CSG, excluding any practices of the Seller after September 30, 1995 that were not consistent with practices of the Seller prior to September 30, 1995. "Patent Rights" means U.S. and foreign patents, patent applications pending or filed between the date hereof and the date of the Closing, continuations, continuations-in-part, divisions, reissues or patent disclosures. "Person" means an individual, corporation, partnership, limited liability company, joint venture, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. "Preferred Stock" shall mean the Series A Preferred Stock and the Series B Preferred Stock. "Prospects" means the prospects of the Business as described in and contemplated by the Business Plan. "Restricted GAAP" means GAAP, as further limited to those accounting principles and methods, all consistent with GAAP (except as disclosed on Exhibit 11.0), shown on Exhibit 11.0 hereto. "SEC" has the meaning specified in Section 3.1. "Securities Act" means the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Securities and Exchange Commission (or of any other Federal agency then administering the Securities Act) thereunder, all as the same shall be in effect at the time. "Securities" has the meaning specified in Section 2.1. -50- "Seller" has the meaning specified in the Preamble. "Seller Damages" has the meaning specified in Section 10.10. "Seller Financial Statements" has the meaning specified in Section 3.1. "Seller SEC Documents" has the meaning specified in Section 3.1. "Seller's Accountants" shall mean the Seller's auditors and any other accounting firm otherwise engaged by the Seller. "Series A Preferred Stock" has the meaning specified in Section 2.1. "Series B Preferred Stock" has the meaning specified in Section 1.3. "Software" means computer software programs and software systems, including, without limitation, all databases, compilations, tool sets, compilers, higher level "proprietary" languages, related documentation and materials, whether in source code, object code or human readable form. "Subordinated Notes" has the meaning specified in Recitals. "Surviving Corporation" has the meaning specified in Section 1.2. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Tax" or "Taxes" shall mean any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise profits, withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Trademarks" mean United States, state and foreign trademarks, service marks, logos, trade dress and trade names, whether registered or unregistered, and pending applications to register the foregoing and all goodwill associated therewith. "Trade Secrets" mean confidential ideas, trade secrets, know-how, concepts, methods, processes, formulae, inventions (whether or not patentable), reports, data, customer lists, mailing lists, business plans, or other proprietary information that provides the owner with a competitive advantage. -51- "Unlimited Claims" shall have the meaning set forth in Section 10.5. "Working Capital" means the aggregate of the cash, net accounts receivable (less any allowances for doubtful accounts), net value of inventory (adjusted for all applicable write-downs and write-offs) less liabilities of any kind, which liabilities will include, but not be limited to, accounts payable, royalties payable, warranty reserves, accrued bonuses, accrued vacation, employee expense obligations, deferred revenue, open purchase order commitments, other commitments or obligations to customers, and liabilities under development agreements. "Year-End Balance Sheet" has the meaning specified in Section 1.5. 11.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all other financial data submitted pursuant to this Agreement shall be prepared and calculated in accordance with such principles. ARTICLE XII MISCELLANEOUS 12.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of the Seller, the Company, Holdco Sub, Holdco, any Investor, any Indemnified Party, or any holder of the Subordinated Notes or the Preferred Stock, in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 12.2 TERMINATION. This Agreement may be terminated prior to the Closing (i) by the mutual consent of the parties hereto; (ii) by the Seller and the Company if there has been a material misrepresentation or material breach on the part of any of the Investors, Holdco or Holdco Sub in the representations and warranties of the Investors, Holdco or Holdco Sub set forth herein, which, if curable, has not been cured within 10 business days after notice thereof by Seller; (iii) by Investors, Holdco, Holdco Sub, if there has been a material misrepresentation or material breach on the part of the Company or the Seller in the representations, warranties and covenants of Seller or the Company set forth herein, which, if curable, has not been cured within 10 business days after notice thereof by Investors; and (iv) by any party hereto, if the Closing does not occur by January 31, 1996 for any reason. Upon termination of this Agreement, no party shall have any further obligations or liability hereunder. Sections 12.5, 12.13 and 12.14 alone shall survive the termination of this Agreement. 12.3 AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this Agreement to the contrary notwithstanding, changes in or additions to this Agreement may be made, and compliance with any covenant or provision herein or therein set forth may be omitted or waived, if each of the Seller, the Company, Holdco, Holdco Sub and the Investors shall consent in writing. Any waiver or -52- consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 12.4 ADDRESSES FOR NOTICES, ETC. Any notices and other communications required or permitted under this Agreement shall be effective if in writing and delivered personally or sent by telecopier, Federal Express or registered or certified mail, postage prepaid, addressed as follows: If to the Seller or the Company Radius Inc. (prior to the Closing), to: 215 Moffet Park Drive Sunnyvale, California 94089-1374 Telecopier: (408) 541-5105 Attention: Charles Berger with a copy to: Gordon Davidson, Esq. Fenwick & West Two Palo Alto Square, Suite 800 Palo Alto, California 94306 Telecopier: (415) 857-0361 If to the Company or Holdco Splash Technology, Inc. or Splash Technology (after the Closing), to: Holdings, Inc. c/o Radius Inc. 215 Moffet Park Drive Sunnyvale, California 94089-1374 Telecopier: (408) 541-5015 Attention: Kevin Macgillivray If to the Investors, Holdco (before Summit Partners the Closing), or Holdco Sub, to: 499 Hamilton Avenue, Suite 200 Palo Alto, California 94301 Telecopier: (415) 321-1188 Attention: Gregory M. Avis with a copy to: Jeffrey D. Saper, Esq. Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Telecopier: (415) 493-6811
Unless otherwise specified herein, such notices or other communications shall be deemed effective (a) on the date delivered, if delivered personally, (b) two business days after being sent, if sent by Federal Express, (c) one business day after being sent, if sent by telecopier with confirmation of good transmission and receipt, and (d) three business days after being sent, if sent by registered or -53- certified mail. Each of the parties herewith shall be entitled to specify another address by giving notice as aforesaid to each of the other parties hereto. 12.5 COSTS, EXPENSES AND TAXES. Holdco agrees to pay on demand all costs and expenses of the Investors in connection with the investigation, preparation, execution and delivery of this Agreement and any other instruments and documents to be delivered hereunder and the consummation of the Merger and all other transactions contemplated hereby and thereby, including the fees and out-of-pocket expenses of Wilson Sonsini Goodrich & Rosati, P.C., counsel for Investors, fees for any government filings required by any of the transactions contemplated hereby, and to pay the legal expenses of the Investors, if this transaction is completed. In addition, if the Closing occurs, the Seller shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement and instruments and documents to be delivered hereunder and the consummation of the transactions hereunder, and agrees to hold the Investors harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and filing fees. 12.6 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company, the Seller, Holdco, Holdco Sub and Investors and their respective successors and assigns, except that no party shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the other parties. 12.7 PRIOR AGREEMENTS. This Agreement, including all Exhibits hereto and the Disclosure Letter, constitutes the entire agreement between the parties and supersedes any prior understandings or agreements concerning the subject matter hereof. 12.8 SEVERABILITY. The invalidity or unenforceability of any provision hereto shall in no way affect the validity or enforceability of any other provision. 12.9 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California without regard to principles of conflicts of law. 12.10 HEADINGS. Article, Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 12.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 12.12 FURTHER ASSURANCES. From and after the date of this Agreement, upon the reasonable request of the Investors, the Seller, the Company and each of their subsidiaries shall execute and deliver such instruments, documents and other writings as may be necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. -54- 12.13 CONFIDENTIALITY. Until the date of Closing, any information relating to the terms of this Agreement and the transactions contemplated hereby shall be treated as confidential and shall not be disclosed, by any of the parties hereto, to a third party without the consent of the board of directors of the Seller and the mutual consent of the Investors except as otherwise required by federal securities laws. The parties hereto agree to request that any federal or state security regulator treat as confidential any information submitted to such regulator with respect to the transactions contemplated by this Agreement. 12.14 PRESS RELEASE. No party hereto shall release a press release relating to this Agreement or any of the transactions or documents contemplated hereby without first submitting a copy of such press release to the other parties hereto and obtaining the prior approval of such other parties to any such press release, which approval shall not be unreasonably withheld. 12.15 INDEMNIFIED PARTIES. The Indemnified Investor Parties and Indemnified Seller Parties that are not parties to this Agreement shall be third parties beneficiaries hereof for the purposes of Article X. -55- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized and in accordance with Section 1102 of the DGCL, as of the date first above written. SELLER: RADIUS INC., a California corporation By: /s/ Charles W. Berger ----------------------------------- Name: Charles W. Berger Title: Chairman and CEO COMPANY: SPLASH TECHNOLOGY, INC. a Delaware corporation By: /s/ Charles W. Berger ----------------------------------- Name: Charles W. Berger Title: Chairman and CE HOLDCO: SPLASH TECHNOLOGY HOLDINGS, INC. a Delaware corporation By: /s/ Gregory M. Avis ----------------------------------- Name: Gregory M. Avis Title: President and CEO HOLDCO SUB: SPLASH MERGER COMPANY, INC. a Delaware corporation By: /s/ Gregory M. Avis ----------------------------------- Name: Gregory M. Avis Title: President and CEO -56- INVESTORS: SUMMIT SUBORDINATED DEBT FUND, L.P. By: Summit Partners SD, L.P., General Partner By: Stamps, Woodsum & Co., III, General Partner By: /s/ Gregory M. Avis ----------------------------------- Name: Gregory M. Avis General Partner SUMMIT VENTURES IV, L.P. By: Summit Partners IV, L.P., General Partner By: Stamps, Woodsum & Co., IV, General Partner By: /s/ Gregory M. Avis ----------------------------------- Name: Gregory M. Avis General Partner SUMMIT INVESTORS II, L.P. By: /s/ Gregory M. Avis ----------------------------------- Name: Gregory M. Avis General Partner -57- EX-2.10 3 EXHIBIT 2.10 AMENDMENT NO. 1 TO MERGER AGREEMENT This Amendment No. 1 to Merger Agreement (this "Amendment") is made as of January 30, 1996, among RADIUS INC., a California corporation (the "Seller"), SPLASH TECHNOLOGY, INC., a Delaware corporation (the "Company"), SPLASH TECHNOLOGY HOLDINGS, INC., a Delaware corporation ("Holdco"), SPLASH MERGER COMPANY, INC., a Delaware corporation, ("Holdco Sub"), the entities listed as Old Investors on the signature page(s) hereof (the "Old Investors") and the entities listed as New Investors on the signature page(s) hereof (the "New Investors"). WHEREAS, the Seller, the Company, Holdco, Holdco Sub, and the Old Investors are parties to that certain Merger Agreement dated December 21, 1995 (the "Merger Agreement"). WHEREAS, the parties to the Merger Agreement wish to amend the terms thereof as provided in this Amendment. WHEREAS, the parties hereto also wish to waive certain requirements under the Merger Agreement as set forth below. NOW, THEREFORE, in consideration of the mutual promises and agreements herein, and subject to the terms and conditions hereinafter set forth, the parties hereby agree as follows: 1. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Merger Agreement. 2. The entities listed as New Investors on the signature page(s) hereto shall be, in addition to the Old Investors, Investors, as that term is defined in the Merger Agreement. The New Investors, along with the Old Investors, shall have all of the rights and obligations of the Investors under the Merger Agreement, except that the notices to each New Investor shall be delivered to the address set forth beneath its respective signature on the signature page(s) hereof rather than to the address specified for the Investors in Section 12.4 of the Merger Agreement, if an address appears directly beneath such signature. 3. The Exhibits to the Merger Agreements shall be deemed modified as follows: EXHIBIT NAME EXHIBIT NUMBER MODIFICATION(S) ------------ -------------- --------------- CSG Assets 1.1A addition of the items listed in Exhibit 1 hereto Company 1.1B Change: size of the board of Cert. Incorp. directors from five to six Company 1.1C Change: size of the board of By-Laws directors from five to six 1 EXHIBIT NAME EXHIBIT NUMBER MODIFICATION(S) ------------ -------------- --------------- Holdco Cert. 2.1A Change: size of the board of directors of Incorp. from being fixed at five members to being set in the bylaws at a size between three and thirteen members Holdco 2.1B Changes: (i) size of board of directors By-Laws from five to six and (ii) allow stockholders holding at least 10% of the voting shares to call a special stockholders meeting Registration 4.4B Changes:(i) alter recitals to indicate Rights that the Series B shares may be issued Agreement after the Closing as set forth in Section 6.6 of the Merger Agreement and (ii) add Imperial Bank as a beneficiary with respect to piggy back registration rights Stockholders 4.4C Change: size of board of directors from Agreement five to six, with the Investors to designate the added director 4. The recital C on the first page of the Merger Agreement shall be modified to read in full as follows: "C. Immediately following the transfer of the assets and certain liabilities of CSG to the Company described above, Holdco Sub shall merge into and with the Company, with the Company surviving, and the Seller shall receive from Holdco $21,945,175 in cash. Prior to such Merger, the management of the Company shall have purchased from Holdco certain shares of Holdco Common Stock pursuant to Restricted Stock Purchase Agreement(s). In consideration for its promises and covenants herein, after the satisfaction of certain conditions set forth in Section 6.6 below, Holdco shall issue to the Seller shares of Series B Redeemable and Convertible Preferred Stock, par value $0.001, of Holdco ("Series B Preferred Stock") convertible into approximately 19.9% of Holdco Common Stock (post-closing, assuming the conversion into Holdco Common Stock of the shares of Series B Preferred Stock issued to the Seller and without considering dilution by management options). After the issuance of such shares of Series B Preferred Stock to the Seller, the shares of Holdco Common Stock purchased by the management of the Company prior to the Merger shall constitute approximately 6.1% of Holdco Common Stock (post-closing, assuming the conversion into Holdco Common Stock of the shares of Series B Preferred Stock issued to the Seller and without considering dilution by management options) and the shares of Holdco Common Stock purchased by the Investors prior to the Merger shall constitute approximately 74% of Holdco Common Stock (post-closing, assuming the conversion into Holdco Common Stock of the shares of Series B Preferred Stock issued to the Seller and without considering dilution by management options)." 2 5. Section 1.3 of the Merger Agreement shall be modified to read in full as follows: "1.3 CONVERSION OF SHARES. As of the Effective Time, by virtue of the Merger and without any action on the part of the Seller as the sole stockholder of the Company or Holdco as the sole stockholder of Holdco Sub: (a) Each share of common stock, par value of $0.001, of the Company (the "Company Common Stock") outstanding immediately prior to the Effective Time shall be converted into the right to receive $21,945.175, payable by wire transfer of federal clearing house funds. (b) Each share of the common stock, par value $0.001, of Holdco Sub (the "Holdco Sub Common Stock") outstanding immediately prior to the Effective Time shall be converted into one share of Company Common Stock." 6. Section 1.4 of the Merger Agreement is hereby amended by deleting the clause (c) thereof in its entirety and by deleting the "(d)" in the tenth line thereof and inserting "(c)" therefor. 7. The third sentence of Section 2.1(c) of the Merger Agreement is hereby modified to read in full as follows: "Immediately prior to the Effective Time, there will be no options, warrants or rights to purchase shares of capital stock or other securities of Holdco authorized, issued or outstanding other than as provided for in Section 6.6 hereof, nor will Holdco be obligated in any other manner to issue shares of its capital stock or other securities other than as provided for in Section 6.6 hereof." 8. The sixth sentence of Section 2.1(c) of the Merger Agreement is hereby modified to read in full as follows: "Immediately after the issuance of the 4,282 shares of Series B Preferred Stock to be issued to the Seller after the Effective Time subject to the terms and conditions of Section 6.6, such shares shall be convertible into 497,465 shares of Holdco Common Stock (approximately 19.9% of the issued and outstanding Holdco Common Stock after such conversion, not accounting for any other conversion or exercise of any options, warrants, convertible securities or other rights to purchase Holdco Common Stock and not accounting for any other securities issued by Holdco after the date of the Effective Time), which shares shall have been reserved for issuance pursuant to the terms of the Certificate of Incorporation of Holdco." 9. Section 4.7 of the Merger Agreement is hereby amended by inserting the words "other than the shares of Series B Preferred Stock" immediately after the word "Securities," and immediately prior to the comma preceding the words "to effect the Merger" contained in the fourth line thereof. 10. Section 5.5 of the Merger Agreement is hereby amended by inserting the words "other than the shares of Series B Preferred Stock" immediately after the word "Securities," and immediately prior to the words "and to carry out the transactions" contained in the fifth line thereof. 11. Section 5.6 of the Merger Agreement shall be modified to read in full as follows: 3 "5.6 BOARD OF DIRECTORS. The number of members of the board of directors of Holdco Sub shall have been fixed at no less than five and no more than six and no less than five members shall have been appointed as follows: (i) Mr. Charles Berger; (ii) three designees of the Investors (one such designee as a Series A Director, as defined in the Certificate of Incorporation of Holdco); and (iii) Kevin Macgillivray (as the initial designee of the management of the Company)." 12. The first sentence of Section 6.1(i) of the Merger Agreement is hereby modified to read in full as follows: "The board of directors of Holdco initially shall consist of six (6) directors." 13. Article VI of the Merger Agreement shall be modified by the addition of the following Section 6.6 at the end of such Article: "6.6 ISSUANCE OF SERIES B PREFERRED STOCK. After the later to occur of (but in no event later than March 31, 1996) (a) the Effective Time and (b) the issuance of a permit to Holdco by the California Department of Corporations that qualifies the issuance of 4,282 shares of Series B Preferred Stock to the Seller under Sections 25120 and 25121 of the California Securities Law, in consideration for the promises and covenants of the Seller contained herein, the Holdco shall issue to the Seller 4,282 shares of Series B Preferred Stock." 14. Holdco, Holdco Sub, the Old Investors and the New Investors hereby waive the requirement that the third party consents with respect to the transactions contemplated by the Merger Agreement described in items 2, 6 and 10 of Exhibit 4.7 to the Merger Agreement (the "Certain Third Party Consents") be received prior to the Closing. The Seller agrees to take all reasonable efforts to obtain the Certain Third Party Consents as soon as practicable after the Closing (as defined in the Merger Agreement). Any failure by the Seller to obtain the Certain Third Party Consents shall be considered a breach of a covenant of the Merger Agreement for the purposes of Article 10 of the Merger Agreement and the last sentence of Article 9 of the Merger Agreement. 15. Section 4.12 of the Merger Agreement shall be modified to read in full as follows: "4.12. ELECTION UNDER SECTION 338(H)(10). The Seller shall have executed the Form 8023A to be prepared in accordance with Section 6.5(d) hereof." 16. Section 6.5(c) of the Merger Agreement shall be amended by the addition of the following sentence as the last sentence thereof: "Upon the completion of the Audited Financial Statements, the Chief Financial Officer of the Seller shall deliver to the Investors' Accountants a representation to the effect that the Seller has provided to the Investors' Accountants all books and records of the Business, CSG and the Company with respect to the period extending from October 1, 1992 to the date of the Closing, and that the Seller has disclosed, to the best knowledge of the Seller, all financial transactions and all contingent liabilities required to be reported or reserved for in accordance with GAAP, existing or occurring during the period extending from October 1, 1992 to the date of the Closing, of the Business, CSG and the Company to the Investors' Accountants" 4 17. The first sentence of Section 9.1 of the Merger Agreement is hereby amended by the deleting the words "Section 2.1(c)" and replacing such words with the words "Sections 2.1(c) and 2.2." 18. The definition of the term for "EFI Litigation" in Section 11.1 of the Merger Agreement is hereby amended by deleted the three capitalized letters "DLG" and replacing such three letters with the three capitalized letters "DLJ." 19. Except as amended hereby, the Merger Agreement shall remain in full force and effect. 20. No failure or delay on the part of the Seller, the Company, Holdco Sub, Holdco, any New Investor, any Old Investor, any Indemnified Party, or any holder of the Subordinated Notes or the Preferred Stock, in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 21. Any provision in this Amendment to the contrary notwithstanding, changes in or additions to this Amendment may be made, and compliance with any covenant or provision herein set forth may be omitted or waived, if each of the Seller, the Company, Holdco, Holdco Sub, the Old Investors and the New Investors shall consent in writing. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 22. This Agreement shall be binding upon and inure to the benefit of the Company, the Seller, Holdco, Holdco Sub, the Old Investors and the New Investors and their respective successors and assigns, except that no party shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the other parties. 23. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 24. This Amendment shall be governed by, and construed in accordance with, the internal laws of the State of California without regard to principles of conflicts of law. 25. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. 26. From and after the date of this Amendment, upon the reasonable request by any of the other parties hereto, the Old Investors, the New Investors, Holdco, Holdco Sub, the Seller, the Company and each of their affiliates shall execute and deliver such instruments, documents and other writings as may be necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Amendment. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and in accordance with Section 1102 of the Delaware General Corporation Law, as of the date first above written. SELLER: RADIUS INC. a California corporation By: /s/ Charles W. Berger ----------------------------- Name: Charles W. Berger Title: Chairman and CEO COMPANY: SPLASH TECHNOLOGY, INC. a Delaware corporation By: /s/ Charles W. Berger ----------------------------- Name: Charles W. Berger Title: Chairman and CEO HOLDCO: SPLASH TECHNOLOGY HOLDINGS, INC. a Delaware corporation By: ----------------------------- Gregory M. Avis President and Chief Executive Officer HOLDCO SUB: SPLASH MERGER COMPANY, INC. a Delaware corporation By: ------------------------------------ Gregory M. Avis President and Chief Executive Officer [Signature Page of Amendment No.1 to Merger Agreement] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and in accordance with Section 1102 of the Delaware General Corporation Law, as of the date first above written. SELLER: RADIUS INC. a California corporation By: ----------------------------- Name: Title: COMPANY: SPLASH TECHNOLOGY, INC. a Delaware corporation By: ----------------------------- Name: Title: HOLDCO: SPLASH TECHNOLOGY HOLDINGS, INC. a Delaware corporation By: /s/ Gregory M. Avis ----------------------------- Gregory M. Avis President and Chief Executive Officer HOLDCO SUB: SPLASH MERGER COMPANY, INC. a Delaware corporation By: /s/ Gregory M. Avis ------------------------------------ Gregory M. Avis President and Chief Executive Officer [Signature Page of Amendment No.1 to Merger Agreement] OLD INVESTORS: SUMMIT SUBORDINATED DEBT FUND, L.P. By: Summit Partners SD, L.P., General Partner By: Stamps, Woodsum & Co., III, General Partner By: /s/ Gregory M. Avis ------------------------------------ Gregory M. Avis General Partner SUMMIT VENTURES IV, L.P. By: Summit Partners IV, L.P., General Partner By: Stamps, Woodsum & Co., IV, General Partner By: /s/ Gregory M. Avis ------------------------------------ Gregory M. Avis General Partner SUMMIT INVESTORS II, L.P. By: ------------------------------------ Gregory M. Avis General Partner NEW INVESTORS: SUMMIT INVESTORS III, L.P. By: ------------------------------------ Gregory M. Avis General Partner [Signature Page of Amendment No.1 to Merger Agreement] SIGMA PARTNERS III, L.P. By: Sigma Management III, General Partner By: /s/ Wade Woodson ------------------------------------ Wade Woodson General Partner Address: c/o Sigma Partners 2884 Sand Hill Road Suite 121 Menlo Park, CA 94025 Telecopier: (415) 854-1323 SIGMA ASSOCIATES III, L.P. By: Sigma Management III, General Partner By: /s/ Wade Woodson ------------------------------------ Wade Woodson General Partner Address: c/o Sigma Partners 2884 Sand Hill Road Suite 121 Menlo Park, CA 94025 Telecopier: (415) 854-1323 SIGMA INVESTORS III, L.P. By: Sigma Management III, General Partner By: /s/ Wade Woodson ------------------------------------ Wade Woodson General Partner Address: c/o Sigma Partners 2884 Sand Hill Road Suite 121 Menlo Park, CA 94025 Telecopier: (415) 854-1323 [Signature Page of Amendment No.1 to Merger Agreement] EX-10.3B 4 EXHIBIT 10.3B RADIUS INC. NEW EMPLOYEE STOCK OPTION GRANT OPTIONEE: ADDRESS: NUMBER OF SHARES OF COMMON STOCK PURCHASABLE: EXERCISE PRICE PER SHARE: DATE OF GRANT: START DATE: EXPIRATION DATE: TYPE OF STOCK OPTION (CHECK ONE): INCENTIVE NONQUALIFIED ---- ---- 1. GRANT OF OPTION. Radius Inc. (the "COMPANY"), a California corporation, hereby grants to the optionee named above ("OPTIONEE") an option (this "OPTION") to purchase to the total number of shares of common stock of the Company set forth above (the "SHARES") at the exercise price per share set forth above (the "EXERCISE PRICE"), subject to all of the terms and conditions of this Grant and the Company's 1986 Stock Option Plan as amended to date (the "PLAN"). If designated as an Incentive Stock Option above, this Option is intended to qualify as an "incentive stock option" ("ISO") within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "CODE"). Unless otherwise defined herein, capitalized terms shall have the meanings ascribed to them in the Plan. 2. EXERCISE PERIOD OF OPTION. Subject to the terms and conditions of the Plan and this Grant, this Option shall become exercisable following the first six (6) month period after the Start Date set forth above, at the rate of four percent (4%) of the total number of Shares per calendar month for the next six months and two percent (2%) of the total number of shares per month for the next 38 months; provided, however, that this Option shall expire on the Expiration Date set forth above and must be exercised, if at all, on or before the Expiration Date. 3. RESTRICTIONS ON EXERCISE. Exercise of this Option is subject to the following limitations: (a) This Option may not be exercised unless such exercise is in compliance with the 1933 Act and all applicable state securities laws, as they are in effect on the date of exercise. (b) This Option may not be exercised as to fewer than 100 Shares unless it is exercised as to all Shares as to which this Option is then exercisable. 4. TERMINATION OF OPTION. Except as provided below in this Section, this Option shall terminate and may not be exercised if Optionee ceases to be employed by the Company or any Parent or Subsidiary of the Company (or in the case of an NQSO, an Affiliate of the Company). Optionee shall be considered to be employed by the Company for all purposes under this Section 4 if Optionee is an officer or full-time employee of the Company or any Parent, Subsidiary or Affiliate of the Company or if the Board determines that Optionee is rendering substantial services as a part-time employee, consultant, contractor or adviser to the Company or any Parent, Subsidiary or Affiliate of the Company. The Board shall have discretion to determine whether Optionee has ceased to be employed by the Company and the effective date on which such employment terminated (the "TERMINATION DATE"). (a) If an Optionee ceases to be employed by the Company or any Parent, Subsidiary or Affiliate of the Company for any reason except death or disability, this Option, to the extent that it would have been exercisable by Optionee on the Termination Date, may be exercised by Optionee no later than (i) thirty (30) days after the Termination Date, or (ii) the Expiration Date, whichever occurs first. (b) If Optionee's employment with the Company or any Parent, Subsidiary or Affiliate of the Company is terminated because of the death of Optionee or disability of Optionee within the meaning of Section 22(e)(3) of the Code, this Option, to the extent that it would have been exercisable by Optionee on the Termination Date, may be exercised by Optionee (or Optionee's legal representative) no later than (i) twelve (12) months after the Termination Date or (ii) the Expiration Date, whichever occurs first. Nothing in the Plan or this Grant shall confer on Optionee any right to continue in the employ of the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Optionee's employment at any time, with or without cause. 5. MANNER OF EXERCISE. (a) This Option shall be exercisable by delivery to the Company of an executed Stock Option Exercise Notice in a form available from the Company, which shall set forth Optionee's election to exercise this Option and the number of Shares being subscribed to. (b) Such notice shall be accompanied by full payment of the Exercise Price for the Shares being purchased (i) in cash (by check), (ii) by surrender of shares of common stock of the Company that have been owned by Optionee for more than six (6) months (and which have been paid for within the meaning of SEC Rule 144 and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares) or were obtained by the Optionee in the open public market, having a Fair Market Value equal to the exercise price of the Option; (iii) by waiver of compensation due or accrued to Optionee for services rendered; (iv) through a "same day sale" commitment from the Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the exercise price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; (v) through a "margin" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; (vi) where permitted by applicable law and approved by the Committee in its sole discretion, by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; or (vii) by any combination of the foregoing where approved by the Committee in its sole discretion. Optionees who are not employees or directors of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares. (c) Prior to the issuance of the Shares upon exercise of this Option, Optionee must pay or make adequate provision for any federal or state withholding obligations of the Company. Optionee may provide for payment of withholding taxes upon exercise of the Option by requesting that the Company retain Shares with a Fair Market Value equal to the minimum amount of taxes required to be withheld. In such case, the Company shall issue the net number of Shares to the Optionee by deducting the Shares retained from the Shares issuable upon exercise. (d) Provided that such notice and payment are in form and substance satisfactory to counsel for the Company, the Company shall issue the Shares registered in the name of Optionee or Optionee's legal representative. 6. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two years after the date of this grant, or (ii) the date one year after transfer of such Shares to the Optionee upon exercise of the ISO, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee from the early disposition by payment in cash or out of the current earnings paid to the Optionee. 7. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of Shares shall be subject to compliance by the Company and the Optionee with all applicable requirements of federal or state securities laws and with all applicable requirements of any stock exchange or national market system on which the Company's common stock may be listed at the time of such issuance or transfer. 8. NONTRANSFERABILITY OF OPTION. This Option may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, successors and assigns of the Optionee. 9. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this Option of some of the federal and California tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) EXERCISE OF ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability or California income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as a tax preference item for federal income tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (b) EXERCISE OF NONQUALIFIED STOCK OPTION. If this Option does not qualify as an ISO, there may be a regular federal income tax liability and a California income tax liability upon the exercise of the Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. The Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (c) DISPOSITION OF SHARES. If the Shares are held for at least twelve months after the date of the transfer of the Shares pursuant to the exercise of this Option (and, in the case of an ISO, are disposed of at least two years after the Date of Grant), any gain realized on disposition of the Shares will be treated as long term capital gain for federal and California income tax purposes. If Shares purchased under an ISO are disposed of within such one year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the Fair Market Value of the Shares - the date of exercise over the Exercise Price. 10. INTERPRETATION. Any dispute regarding the interpretation of this agreement shall be submitted by Optionee or the Company forthwith to the Board or the committee thereof that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or committee shall be final and binding on the Company and on Optionee. 11. ENTIRE AGREEMENT. The Plan and the Stock Option Exercise Notice are incorporated herein by reference. This Grant, the Plan and the Stock Option Exercise Notice constitute the entire agreement of the parties and supersede all prior undertakings and agreements with respect to the subject matter hereof. ACCEPTANCE Optionee hereby acknowledges receipt of a copy of the Plan, represents that Optionee has read and understands the terms and provisions thereof, and accepts this Option subject to all the terms and provisions of the Plan and this Grant. Optionee acknowledges that there may be adverse tax consequences upon exercise of this Option or disposition of the Shares and that Optionee should consult a tax adviser prior to such exercise or disposition. OPTIONEE By: ------------------------------- EX-10.04 5 EXHIBIT 10.04 RADIUS INC. 1990 EMPLOYEE STOCK PURCHASE PLAN As Amended by the Board of Directors Through June 21 1995 As Approved by Shareholders on August 23, 1995 1. ESTABLISHMENT OF PLAN. Radius, Inc. (the "Company") proposes to grant options for purchase of the Company's Common Stock to eligible employees of the Company and Subsidiaries (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (the "Plan"). For purposes of this Plan, "parent corporation" and "Subsidiary" (when used in the plural, "Subsidiaries") shall have the same meanings as "parent corporation" and "subsidiary corporation" in Sections 425(e) and 425(f), respectively, of the Internal Revenue Code of 1986, as amended (the "Code"). The Company intends that the Plan shall qualify as an "employee stock purchase plan" under Section 423 of the Code (including any amendments or replacements of such section), and the Plan shall be so construed. Any term not expressly defined in the Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. Subject to adjustment as provided in Section 14 of the Plan, the aggregate number of shares of Common Stock which may be purchased under this Plan shall not exceed 650,000 shares of Common Stock of the Company, which may be treasury shares reacquired by the Company or authorized and unissued shares, or a combination of both. 2. PURPOSES. The purpose of the Plan is to provide employees of the Company and Subsidiaries designated by the Board of Directors as eligible to participate in the Plan with a convenient means to acquire an equity interest in the Company through payroll deductions, to enhance such employees' sense of participation in the affairs of the Company and Subsidiaries, and to provide an incentive for continued employment. 3. ADMINISTRATION. The Plan is administered by the Board of Directors of the Company or by a committee designated by the Board of Directors of the Company (in which event all references herein to the Board of Directors shall be to the committee). Subject to the provisions of the Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of the Plan shall be determined by the Board and its decisions shall be final and binding upon all participants. Members of the Board shall receive no compensation for their services in connection with the administration of the Plan, other than standard fees as established from time to time by the Board of Directors of the Company for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of the Plan shall be paid by the Company. 4. ELIGIBILITY. Any employee of the Company or the Subsidiaries is eligible to participate in an Offering Period (as hereinafter defined) under the Plan except the following: (a) employees who are not employed by the Company or Subsidiaries on the day before the beginning of such Offering Period; (b) employees who are customarily employed for less than 20 hours per week; (c) employees who are customarily employed for less than 5 months in a calendar year; and (d) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 425(d) of the Code, own stock or hold options to purchase stock or who, as a result of being granted an option under the Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the Company or any of its Subsidiaries. 5. OFFERING DATES. The Offering Periods of the Plan (the "Offering Period") shall be of six (6) months duration commencing April 1 and October 1 of each year and ending on September 30 and March 31, respectively, during which payroll deductions of the participant are accumulated under this Plan. The first Offering Period shall commence on April 1, 1991. The first day of each Offering Period is referred to as the "Offering Date." The last day of each Offering Period is hereinafter referred to as the "Purchase Date". The Board of Directors of the Company shall have the power to change the duration of Offering Periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 6. PARTICIPATION IN THE PLAN. Eligible employees may become participants in an Offering Period under the Plan on the first Offering Date after satisfying the eligibility requirements by delivering to the Company's or Subsidiary's (whichever employs such employee) payroll department not later than March 22, 1991 a subscription agreement authorizing payroll deductions for the Offering Period beginning April 1, 1991. For subsequent Offering Periods the subscription agreement is due (i) for current employees, not later than the 15th day of the month before such Offering Date, or (ii) for new employees who commenced employment with the Company within thirty (30) days of the next Offering Date, not later than the day before the beginning of the new Offering period, unless a later time for filing the subscription agreement is set by the Board for all eligible employees with respect to a given Offering Period, An eligible employee who does not deliver a subscription agreement to the payroll department by such date after becoming eligible to participate in such Offering Period under the Plan shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in the Plan by filing the subscription agreement with the payroll department not later than the 15th day of the month preceding a subsequent Offering Date. Once an employee becomes a participant in an Offering Period, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws from the Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such participant is not required to file any additional subscription agreements in order to continue participation in the Plan. Any participant whose option expires and who has not withdrawn from the Plan pursuant to Section 11 below will automatically be re-enrolled in the Plan and granted a new option on the Offering Date of the next Offering Period. 7. GRANT OF OPTION ON ENROLLMENT. An eligible employee who enrolls in the Plan with respect to an Offering Period pursuant to Section 6 hereof, will receive a grant of an option (as of the Offering Date) to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by dividing the amount accumulated in such employee's payroll deduction account during such Offering Period by the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date (the "Entry Price") or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Purchase Date, provided, however, that the number of shares of the Company's Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (a) the maximum number of shares set by the Board pursuant to Section 10(c) below with respect to the applicable Offering Period, or (b) 200% of the number of shares determined by using 85% of the fair market value of a share of the Company's Common Stock on the Offering Date as the denominator. Fair market value of a share of the Company's Common Stock shall be determined as provided in Section 8 hereof. 8. PURCHASE PRICE. The purchase price per share at which a share of Common Stock will be purchased in any Offering Period shall be 85 percent of the lesser of: (a) the fair market value at the close of trading on the day prior to the Offering Date; or (b) the fair market value at the close of trading on the Purchase Date. For purposes of the Plan, the term "fair market value" on a given date shall mean the closing price in U.S. dollars of a share of the Company's Common Stock on that date as reported on the NASDAQ National Market System. 9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF SHARES. (a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the employee's compensation in one percent increments not less than 2 percent nor greater than 10 percent. Compensation shall be limited to base salary or wages, bonuses, overtime and commissions, if any, paid; provided, however, that for purposes of determining a participant's compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Payroll deductions shall commence on the first payday following the Offering Date and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in the Plan. (b) A participant may decrease (but not increase) the rate of payroll deductions during an Offering Period by filing with the payroll department a new authorization for payroll deductions, in which case the new rate shall become effective for the next payroll period commencing more than 15 days after the payroll department's receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one change may be made effective during any Offering Period. A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the payroll department a new authorization for payroll deductions not later than the 15th day of the month before the beginning of such Offering Period. (c) All payroll deductions made for a participant are credited to his or her account under the Plan and are deposited with the general funds of the Company; no interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. (d) On each Purchase Date, so long as the Plan remains in effect and provided that the participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the participant wishes to withdraw from that Offering Period under the Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant as of that date returned to the participant, the Company shall apply the funds then in the participant's account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 8 of the Plan. Any cash remaining in a participant's account after such purchase of shares by reason of any limitation on the number of shares that may be purchased under the Plan as set forth in Section 10 hereof, shall be refunded to such participant in cash; provided, however, that any amount remaining in such participant's account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock of the Company shall be carried forward, without interest, into the next Offering Period. In the event that the Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in the Plan has terminated prior to such Purchase Date. (e) As promptly as practicable after the Purchase Date, the Company shall arrange the delivery to each participant, as appropriate, of a statement of shares purchased upon exercise of his option. (f) During a participant's lifetime, such participant's option to purchase shares hereunder is exercisable only by him or her. The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. Shares purchased on behalf of a participant under the Plan will be included in the Beneficial Owners list associated with the total shares registered in the name of the Employee Stock Purchase Plan individual accounts. 10. LIMITATIONS ON SHARES TO BE PURCHASED. (a) No employee shall be entitled to purchase stock under the Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in the Plan. (b) No more than 200% of the number of shares determined by using 85% of the fair market value of a share of the Company's Common Stock on the Offering Date as the denominator may be purchased by a participant on any single Purchase Date. (c) No employee shall be entitled to purchase more than the Maximum Share Amount (as defined below) on any single Purchase Date. Not less than thirty days prior to the commencement of any Offering Period, the Board may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (hereinafter the "Maximum Share Amount"). In no event shall the Maximum Share Amount exceed the amounts permitted under Section 10(b) above. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount not less than fifteen days prior to the commencement of the next Offering Period. Once the Maximum Share Amount is set, it shall continue to apply in respect of all succeeding Purchase Dates and Offering Periods unless revised by the Board as set forth above. (d) If the number of shares to be purchased on a Purchase Date by all employees participating in the Plan exceeds the number of shares then available for issuance under the Plan, the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be practicable and as the Board shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant's option to each employee affected thereby. (e) Any payroll deductions accumulated in a participant's account which are not used to purchase stock due to the limitations in this Section 10 shall be returned to the participant as soon as practicable after the end of the Offering Period. 11. WITHDRAWAL. (a) Each participant may withdraw from an Offering Period under the Plan by signing and delivering to the payroll department a notice on a form provided for such purpose. Such withdrawal may be elected at any time prior to the 15th day of the month in which an Offering Period ends. (b) Upon withdrawal from the Plan, the accumulated payroll deductions shall be returned to the withdrawn employee and his or her interest in the Plan shall terminate. In the event an employee voluntarily elects to withdraw from the Plan, he or she may not resume his or her participation in the Plan during the same Offering Period, but he or she may participate in any Offering Period under the Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth above for initial participation in the Plan. 12. TERMINATION OF EMPLOYMENT. Termination of a participant's employment for any reason, including retirement or death or the failure of a participant to remain an eligible employee, terminates his or her participation in the Plan immediately. In such event, the payroll deductions credited to the participant's account will be returned to him or her or, in the case of his or her death, to his or her legal representative. For this purpose, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company in the case of sick leave, military leave, or any other leave of absence approved by the Board of Directors of the Company; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute. 13. RETURN OF PAYROLL DEDUCTIONS. In the event an employee's interest in the Plan is terminated by withdrawal, termination of employment or otherwise, or in the event the Plan is terminated by the Board, the Company shall promptly deliver to the employee all payroll deductions credited to his account. No interest shall accrue on the payroll deductions of a participant in the Plan. 14. CAPITAL CHANGES. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that the options under the Plan shall terminate as of a date fixed by the Board and give each participant the right to exercise his or her option as to all of the optioned stock, including shares which would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the participant shall have the right to exercise the option as to all of the optioned stock. If the Board makes an option exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the participant that the option shall be fully exercisable for a period of twenty (20) days from the date of such notice, and the option will terminate upon the expiration of such period. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 15. NONASSIGNABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect. 16. REPORTS. Individual accounts will be maintained for each participant in the Plan. Each participant shall receive promptly after the end of each Offering Period a report of his account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Offering Period. 17. NOTICE OF DISPOSITION. Each participant shall notify the Company if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two years from the Offering Date or within twelve months from the Purchase Date on which such shares were purchased (the "Notice Period"). Unless such participant is disposing of any of such shares during the Notice Period, such participant shall keep the certificates representing such shares in his or her name (and not in the name of a nominee) during the Notice Period. The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to the Plan requesting the Company's transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on certificates. 18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Subsidiary or restrict the right of the Company or any Subsidiary to terminate such employee's employment. 19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have equal rights and privileges with respect to the Plan so that the Plan qualifies as an "employee stock purchase plan" within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of the Plan which is inconsistent with Section 423 or any successor provision of the Code shall without further act or amendment by the Company or the Board be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in the Plan. 20. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. SHAREHOLDER APPROVAL OF AMENDMENTS. Any required approval of the shareholders of the Company shall be solicited substantially in accordance with Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. Any such approval shall be solicited at or prior to the first annual meeting of shareholders held subsequent to the grant to an officer or director of the Company of an option under the Plan as then amended. Such shareholder approval shall be obtained at a duly held meeting or by written consent only to the extent required by and by a vote that satisfies the requirements of Section 423 of the Code and Rule 16b-3 as promulgated under the Exchange Act ("Rule 16b-3"). 22. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of an Offering Period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to a Purchase Date. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. If the purchase of shares on a Purchase Date is exempt from the operation of Section 16(b) of the Exchange Act by the operation of Rule 16b-6 promulgated under the Exchange Act, to the extent required by the Exchange Act, shares purchased by an person subject to the requirements of Section 16(b) of the Exchange Act may not be sold prior to the expiration of six (6) months from the Purchase Date on which such shares were purchased (or on such other date as may be required by Rule 16b-3 or any successor rule). 24. APPLICABLE LAW. The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of California. 25. AMENDMENT OR TERMINATION OF THE PLAN. This Plan shall be effective April 1, 1991 or such later date as the Board determines, and shall continue until the earlier to occur of termination by the Board, issuance of all of the shares of Common Stock reserved for issuance under the Plan, or ten (10) years from the adoption of the Plan by the Board. The Board of Directors of the Company may at any time amend or terminate the Plan, except that any such termination cannot affect options previously granted under the Plan, nor may any amendment make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the shareholders of the Company obtained in accordance with Section 21 hereof within 12 months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would: (a) increase the number of shares that may be issued under the Plan; (b) change the designation of the employees (or class of employees) eligible for participation in the Plan; or (c) constitute an amendment for which shareholder approval is required in order to comply with Rule 16b-3 (or any successor rule) of the Exchange Act. -----END PRIVACY-ENHANCED MESSAGE-----