-----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, PswNcFbx7ZafMOtKFmLhvdeioBMytEeJk9Hszich0clzlkxNphQjNr6n817mIgLX cdHTMANvdU4bqGZS1Y6zNQ== 0000912057-99-011108.txt : 19991231 0000912057-99-011108.hdr.sgml : 19991231 ACCESSION NUMBER: 0000912057-99-011108 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL ORIGIN INC CENTRAL INDEX KEY: 0000805574 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 680101300 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18690 FILM NUMBER: 99784493 BUSINESS ADDRESS: STREET 1: 460 E.MIDDLEFIELD ROAD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043- BUSINESS PHONE: 6504046000 MAIL ADDRESS: STREET 1: 460 E MIDDLEFIELD RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 FORMER COMPANY: FORMER CONFORMED NAME: RADIUS INC DATE OF NAME CHANGE: 19920703 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-18690 DIGITAL ORIGIN, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 68-0101300 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER OR ORGANIZATION) IDENTIFICATION NO.) 460 E MIDDLEFIELD ROAD MOUNTAIN VIEW, CA 94043 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (650) 404-6300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ( ) AS OF NOVEMBER 30, 1999 ------------------------ AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING BID PRICE OF SUCH STOCK: $51,154,558 NUMBER OF SHARES OF COMMON STOCK OUTSTANDING: 5,605,979 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD FEBRUARY 23, 2000 ARE INCORPORATED BY REFERENCE INTO PART III (ITEMS 10, 11, 12, AND 13) HEREOF. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DIGITAL ORIGIN, INC. 1999 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I Page ---- ITEM 1. Business.................................................................................... 2 ITEM 2. Properties.................................................................................. 5 ITEM 3. Legal Proceedings........................................................................... 5 ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 6 ITEM 4A. Executive Officers of Registrant............................................................ 6 PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters....................... 7 ITEM 6. Selected Financial Data..................................................................... 8 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 9 ITEM 7A Quantitative and Qualitative Disclosures about Market Risk.................................. 16 ITEM 8. Financial Statements and Supplementary Data................................................. 16 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ........ 16 PART III ITEM 10. Directors and Executive Officers of the Registrant.......................................... 17 ITEM 11. Executive Compensation...................................................................... 17 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................. 17 ITEM 13. Certain Relationships and Related Transactions.............................................. 17 PART IV ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................. 18 SIGNATURES ............................................................................................ 22
Digital Origin, the Digital Origin logo, EditDV, MotoDV, PhotoDV, IntroDV and RotoDV, among others, are trademarks and/or service marks of Digital Origin, Inc. Other brands and names referred to may be trademarks or service marks of others. -1- PART I ITEM 1. BUSINESS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: The following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that are subject to risks and uncertainties. Statements indicating that we "intend", "plan", "expect," "estimate" or "believe" are forward-looking, as are all other statements concerning future financial results, product offerings or other events that have not yet occurred. There are several important factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements contained in this discussion and other sections of this Form 10-K. OVERVIEW We design, develop, assemble, market and support digital video computer products for creative professionals and consumers who use digital camcorders. Our current product line consists of multimedia authoring and nonlinear editing video software and related hardware that can manipulate video and audio information in conjunction with desktop computers and digital camcorders. Our primary target markets are video editors, video producers, and creators of multimedia with an increasing emphasis on consumers. Prior to 1999, substantially all of our products have been designed for and sold to users of Macintosh computer products manufactured by Apple Computer, Inc. During 1999, we focused on the Windows market. As a result: 25% of unit sales were made to Macintosh only users, 29% were made to Windows only users, and 46% were made to cross-platform users. We distribute our products directly through our web site and through various distributors and resellers. Prior to 1999, our business included a number of other hardware product lines, including computer monitors, which were divested. Fiscal 1999 revenues were predominantly related to software products. As a result, comparisons to prior period results are not meaningful, since prior periods include these divested product lines. Our executive offices are located at 460 E. Middlefield Road, Mountain View, CA 94043, and our telephone number is (650) 404-6300. PRODUCTS AND APPLICATIONS Here is a summary of some of our principal products and their typical applications:
Software Products that include IEEE 1394 Firewire Card Suggested Retail Price ------------------------------------------------------- ------------------------ IntroDV $249 PhotoDV $299 MotoDV $399 MotoDV Studio $899 MotoDV Mobile $499 EditDV $999 Software Products without the IEEE 1394 Firewire Card PhotoDV $199 MotoDV $299 EditDV $899 EditDV Unplugged $149 RotoDV $399 RotoWeb $ 99
These prices listed are suggested retail prices. Actual prices may vary based on purchase volumes, competition, seasonality and promotions or other sales incentives. -2- DIGITAL VIDEO SYSTEMS AND SOFTWARE We offer a number of products for both the multimedia authoring and the non-linear digital video editing and production market. Non-linear digital editing enables video editors to manipulate pictures and sound in a faster, easier and more cost effective manner than traditional analog tape-based systems. Editors can randomly access and digitally "cut and paste" images, videos and sound clips, avoiding the tedious process of winding and rewinding linear tape and the subsequent physical cutting and splicing of film segments. INTRODV, introduced in September 1999, is an entry-level video editing solution targeted at new owners of DV camcorders. Declining prices of digital camcorders has created increased demand for value-priced DV "FireWire" video capture and editing solution. IntroDV includes our own video editing software, a still photo capture and touch-up software application as well as a PCI FireWire card. Designed for the Windows 95/98 platform, IntroDV features a simple interface that facilitates step-by-step movie production. As an entry-level video editing solution, IntroDV provides fewer features than our higher-end editing products. IntroDV is currently not available for Macintosh operating systems. PHOTODV is a software tool used as an Adobe PhotoShop-Registered Trademark- import plug-in. It is available with or without our FireWire card. PhotoDV enables a DV camcorder to perform as a still image camera, in addition to being used to record video. Pictures are acquired digitally over the FireWire card and can be used for Web sites, picture databases, printed pages, and QuickTime VR scenes. PhotoDV is available for both the Macintosh and Windows operating systems. MOTODV is an input/output software utility for moving DV camcorder footage from the camcorder to a personal computer for the purpose of editing. MotoDV is targeted at video designers and other creative professionals who produce video and multimedia content for tape, CD-ROM, and Web delivery. The MotoDV application remotely controls the DV camcorder or DV video tape recorder over FireWire and captures DV clips, in real-time or time-lapse mode. As clips are being captured, MotoDV converts the integrated DV data stream into QuickTime movies with separate video and audio tracks. These clips can then be imported into any QuickTime-compliant editing or special effects application, including our own EditDV, Adobe Premiere, and Adobe After Effects. MotoDV is available for both the Macintosh and Windows operating systems. MotoDV Studio builds on MotoDV by including Adobe Premiere for Windows and a set of custom developed plug-ins and is targeted towards the large installed base for Premiere. MotoDV Mobile is a version of MotoDV Studio tailored for users of Apple G4-based laptops. These laptop users can capture and edit DV footage away from their offices. EDITDV is a digital non-linear editing software system which operates on both the Macintosh and Windows operating systems in conjunction with digital camcorders, Apple's QuickTime (an industry standard architecture of digital media) and FireWire connections. Users can create digital video with multiple video and effects tracks, rubber-band audio, and traditional wipes and fades for fast interactive editing, color modification and keying. EditDV also provides QuickTime-compliant digital video non-linear editing, compositing and animation capability that facilitates the creation and editing of digital video content. EditDV is targeted to professional users and features an intuitive user interface, FX templates, built-in titling, multiple key frames, batch digitizing and picture-in-picture capabilities. It also offers a variety of high-quality special effects, including pan-zoom-rotating, chroma keying and compositing. EditDV Unplugged is an entry level version of EditDV targeted to the beginning non-linear editor, and is available for both the Macintosh and Windows operating systems. ROTODV is a painting and special effects software application for digital video, which provides an assortment of familiar yet powerful graphics tools for enhancing video productions. RotoDV is particularly useful for performing touch-ups such as removing unwanted objects from scenes, which can save the user the time and expense of re-shooting. Users can also brush animated digital "paint" directly onto moving images, to produce creative effects like those seen in music videos. In addition, by combining multiple layers of paint and video, RotoDV can be used to add Hollywood-style effects to a digital video production. RotoDV is currently available only for the Macintosh operating system. TECHNOLOGY AND PRODUCT DEVELOPMENT Our current research and development focus is on developing digital video acquisition products and editing tools for the Windows and Macintosh operating systems for customers who create, review, approve and utilize moving video. Current research and development efforts include: (i) performance improvements and cost reductions of current products and (ii) development of application software to facilitate the creation and manipulation of video and high resolution still and full motion images for use on the Internet. We believe that the competitive nature of the computer industry, along with the rapid pace of technological evolution, require that we continue to introduce innovative products on a timely basis to compete effectively. During fiscal 1999, 1998 and 1997, our expenditures for research and development totaled $2.6 million, $2.8 million and $5.0 million, respectively. Of these expenditures 100.00%, 68.98% and 28.95%, respectively, were allocated to -3- the digital video product line. To date, all of our research and development expenditures have been charged to operations as incurred. Because of our smaller size and narrowing product focus, we do not anticipate having research and development expenditures equal to earlier levels and there can be no assurance we will be able to successfully develop new or enhanced products, commercially successful products, or products that will not be rendered obsolete by changing technology or new products introduced by others. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Our Future Results of Operations -- Technological Change; Continuing Need to Develop New Products." MARKETING, SALES AND DISTRIBUTION We employ a two-tiered distribution model through which we sell products primarily through a limited number of distributors that in turn distribute our products to a variety of resellers including e-tailers, superstores, independent dealers, educational resellers, systems integrators, value added resellers and mail order resellers, both domestically and internationally. Our distributors purchase products at discounts from suggested retail prices. We also sell directly using our web site and toll-free call center. Our domestic distributors include: Canon USA, Inc., Ingram Micro, Inc., Broadfield Distributing, Inc., Micro-Pace, and Wynit. Our European and Japanese distributors include: Canon Europa, Computers Unlimited, Scribona, Towa and Orbit. Our business and financial results are highly dependent on the success of these distributors. To assist distributors and to provide marketing, training and technical support, we provide sales representatives in a number of locations in the United States. In Europe, we have a local sales and marketing representative to assist European distribution. In Japan, a local firm provides localized marketing and support. We also provide market development funds to give distributors incentives to increase sales, improve reporting and achieve a product mix favoring higher margin products. For fiscal years ended September 30, 1999, 1998 and 1997, our export sales accounted for approximately 31.6%, 23.4%, and 15.7% respectively, of our net sales. See Note 6 of Notes to Consolidated Financial Statements. Our export sales are subject to certain risks common to international operations, such as currency fluctuations and governmental regulation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Our Future Results of Operations -- International Sales." Many of our distributors have the limited right to return products purchased from us. While we reasonably allow for estimated product returns, if we were to experience returns from customers significantly in excess of this estimate, such returns could have a material adverse effect on our results of operations. Our marketing programs support worldwide sales and distribution of our products. Our principal marketing activities include active use of our web site and other web sites, frequent participation in industry trade shows and seminars, advertising in major trade publications worldwide, public relations activities with the trade and business press, publication of technical articles, distribution of sales literature and product specifications and communications with its installed base of end users. Our marketing programs are designed to generate sales leads for both direct sales and our distributors as well as to enhance our brand name recognition. MANUFACTURING AND SUPPLIERS Substantially all of our assembly, quality control testing, packaging and other manufacturing operations are performed by our suppliers, contract manufacturers, and other subcontractors pursuant to customary quality assurance programs. We attempt to utilize standard parts and components available from multiple vendors. However, certain components used are available only from sole or limited suppliers. Although we have been able to obtain an adequate supply of these components in the past, there can be no assurance that we will always be able to do so. COMPETITION All markets in which we compete are expected to remain highly competitive. Our principal competitors in the digital video market include Apple, Adobe, MGI, Ulead, Pinnacle Systems and Canopus. It is difficult to predict all future sources of competition. For example, Apple has introduced a non-linear digital video editing products called iMovie and Final Cut for use on Apple computers in fiscal 1999. Therefore, we will face significant competition in the future from Apple. There may be other new competitors or newly competitive products, including from Microsoft. Apple and Microsoft also could add functionality to their computer systems that is similar to that provided by certain of our products, or alter their systems' architecture in a manner that could adversely affect our ability to compete. We believe that the principal competitive factors for our product line are product performance, breadth of distribution, brand name recognition, price and customer support. There can be no assurance that we will be able to compete successfully with respect to these factors. In addition, many of our -4- current and prospective competitors have significantly greater financial, technical and marketing resources. As a result, there can be no assurance that we will compete effectively with current or future competitors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Our Future Results of Operations - -- Competition." EMPLOYEES As of October 31, 1999, we had approximately 49 full time employees, 25 of which are in sales and marketing functions, 11 of which are in research and development, and the balance are in administration (finance, operations, and senior management). Our success will depend, in large measure, on our ability to attract, motivate and retain highly qualified technical, marketing, engineering and management personnel, who are in great demand. Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe that our employee relations are good. RECENT DEVELOPMENTS -AGREEMENT TO MERGE WITH MEDIA 100, INC. We entered into a definitive agreement on December 28, 1999 to be acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ:MDEA), a pioneer of streaming media production tools. The merger is intended to be completed as a pooling of interests for accounting purposes and as a tax-free transaction. Under the agreement, Media 100 will issue .5347 shares of common stock for each share of our common stock. The transaction is subject to the approval of our shareholders and the stockholders of Media 100 and other customary closing conditions. The merger is expected to be complete in 90-120 days. The combined company will target Internet desktops with low-cost applications that allow personal computer users to capture, edit, and stream video on the Internet using a single, integrated, and easy-to-use application. We also have entered into a non-exclusive, four-year OEM development and license agreement with Media 100 by which Media 100 will use our consumer level video editing and effects software with Media 100's Internet streaming media software in exchange for certain royalty payments. ITEM 2. PROPERTIES We are located in Mountain View, California in a leased building with approximately 19,000 square feet of space. Our lease began on April 15, 1999 and has a three year term with an option to extend for an additional two years. Our current facility is sufficient for our current needs. ITEM 3. LEGAL PROCEEDINGS (a) On January 13, 1999 and January 28, 1999, we and one of our former directors, Charles Berger, were named as defendants in two shareholder class action lawsuits against Splash Technology Holdings, Inc. ("Splash"), various directors and executives of Splash and certain selling shareholders of Splash. The suits were filed in the United States District Court in Northern District of California and have been consolidated and captioned IN RE SPLASH TECHNOLOGY HOLDINGS INC. SECURITIES LITIGATION (Master File No. C99-0109 SBA). The law firm of Milberg Weiss Bershad Hynes & Lerach LLP has been designated lead counsel for the eight lead plaintiffs. The lawsuit alleges, among other things, that the defendants made or were responsible for material misstatements, and failed to disclose information concerning Splash's business, finances and future business prospects in order to artificially inflate the price of Splash common stock. The complaint does not identify any statements alleged to have been made by Charles Berger or us. The complaint further alleges that we engaged in a scheme to artificially inflate the price of Splash common stock to reap an artificially large return on the sale of the common stock in order to pay off our debt. We and the former director vigorously deny all allegations of wrongdoing and intend to aggressively defend ourselves in these matters. Defendants initial motion to dismiss the action was granted with leave to amend and an amended complaint has been filed by plaintiffs. (b) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates filed a suit in the United States District Court for the District of Colorado alleging a breach of contract and related claims in the approximate amount of $800,000, maintaining that we failed to comply with various return, price protection, inventory balancing and marketing development funding undertakings. In 1997, we filed an answer to the complaint and cross-claimed against the plaintiffs, and in October 1997 additionally cross claimed against Deutsche Financial, Inc., a factor in the account relationship between us and the plaintiffs, seeking the recovery of approximately $2 million. We continue to investigate these claims as well as cross claims and expect to vigorously defend and prosecute them as applicable. This case is scheduled for trial in April 2000. (c) We are involved in a number of other judicial and administrative proceedings incidental to our business. We intend to defend these matters vigorously and although adverse decisions (or settlements) may occur, the final resolution of -5- these lawsuits is not expected to have a material adverse effect on our financial position. However, an adverse resolution and the costs of defense, regardless of the outcome, could have a material adverse effect on our results of operations and financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT Our executive officers are:
NAME AGE POSITION ---- --- -------- Mark Housley 43 Chairman of the Board of Directors, Chief Executive Officer (CEO) and President Mary F. Bobel 50 Vice-President & Chief Financial Officer
MARK HOUSLEY has been our President since January 1997, CEO since August 1997 and Chairman since December 1997. From March 1995 until October 1996, Mr. Housley was founder and Vice President of Marketing of Spectrum Wireless, Inc., a manufacturer of wireless infrastructure products. From May 1992 until March 1995, Mr. Housley held various positions of responsibility for us and our predecessor SuperMac Technologies, Inc., including Vice President and General Manager of our Color Publishing Division. From October 1990 until May 1992, Mr. Housley was a Vice President for Siemens AG in Santa Clara, a multinational manufacturer of electronic equipment, directing product marketing and planning. MARY BOBEL has been our Vice-President & Chief Financial Officer since May 1999. Ms. Bobel served as the Executive Vice-President and Chief Financial Officer of Genus, Inc., a publicly traded manufacturer of semiconductor equipment from March 1997 through August 1998. Prior to Genus, she was Vice-President and Chief Financial Officer of Educational Publishing Corporation, a privately held supplier of educational materials from September 1994 until September 1996. From March 1990 through September 1994 she was Vice-President and Corporate Controller for Adobe Systems, a publicly traded software company. -6- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock was quoted on the Nasdaq National Market from August 21, 1991 until July 1, 1996 and on the Nasdaq SmallCap Market from July 2, 1996 until February 28, 1999 under the symbol "RDUS." On March 1, 1999, we changed our name from Radius Inc. to Digital Origin, Inc. and our common stock is now quoted on the Nasdaq SmallCap Market under the symbol "DODV." The high and low sales prices for the common stock are indicated below, adjusted to reflect the one-for-ten reverse split effective March 9, 1998.
Year Ended September 30, 1998 Low High - ----------------------------- --- ---- First Quarter $2.81 $7.19 Second Quarter 2.25 4.37 Third Quarter 2.37 5.87 Fourth Quarter 0.94 2.94 Year Ending September 30, 1999 - ------------------------------ First Quarter $0.78 $2.56 Second Quarter 1.34 4.25 Third Quarter 2.37 4.50 Fourth Quarter 3.25 6.13
On September 30, 1999, there were approximately 3,169 holders of record of our common stock. The price of our common stock has fluctuated widely in the past. We believe 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 of Apple Computer in particular, changes in our results of operations and financial condition, among other factors. 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 our securities and those of other high technology companies, often for reasons unrelated to the operating performance of the specific companies. Due to these factors, the dynamic nature of the our industry, and general economic conditions, our future operating results and stock prices may be subject to significant volatility. Such stock price volatility for the common stock has in the past provoked securities litigation, and future volatility could provoke new litigation that could divert substantial management resources and have an adverse effect on our results of operations. We have never declared or paid any cash dividends on our common stock. We anticipate that we will retain any future earnings for use in its business and do not anticipate paying any cash dividends . -7- ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30, (1) ---------------------------------------------------------------- 1999 1998 1997 1996 1995 ------ ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total net sales $ 13,353 $ 15,668 $ 31,150 $ 90,290 $ 308,133 Cost of sales 4,750 9,921 31,032 77,382 302,937 --------- ---------- ---------- ---------- --------- Gross profit 8,603 5,747 118 12,908 5,196 Operating expenses: Research and development 2,649 2,801 5,002 7,478 19,310 Selling, general and administrative 7,154 7,107 21,355 25,886 90,068 --------- ---------- ---------- ---------- --------- Total operating expenses 9,803 9,908 26,357 33,364 109,378 --------- ---------- ---------- ---------- --------- Loss from operations (1,200) (4,161) (26,239) (20,456) (104,182) Other income (expense), net 7,104 12,353 30,600 24,032 (3,045) Interest expense (55) (459) (2,777) (3,736) (3,023) Litigation settlement - - - - (12,422) --------- ---------- ---------- ---------- ---------- Income (loss) before income taxes 5,849 7,733 1,584 (160) (122,672) Provision (benefit) for income taxes - (1,000) 316 815 9,070 --------- ----------- ---------- ---------- --------- Net income (loss) $ 5,849 $ 8,733 $ 1,268 $ (975) $(131,742) ========= ========== ========== =========== ========== Preferred stock dividend - - 272 - - --------- ---------- ------------ ---------- --------- Net income (loss) applicable to common shareholders $ 5,849 $ 8,733 $ 996 $ (975) $(131,742) ========= ========== ========== =========== ========== Net income (loss) per common share: Basic net income (loss) per share applicable to common shareholders $ 1.06 $ 1.58 $ 0.18 $ (0.46) $ (87.54) ======== ========== ========== ============ =========== Diluted net income (loss) per share applicable to common shareholders $ 1.02 $ 1.57 $ 0.18 $ (0.46) $ (87.54) ======== ========== ========== ============ =========== Shares used in per share computations: Shares used in computing basic net income (loss) per share 5,535 5,522 5,389 2,125 1,505 ========= ========== ======== ========== ========== Shares used in computing diluted net income (loss) per share 5,747 5,557 5,522 2,125 1,505 ========= ========== ======== ========== ========== YEARS ENDED SEPTEMBER 30, (1) ---------------------------------------------------------------- 1999 1998 1997 1996 1995 ------ ---- ---- ---- ---- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA Working capital (deficiency) $ 980 $ (5,216) $ 7,909 $ 8,476 $ (59,334) Total assets 6,895 6,556 26,272 45,526 87,878 Long-term debt - noncurrent portion - - - 22,213 1,331 Convertible preferred stock - - - 3,000 - Shareholders' equity (Net capital deficiency) $ 1,081 $ (5,083) $ 8,158 $ 3,960 $ (57,117)
-8- (1) Our fiscal year ends on the Saturday closest to September 30 and includes 53 weeks in fiscal year 1998. All other fiscal years presented are 52 weeks. For consistency of presentation, all fiscal periods in this Form 10-K are reported as ending on a calendar month end. ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: Our discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that are subject to risks and uncertainties. Statements indicating that we "intend", "plan", "expect," "estimate" or "believe" are forward-looking, as are all other statements concerning future financial results, product offerings or other events that have not yet occurred. There are several important factors that could cause actual results or events to differ materially from those anticipated by our forward-looking statements. Such factors include, but are not limited to: our ability to achieve and maintain profitability; the success of our digital video software products; our ability to compete successfully with Apple in the digital video software market; the success of Apple's QuickTime technology for Windows; continued favorable licensing terms for QuickTime from Apple; our ability to successfully develop, introduce and market new software products, including products for the Windows operating system, to keep pace with technological innovation, particularly in light of its limited financial resources; the ability of our manufacturers and suppliers to deliver components and manufacture the our products; our reliance on international sales and its key distributor arrangements; and our ability to attract and retain its key personnel. RESULTS OF OPERATIONS The following table sets forth for the years indicated certain operational data as a percentage of net sales (may not add due to rounding).
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 1999 1998 1997 ---- ---- ---- Total net sales 100.0% 100.0% 100.0% Cost of sales 35.6 63.3 99.6 ----- ------ ----- Gross profit 64.4 36.7 0.4 Operating Expenses: Research and development 19.8 17.9 16.1 Selling, general, and administrative 53.6 45.3 68.5 ----- ------ ----- Total operating expenses 73.4 63.2 84.6 ----- ------ ----- Loss from operations (9.0) (26.5) (84.2) Other income, net 53.2 78.8 98.2 Interest expense (0.4) (2.9) (8.9) ------ ------- ------- Income before income taxes 43.8 49.4 5.1 Provision (benefit) for income taxes 0.0 (6.3) 1.0 ----- ------- ----- Net income 43.8% 55.7% 4.1% ===== ====== =====
FISCAL 1999 TO FISCAL 1998 NET SALES. Our net sales for fiscal 1999 decreased 15% to $13.4 million from $15.7 million for fiscal 1998. In 1998, we entered into an agreement for the license of significant assets of our monitor business to Korea Data Systems America, Inc. ("KDS") and concluded this transaction in 1999. These monitor products accounted for $8.7 million in sales for fiscal 1998. Consequently, sales revenues for fiscal 1999 declined from the previous year as revenues for fiscal 1999 are almost entirely attributable to video software, which accounted for approximately $4.6 million in fiscal 1998. The Company follows Statement of Position (SOP) 97-2, "Software Revenue Recognition." Revenue from the sale of software, net of estimated returns, is recognized upon either shipment of the physical product or delivery of electronic product, at which time, collection is determined to be probable and the Company has no remaining obligations. Sales to certain resellers are subject to agreements allowing certain rights of return and price protection on unsold merchandise held by these resellers. The Company provides for estimated returns at the time of shipment and for price -9- protection following price declines. Revenue earned under royalty or commission agreements is recognized in the period in which it is earned. During 1999, sales of previously introduced software products for digital video camcorders including PhotoDV, MotoDV, and EditDV increased over fiscal 1998. In addition during 1999, we introduced several new products including EditDV-Windows, MotoDV Studio, MotoDV Mobile, RotoDV, RotoWeb and IntroDV. Localized versions of several of the products were introduced to the European and Japanese markets contributing to growth in international software revenues. Related revenue grew sequentially each quarter of fiscal 1999. However, while we plan to introduce revisions of current products and increase localized versions, there can be no assurance that sales of these software products will continue to increase. Two customers accounted for 20.7% and 18.4% of our net sales for fiscal 1999. For fiscal 1998 the same distributors accounted for 53.5% and 0.0% of our net sales, respectively. GROSS PROFIT. Our gross profit margin was 64.4% for fiscal 1999, as compared with 36.7% for fiscal 1998 as a result of increased sales of higher margin digital video software products and the discontinuation of lower margin monitors and other hardware product lines. Our digital video products have varying gross margins. In addition, margins vary according to the method of distribution. Accordingly, in any future period, the product and channel mix will affect the gross margin. While we expect the gross profit margins to remain at similar levels in the future, there can be no assurance that our gross margins will improve or remain at current levels, particularly if the volume of our consumer oriented products grows significantly in relation to our professional products. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased from $2.8 million or 17.9% of net sales for fiscal 1998 to $2.6 million or 19.8% of net sales for fiscal 1999. The decrease in research and development expenses is primarily due to headcount reductions resulting from our departure from the monitor and other hardware businesses. The increase in research and development expenses expressed as a percentage of net sales for fiscal 1999 was primarily attributable to the decrease in net sales as we refocused on higher margin software products, rather than high volume, lower margin hardware products. We expect to increase our research and development expenses in fiscal 2000 in absolute dollars. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for fiscal 1999 increased slightly to $7.2 million or 53.6% of net sales compared to $7.1 million or 45.3% of net sales for fiscal 1998. Increases in sales and marketing efforts in Japan and Europe offset decreased expenses from reductions in headcount from fiscal 1998. During the last quarter of fiscal 1999, we installed both new telephone and computer systems and expect increased depreciation expense in fiscal 2000. OTHER INCOME (EXPENSE), NET. Other income was $7.1 million for fiscal 1999 compared to $12.4 million for fiscal 1998. The other income for fiscal 1999 includes $4.5 million from the KDS license, $2.5 million from the sale of the Color Server Group and other assets to Splash, and $0.1 million in miscellaneous other income. Fiscal 1998 included $1.6 million related to the KDS license, $10.0 million from the sale of Splash Common Stock, $0.5 million from the sale of Umax Common Stock and $0.3 in miscellaneous other income. INTEREST EXPENSE. Interest expense was $55,000 for fiscal 1999 as compared to $.5 million for fiscal 1998. This decrease was due to lower average borrowings primarily as a result of the repayment of the working capital line of credit, which was secured by the note receivable from KDS. PROVISION FOR INCOME TAXES. No provision for income taxes was recorded in fiscal 1999 due to the benefit of previously unutilized net operating losses and timing differences. For fiscal 1998 we recorded a reversal of accrual for income taxes of $1.0 million. The reversal reflects the fact that exposure in certain foreign jurisdictions, as a result of the passage of time, had become remote. FASB Statement 109, Accounting for Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Our valuation allowance reduced the deferred tax asset to the amount realizable. We have provided a full valuation allowance against our net deferred tax assets due to uncertainties surrounding their realization. Due to the net cumulative losses reported, predictability of earnings in future periods is uncertain. We will evaluate the realizability of the deferred tax assets on a quarterly basis. As a result of our issuance of common stock and Series A Convertible Preferred Stock in exchange for the release of certain liabilities in September 1996, we experienced a "change in ownership" as defined under Section 382 of the Internal Revenue Code. Accordingly, utilization of substantial net operating losses and tax credit carryforwards will be subject to an approximate $2.0 million annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 (and similar state provisions), except under limited circumstances. This limitation will result in the expiration of all of the tax credit carryforwards and a substantial portion of the net operating loss carryforwards without full utilization. See Note 4 of Notes to Consolidated Financial Statements. -10- NET INCOME (LOSS). As a result of the above factors, we had net income of $ 5.8 million in fiscal 1999 compared to a net income of $8.7 million for fiscal 1998. FISCAL 1998 TO FISCAL 1997 NET SALES. Our net sales for fiscal 1998 decreased 50% to $15.7 million from $31.2 million for fiscal 1997. The decline is due primarily to the following factors: our efforts to refocus on the digital video software product lines while discontinuing the development of our monitor, accelerated color graphics products and the DOS on Mac products; and a decline in fourth quarter sales of our monitor products due to the agreement for the license of significant assets of our monitor business to KDS. The monitor products had $8.7 million in sales for fiscal 1998 as compared to $16.6 million for fiscal 1997. As a result of these factors, product sales decreased 45.9% in fiscal 1998 from fiscal 1997. Commissions and royalties decreased in fiscal 1998 by 77.3% to $1.1 million from $4.9 million in fiscal 1997 due to the termination of our exclusive distributor relationships in Europe and Japan and due to the expiration of the royalty agreement with Umax Computer Corporation in March 1998. Also as a result of the distributor relationships in Japan and Europe, our export sales for fiscal 1998 declined to $3.7 million as compared to $4.9 million for fiscal 1997. Sales growth in the Asia market has been impacted by certain factors including weaker economic conditions and stronger dollar versus the local currencies and the restructuring of various distributor relationships. Revenue is recognized when products are shipped. Sales to certain distributors are subject to agreements allowing certain rights of return and price protection on unsold merchandise held by these distributors. We provide for estimated returns at the time of shipment and for price protection following price declines. Revenue earned under royalty or commission agreements is recognized in the period in which it is earned. The sale of the software products for digital video camcorders (PhotoDV introduced in April 1997, MotoDV introduced in September 1997 and EditDV introduced in November 1997) increased during 1998. Effective January 1, 1998, we modified our relationships with distributors in Japan and Europe for our digital video software products. Rather than paying commissions to us for products sold, they purchase products from us at a discount from the price list. Commissions were paid on the sales of our other products sold through these distributors, however. One customer accounted for 53.5% of our net sales for fiscal 1998. For fiscal 1997 the same distributor accounted for 66.1% of our net sales. GROSS PROFIT. Our gross profit margin was 36.7% for fiscal 1998, as compared with 0.4% for fiscal 1997. This increase was a result of our decision to refocus our business on higher margin digital video software products. Included in fiscal 1997 cost of sales are one-time charges of $9.7 million consisting principally of inventory write downs of $7.7 million and reserves for excess purchase order commitments of $2.0 million for inventory in excess of anticipated demand. These charges reflect decreases in demand and were consistent with our decision to refocus our business. Excluding these one-time charges, gross profit margin in fiscal 1997 was 31.5%. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased from $5.0 million or 16.1% of net sales for fiscal 1997 to $2.8 million or 17.9% of net sales for fiscal 1998. We decreased our research and development expenses primarily by reducing expenses related to discontinued product lines in connection with our efforts to refocus our business. The increase in research and development expenses expressed as a percentage of net sales for fiscal 1998 was primarily attributable to the decrease in net sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased from $21.4 million or 68.6% of net sales for fiscal 1997 to $7.1 million or 45.4% of net sales for fiscal 1998. Included in these expenses for fiscal 1997 is a $2.6 million charge to increase the allowance for doubtful accounts due to accounts which we determined were unlikely to be collected in full. Adjusting for these charges and reductions, selling, general and administrative expenses would have been $18.8 million or 60.3% of net sales in fiscal 1997. We decreased fiscal 1998 selling, general and administrative expenses in absolute and percentage terms primarily by reducing expenses related to headcount. OTHER INCOME (EXPENSE), NET. Other income was $12.4 million for fiscal 1998 compared to $30.6 million for fiscal 1997. The other income for fiscal 1998 was due to the sale of 570,139 shares of Splash common stock compared to 996,875 shares of Splash common stock in fiscal 1997. Fiscal 1998 also includes $1.6 million related to the KDS license. INTEREST EXPENSE. Interest expense was $0.5 million for fiscal 1998 as compared to $2.8 million for fiscal 1997. This decrease was due to lower average borrowings primarily as a result of the repayment of the working capital line of credit to IBM Credit. PROVISION FOR INCOME TAXES. We recorded a reversal of accrual for income taxes of $1.0 million for fiscal 1998 compared to a provision of $0.3 million for fiscal 1997. The reversal reflects the fact that exposure in certain foreign jurisdictions, as a result of the passage of time, has become remote. -11- As a result of our issuance of common stock and Series A Convertible Preferred Stock in exchange for the release of certain liabilities in September 1996, we experienced a "change in ownership" as defined under Section 382 of the Internal Revenue Code. Accordingly, utilization of substantial net operating losses and tax credit carryforwards will be subject to an approximate $2.0 million annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 (and similar state provisions), except under limited circumstances. This limitation will result in the expiration of all of the tax credit carryforwards and a substantial portion of the net operating loss carryforwards without full utilization. See Note 4 of Notes to Consolidated Financial Statements. NET INCOME (LOSS). As a result of the above factors, we had net income of $ 8.7 million in fiscal 1998 compared to a net income of $1.0 million for fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents increased from $.0.6 million at the end of fiscal 1998 to $3.6 million at the end of fiscal 1999. Approximately $0.1 million of the $3.6 million of cash and cash equivalents available at September 30, 1999 was restricted under a letter of credit. The increase in our cash and cash equivalents during fiscal 1999 was primarily attributable to remaining funds received from the Splash escrow, and receipt of the licensing fees from KDS, offset by funding of operating losses during the first half of the year. Working capital was $980,000 at September 30, 1999. In fiscal 1998, under the license and asset transfer agreement with KDS, we transferred our Radius, Supermac, PressView and certain other trademarks to KDS and licensed certain intellectual property pertaining to PressView and PrecisionView monitors. The value of the transaction was $6.2 million payable in installments. The asset transfer agreement was completed on May 17, 1999, and we received the final installment payment on the note in July 1999. We believe that our cash and cash equivalents, cash flow from operations, and other available sources of financing, will be sufficient to fund operations for the next fiscal year. However, there can be no assurances that the sale of software products will continue to increase to a sufficient extent to fund our operating plan for fiscal 2000. We may need to reduce our operating expenses or seek additional sources of working capital. Capital expenditures were approximately $0.7 million during fiscal 1999, primarily attributable to the upgrade of our telephone and computer systems and leasehold improvements. As a result of these significant expenditures in 1999, such capital expenditures for fiscal 2000 are expected to decrease. At September 30, 1999, our principal commitments consisted of our obligation under a building lease. See Note 2 to the Consolidated Financial Statements. We are also a party to various litigation proceedings, the costs of defending or the outcome of which could adversely affect the Company's liquidity. See "Business -- Legal Proceedings." -12- CERTAIN FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OF OPERATIONS Our future operating results could be affected by a number of uncertainties, including: OPERATING LOSSES While we have achieved profitability on the operating level during the last two quarters of 1999, we have experienced operating losses in each of its prior five fiscal years. Our ability to sustain profitable operations will depend upon a number of factors, including our ability to control costs; our ability to generate sufficient cash from operations or obtain additional funds to fund our operating expenses; our ability to successfully market our software products; our ability to develop innovative and cost-competitive new products and to bring those products to market in a timely manner; and competitive factors such as new product introductions, product enhancements and aggressive marketing and pricing practices; general economic conditions; and other factors. For these and other reasons, there can be no assurance that we will be able to maintain profitability. FLUCTUATIONS IN OPERATING RESULTS We have experienced substantial fluctuations in operating results. Our customers generally order on an as-needed basis, and we have 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 our revenues are derived from sales made late in each quarter, which increases the difficulty in forecasting sales accurately. We recognize sales upon shipment of product, and allowances are recorded for estimated uncollectible 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 our forecasts regarding bookings, collections, returns, credits and related matters will be accurate. A significant portion of our operating expenses 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 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 our operating results. As a strategic response to a changing competitive environment, we have elected, and, in the future, may elect from time to time, to make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on the our business. As a result, we believe that period-to-period comparisons of our results of operations will not necessarily be meaningful and should not be relied upon as any indication of future performance. Due to all of the foregoing factors, it is likely that in some future quarter, our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would be likely to be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON AND COMPETITION WITH APPLE Although most of our current products are cross platform and are targeted at the Windows environment, it is expected that sales of products for Apple computers will continue to represent a portion of our sales for fiscal 2000. While Apple has introduced new products which have been well received in the marketplace this year, Apple had lost significant market share over recent years. Our operating results would be adversely affected if other developments were to adversely affect Apple's business. Furthermore, any continued 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 further reduced demand for Apple computers, which in turn could materially and adversely affect sales of our products. A number of our products compete with products marketed by Apple, e.g. Final Cut and iMovie. As a competitor, Apple could in the future take steps to hinder our development and to slow sales of our products. 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. In order to develop products for the Macintosh on a timely basis, we depend upon access to advance information concerning new Macintosh products. A decision by Apple to cease sharing advance product information with us would adversely affect out business. We also license certain technology from Apple to use on both the Macintosh and Windows platform. Favorable licensing terms cannot be assured in the future. If Apple ceases to support this technology for the Windows platform this would adversely affect our business. -13- DEPENDENCE ON AND COMPETITION WITH MICROSOFT As a competitor, Microsoft could in the future take steps to hinder our development and to slow sales of our products. New products anticipated from and introduced by Microsoft could cause customers to defer or alter buying decisions due to uncertainty in the marketplace, as well as presenting additional direct competition. In order to develop products for Windows on a timely basis, we depend upon access to advance information concerning new Microsoft operating systems and their digital video software architecture. A decision by Microsoft to cease sharing advance product information with us would adversely affect our business. COMPETITION The markets for our products are highly competitive, and we expect competition to intensify. Many of our current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources, particularly Adobe Systems. We believe that our ability to compete will depend on a number of factors, including the amount of financial resources available, success and timing of new product developments and its competitors, product performance, price and quality, breadth of distribution and customer support. There can be no assurance that we 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. See "Business -- Competition." DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS We are dependent on sole or limited source suppliers for certain key components used in the Firewire card. We purchase these sole or limited source components primarily pursuant to purchase orders placed from time to time in the ordinary course of business and have no guaranteed supply arrangements with sole or limited source suppliers. Therefore, these suppliers are not necessarily obligated to supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. Although we expect that these suppliers will continue to meet our requirements for the components, there can be no assurance that they will do so. Our reliance on a limited number of suppliers involves a number of risks, including the absence of adequate capacity, the unavailability or interruption in the supply of key components and reduced control over delivery schedules and costs. We expect to continue to rely on a limited number of suppliers for the foreseeable future. If these suppliers became unwilling or unable to continue to provide these components, we would have to develop alternative sources for these components which could result in delays or reductions in product shipments. 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. TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS The digital video software applications industry is characterized by rapidly changing technology, often resulting in short product life cycles and rapid price declines. We believe that our success will be highly dependent on our ability to develop innovative and cost-competitive new products and to bring them to the marketplace in a timely manner. If we fail to introduce new products on a timely basis, our operating results could be adversely affected. A reduction in available cash resources could also result in the interruption or cancellation of research and product development efforts which would have a material adverse effect on the business. We anticipate that the digital video software industry will follow the pattern of the professional publishing industry in which desktop publishing products, including those produced by our predecessor, replaced more expensive, proprietary products, and we also anticipate that this evolution will lead to an increase in the purchase and use of digital video editing products for use with digital video camcorders. As a result, we have devoted significant resources to this product line. There can be no assurance that this evolution will occur in the digital video editing industry as expected, or that even if it does occur that it will not occur at a slower pace than anticipated. There can also be no assurance that any digital video editing products developed by us will achieve consumer acceptance or broad commercial success. In the event that the increased use of such video editing products does not occur or in the event that we are unable to successfully develop and market such products, our business, operating results and financial condition would be materially adversely affected, particularly in light of the fact that we have licensed or sold its remaining hardware product lines over the last four years. DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS Our primary means of distribution is through a limited number of third-party distributors that are not under our direct control. Furthermore, we continue to build a new distribution network in Europe and in Japan. We maintain only a small direct sales force. As a result, our business and financial results are highly dependent on the amount of products ordered by these distributors. Such orders are in turn dependent upon the continued viability and financial condition of these distributors as well as on their ability to resell such products and maintain appropriate inventory levels. These distributors generally carry the product lines of a number of companies, are not subject to minimum order requirements and can discontinue marketing -14- our products at any time. We must compete for the focus and sales efforts of these third parties. In addition, due in part to the historical volatility of the personal computer industry, some distributors have from time to time experienced declining profit margins, cash flow shortages and other financial difficulties. Our future growth and success will continue to depend in large part upon indirect distribution channels. If our distributors were to experience financial difficulties, our results of operations could be adversely affected. INTERNATIONAL SALES We expect that international sales, primarily in Europe, will represent a significant portion of our business activity and 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. Sales in Japan could be affected by the economic conditions in that region, which have been unfavorable. Furthermore, a reduction in sales efforts or financial viability of our international distributors could adversely affect our net sales and our ability to provide service and support to Japanese and European customers. Additionally, if for any reason exchange or price controls or other restrictions on foreign currencies are imposed, our business, operating results and financial condition could be materially adversely affected. DEPENDENCE ON KEY PERSONNEL Our success depends to a significant degree upon the continued contributions of key management, marketing, product development and operational personnel and our ability to retain and continue to attract highly skilled personnel. We currently have only two executive officers. We do not carry any key person life insurance with respect to any of its personnel. Competition for employees in the computer industry is intense, and there can be no assurance that we will be able to attract and retain qualified employees. Because of the very tight labor market for technical personnel, it has become increasingly difficult for us to hire new employees and retain key management and current employees. The failure to attract and retain key personnel would have a material adverse effect on our business, operating results and financial condition. DEPENDENCE ON PROPRIETARY RIGHTS We rely on a combination of patent, copyright, trademark and trade secret protection, nondisclosure agreements and licensing arrangements to establish and protect our proprietary rights. Although we intend to defend our proprietary rights, policing unauthorized use of proprietary technology or products and defending patents, copyrights and trademarks are difficult, and there can be no assurance that our efforts will be successful. Moreover, the laws of certain foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. We have also received, and expect to receive in the future, communications asserting that our products may infringe the proprietary rights of third parties. As a result of such claims or potential litigation, it may become necessary or desirable in the future for us 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 we would be able to do so on commercially reasonable terms. IMPACT OF YEAR 2000 The year 2000 Issue ("Y2K Issue") is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on prior assessments of our information management and accounting systems, we determined that it was necessary to replace significant portions of this software and certain hardware, which was completed during fiscal 1999. We have spent approximately $700,000 on our new information technology and accounting systems and anticipate spending an additional $300,000 in fiscal 2000. We paid for this investment from internally generated funds. The upgrade of those systems represents over 90% of the information technology budget for the year and was our major project. In addition to Y2K readiness, these systems provide additional functionality in streamlining and automating many business processes and increasing operating efficiencies. No major information technology projects were deferred as a result. Based on a review of our product line, we have concluded that none of our products require remediation to be Year 2000 compliant, as primarily all operate in conjunction with the MacOS or the Windows operating system. We therefore do not believe that the Y2K Issue presents a material risk with respect to our current products. In addition, we have received assurances from our key suppliers and distributors that they are fully compliant. However, we have no means of ensuring that such suppliers and distributors will be Year 2000 ready. The inability of suppliers and distributors to complete their Year 2000 resolution process in a timely fashion could materially -15- impact us. Our contingency plans, should our suppliers and distributors fail to be Year 2000 compliant, would primarily involve manual processes and workarounds, which could result in delays in obtaining components for our products, in shipping product, in collecting receivables, and also increased administrative expense. To date, we believe that we have adequately addressed the Y2K Issue, but there can be no assurance that Y2K problems will not adversely affect our business. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The index to the Company's Financial Statements, Financial Schedules, and the Report of the Independent Auditors appears in Part IV of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. -16- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information concerning our directors required by Item 10 is incorporated by reference herein to section entitled "Proposal No. 1 - Election of Directors" of the Proxy Statement for its 2000 Annual Meeting of Shareholders (the "Proxy Statement"). The information concerning our executive officers required by Item 10 is incorporated by reference to Item 4A in Part 1 hereof entitled "Executive Officers of Registrant." With the exception of the information specifically stated as being incorporated by reference from the Company's Proxy Statement in Part III of this Annual Report on Form 10-K, our Proxy Statement is not to be deemed as filed as part of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the sections entitled "Executive Compensation" and "Proposal No. 1 - Election of Directors--Compensation of Directors" of the Proxy Statement. With the exception of the information specifically stated as being incorporated by reference from the Proxy Statement in Part III of this Annual Report on Form 10-K, our Proxy Statement is not to be deemed as filed as part of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement. With the exception of the information specifically stated as being incorporated by reference from the Proxy Statement in Part III of this Annual Report on Form 10-K, our Proxy Statement is not to be deemed as filed as part of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the section entitled "Certain Transactions" of the Proxy Statement. With the exception of the information specifically stated as being incorporated by reference from the Proxy Statement in Part III of this Annual Report on Form 10-K, our Proxy Statement is not to be deemed as filed as part of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end. -17- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS.
Page ---- Report of Ernst & Young LLP, Independent Auditors 24 Consolidated Balance Sheets at September 30, 1999 and 1998 25 Consolidated Statements of Income for the Years Ended September 30, 1999, 1998 and 1997 26 Consolidated Statements of Convertible Preferred Stock and Shareholders' Equity for the Years Ended September 30, 1999, 1998, and 1997 27 Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998, and 1997 28 Notes to Consolidated Financial Statements 29 (a) (2) FINANCIAL STATEMENT SCHEDULES. The Company's financial statement schedule filed herewith is as follows: Schedule II: Valuation and Qualifying Accounts 41
All other financial statement schedules are omitted because the information called for is not present in amounts sufficient to require submission of the schedules or because the information required is shown either in the financial statements or the notes thereto. (a) (3) The following exhibits are filed herewith or incorporated by reference herein:
EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 2.07 -- Merger Agreement (the "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) 2.08 -- Amendment No. 1 to Merger Agreement dated as of January 30, 1996. (2) 2.09 -- Agreement and Plan of Reorganization dated December 28, 1999 with Media 100, Inc. 3.01 A Registrant's Sixth Amended and Restated Articles of Incorporation. (3) B Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (1) C Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (15) -18- EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 4.01 -- Specimen Certificate for shares of Common Stock of the Registrant. (5) 4.03 A Warrant dated September 13, 1995 between IBM Credit Corporation and the Registrant. (8) B Warrant dated October 13, 1996, between Mitsubishi Electronics America, Inc. and the Registrant. (9) 4.04 -- Form of Registration Rights Agreement between the Registrant and certain shareholders. (8) A Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (See exhibit 3.01) 4.05 -- The Registrant's Bylaws. (4) 10.01 A *Registrant's 401(k) Savings and Investment Plan. (6) B *Amendment to Registrant's 401(k) Savings and Investment Plan. (1) C *Registrant's 401(k) Savings and Investment Plan Loan Policy. (1) 10.02 -- *Registrant's 1995 Stock Option Plan. (1) 10.03 -- *Form of Stock Option Agreement and Exercise Request as currently in effect under 1995 Stock Option Plan. (1) 10.04 -- *Registrant's 1994 Directors' Stock Option Plan. (1) 10.05 -- Form of Indemnity Agreement with Directors. (5) 10.06 -- *Employment Agreement by and between Registrant and Mark Housley dated December 20, 1996. (10) 10.07 Asset Purchase Agreement dated as of August 7, 1998 between Korea Data Systems America, Inc. and the Registrant. (11) 10.08 -- Amended and Restated License Agreement dated as of August 7, 1998 between Korea Data Systems America, Inc. and the Registrant. (11) 10.09 -- Asset Purchase Agreement dated as of November 23, 1998 between Post Digital Software, Inc. and the Registrant. (12) 10.10 -- Asset Sale Agreement dated as of December 4, 1998 between Splash Technology Holdings, Inc. and the Registrant. (12) 10.11 -- Supplement to the License and Asset Purchase Agreement dated December 4, 1998 between Korea Data Systems America, Inc. and the Registrant. (12) -19- EXHIBIT NUMBER EXHIBIT TITLE ------ ------------- 10.12 -- Lease agreement by and between Registrant and Eliane Ortuno, Trustee, Donald T. Kitts Trust dated January 8, 1999. (460 East Middlefield Road, Mountain View, California offices). (13) 10.13 -- Registrant's 1999 Employee Stock Purchase Plan and related documents. (14) 10.14 -- OEM and license agreement between Media 100, Inc. and the registrant. - ------------- 21.01 -- List of Registrant's subsidiaries. 23.01 -- Consent of Ernst & Young LLP, Independent Auditors. 27.01 -- Financial Data Schedule (EDGAR version only)
(1) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 15, 1995. (2) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on February 13, 1996 (3) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 24, 1990. (4) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 filed on April 29, 1992 (File No. 33-47525). (5) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (File No. 33-35769) which became effective on August 16, 1990. (6) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 28, 1992. (7) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 12, 1992. (8) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-12417) filed on September 20, 1996. (9) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 333-12417) filed on November 12, 1996. (10) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on February 11, 1997. (11) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 11, 1998. (12) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 23, 1998. (13) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on February 10, 1999. (14) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on May 12, 1999. (15) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 filed on August 13, 1999 (File No. 333-85213). * management contracts or compensatory plans required to be filed as an exhibit to Form 10-K. - ---------------- -20- (b) REPORTS ON FORM 8-K. No report on Form 8-K was filed during the last quarter of fiscal 1999. (c) EXHIBITS - See (a) (3) above. (d) FINANCIAL STATEMENT SCHEDULES - See (a) (2) above. -21- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIGITAL ORIGIN, INC. By: /s/ Mark Housley ----------------------------------------- Mark Housley Chairman of the Board of Directors, Chief Executive Officer and President POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Mark Housley and Mary F. Bobel, jointly and severally, his true and attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
NAME TITLE DATES - ---- ----- ----- PRINCIPAL EXECUTIVE OFFICER: /s/ Mark Housley Chairman of the Board of Directors, December 29, 1999 - ------------------------------------------- Mark Housley Chief Executive Officer and President PRINCIPAL FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER: /s/ Mary F. Bobel Vice-President & Chief Financial Officer December 29, 1999 - ------------------------------------------- Mary F. Bobel DIRECTORS: /s/ Michael D. Boich Director December 29, 1999 - ------------------------------------------- Michael D. Boich /s/ John Cirigliano Director December 29, 1999 - ------------------------------------------- John Cirigliano /s/ John C. Kirby Director December 29, 1999 - ------------------------------------------- John C. Kirby -22- /s/ Henry V. Morgan Director, Secretary December 29, 1999 - ------------------------------------------- Henry V. Morgan /s/ Stephen Manousos Director December 29, 1999 - ------------------------------------------- Stephen Manousos /s/ Carl Rosendahl Director December 29, 1999 - ------------------------------------------- Carl Rosendahl
-23- REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS DIGITAL ORIGIN, INC. We have audited the accompanying consolidated balance sheets of Digital Origin, Inc. as of September 30, 1999 and 1998, and the related consolidated statements of income, convertible preferred stock and shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Digital Origin, Inc. at September 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP San Jose, California November 3, 1999 -24- CONSOLIDATED BALANCE SHEETS (in thousands)
Years ended September 30, ------------------------- 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 3,627 $ 600 Accounts receivable, net of allowance for doubtful accounts of $3,758 in 1999 and $3,894 in 1998 1,995 364 Note receivable from Korea Data Systems America, Inc. - 4,500 Inventories 211 803 Prepaid expenses and other current assets 161 156 -------- --------- Total current assets 5,994 6,423 Property and equipment, net 726 133 Other assets 175 - -------- --------- $ 6,895 $ 6,556 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,791 $ 1,971 Accrued payroll and related expenses 551 324 Accrued legal expenses 285 69 Other accrued liabilities 1,086 2,000 Deferred income - 4,833 Accrued income taxes 301 1,102 Short-term borrowings - 1,340 -------- --------- Total current liabilities 5,014 11,639 Accrued income taxes 800 - Shareholders' equity (net capital deficiency): Preferred stock, no par value, 2,000 authorized; none issued and outstanding in 1999 and 1998 - - Common stock, no par value; 100,000 shares authorized; issued and outstanding-5,593 shares in 1999 and 5,524 shares in 1998 169,417 169,102 Accumulated deficit (168,390) (174,239) Other comprehensive income 54 54 -------- --------- Total shareholders' equity (net capital deficiency) 1,081 (5,083) -------- ---------- $ 6,895 $ 6,556 ======== =========
See accompanying notes. -25- CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Years ended September 30, -------------------------------------------- 1999 1998 1997 ---- ---- ---- Net sales $ 13,168 $ 14,564 $ 26,276 Commissions and royalties 185 1,104 4,874 --------- -------- --------- Total net sales 13,353 15,668 31,150 Cost of sales 4,750 9,921 31,032 --------- -------- --------- Gross profit 8,603 5,747 118 --------- -------- --------- Operating expenses: Research and development 2,649 2,801 5,002 Selling, general and administrative 7,154 7,107 21,355 --------- -------- --------- Total operating expenses 9,803 9,908 26,357 --------- -------- --------- Loss from operations (1,200) (4,161) (26,239) Other income, net 7,104 12,353 30,600 Interest expense (55) (459) (2,777) ---------- --------- ---------- Income before income taxes 5,849 7,733 1,584 Provision (benefit) for income taxes - (1,000) 316 --------- --------- --------- Net income $ 5,849 $ 8,733 $ 1,268 ========= ======== ========= Preferred stock dividend - - 272 --------- ---------- --------- Net income applicable to common shareholders $ 5,849 $ 8,733 $ 996 ========== ======== ========= Net income per common share: Basic net income per share applicable to common shareholders $ 1.06 $ 1.58 $ 0.18 ========= ========= ========= Diluted net income per share applicable to common shareholders $ 1.02 $ 1.57 $ 0.18 ========= ========= ========= Shares used in computing net income per common share: Shares used in computing basic net income per common share 5,535 5,522 5,389 ========== ========= ========= Shares used in computing diluted net income per common share 5,747 5,557 5,522 ========== ========= =========
See accompanying notes. -26- CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (in thousands)
Shareholder's Equity ------------------------------------------------ Convertible Other Total Preferred Common Accumulated Comprehensive Shareholders' Stock Stock Deficit Income Equity --------- ------------------------------------------------- Balance at September 30, 1996 $ 3,000 $ 168,746 $(183,968) $ 19,182 $ 3,960 Net income -- -- 1,268 -- 1,268 Net translation adjustment -- -- -- 13 13 Change in unrealized gain on available-for-sale securities -- -- -- 2,941 2,941 --------- Total comprehensive income -- -- -- -- 4,222 Issuance of 53 shares of common stock under Stock Option Plans -- 200 -- -- 200 Issuance of 8 shares of common stock under Employee Stock Purchase Plan -- 48 -- -- 48 Redemption of 75 shares of preferred stock held by IBM (3,000) -- -- -- -- Dividends paid on convertible preferred stock -- -- (272) -- (272) --------- ------------------------------------------------- Balance at September 30, 1997 -- 168,994 (182,972) 22,136 8,158 Net income -- -- 8,733 -- 8,733 Net translation adjustment -- -- -- 11 11 Change in unrealized gain on available-for-sale securities -- -- -- (22,093) (22,093) --------- Total comprehensive loss -- -- -- -- (13,349) Issuance of 22 shares of common stock under Stock Option Plans -- 108 -- -- 108 --------- ------------------------------------------------- Balance at September 30, 1998 -- 169,102 (174,239) 54 (5,083) Net income -- -- 5,849 -- 5,849 --------- Total comprehensive income -- -- -- -- 5,849 Issuance of 38 shares of common stock under Stock Option Plans -- 153 -- -- 153 Issuance of 31 shares of common stock under Employee Stock Purchase Plan -- 89 -- -- 89 Issuance of warrants for 50 shares of common stock -- 73 -- -- 73 --------- ------------------------------------------------- Balance at September 30, 1999 $ -- $ 169,417 $(168,390) $ 54 $ 1,081 --------- ------------------------------------------------- --------- -------------------------------------------------
See accompanying notes. -27- CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (in thousands)
Years ended September 30, ------------------------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income $ 5,849 $ 8,733 $ 1,268 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 150 149 801 Gain on the sale of Splash Common Stock -- (10,011) (30,779) Gain on the monitor license and sale of other assets to KDS (4,502) (1,615) -- Gain on the sale of the Color Server Group and other assets to Splash (2,485) -- -- Gain on the sale of Umax Common Stock -- (534) -- Non-cash restructuring and other charges -- -- 2,162 Loss on disposal of fixed assets -- 22 500 (Increase) decrease in assets: Accounts receivable (1,631) 1,815 5,968 Note receivable 4,500 (4,500) -- Inventories 592 2 12,047 Prepaid expenses and other current assets (5) 28 182 Income tax receivable -- -- 514 Increase (decrease) in liabilities: Accounts payable 820 (2,540) (493) Accrued payroll and related expenses 227 (996) (1,492) Accrued legal expenses 216 49 (67) Other accrued liabilities (914) (1,208) 272 Deferred income (4,833) 4,833 -- Accrued income taxes (1) (1,009) (116) Accrued restructuring and other charges -- (2,033) (420) -------- -------- -------- Net cash used in operating activities (2,017) (8,815) (9,653) -------- -------- -------- Cash flows from investing activities: Capital expenditures (703) (55) (55) Other assets (142) -- 50 Net proceeds from the sale of Splash Common Stock -- 10,011 30,779 Net proceeds from the monitor license and sale of other assets to KDS 4,502 1,615 -- Net proceeds from the sale of the Color Server Group and other assets to Splash 2,485 -- -- Net proceeds from the sale of Umax Common Stock -- 534 -- -------- -------- -------- Net cash provided by investing activities 6,142 12,105 30,774 -------- -------- -------- Cash flows from financing activities: Principal payment of short-term borrowings, net (1,340) (3,298) 2,716 Principal payment of long-term borrowings, net -- -- (21,940) Redemption of preferred stock and related dividend -- -- (3,272) Issuance of common stock 242 108 248 Principal payments under capital leases -- (273) (1,074) -------- -------- -------- Net cash used in financing activities (1,098) (3,463) (23,322) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 3,027 (173) (2,201) Cash and cash equivalents, beginning of year 600 773 2,974 -------- -------- -------- Cash and cash equivalents, end of year $ 3,627 $ 600 $ 773 -------- -------- -------- -------- -------- --------
See accompanying notes. -28- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION The Company's name was changed to Digital Origin, Inc. (formerly Radius Inc.) in fiscal 1999. The consolidated financial statements include the accounts of Digital Origin, Inc. ("Digital Origin" or the "Company") and its wholly-owned subsidiaries after elimination of significant intercompany transactions and balances. FINANCIAL STATEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Such estimates include levels of allowance for potentially uncollectible receivables and sales returns; inventory reserves for obsolete, slow-moving, or non-salable inventory; and estimated costs for warranty and other customer support obligations. Actual results could differ from these estimates. MANAGEMENT'S BUSINESS RECOVERY PLANS As shown in the accompanying consolidated financial statements, the Company has incurred recurring operating losses. During fiscal 1997, 1998 and 1999, management implemented a number of actions to address its cash flow and operating issues, including: refocusing its efforts on providing solutions for digital video customers; discontinuing sales of mass market and other low value added hardware products; divesting a number of businesses and product lines, including the sale of its monitor business to Korea Data Systems America, Inc.; significantly reducing expenses and personnel headcount; and reducing its lease obligations given its reduced occupancy requirements. All revenue in the year ended September 30, 1997 and approximately $13.0 million in the year ended September 30, 1998, relates to businesses and product lines that have been disposed of over the last two years. Approximately $12.9 million of revenue in the year ended September 30, 1999 relates to digital video-related software. For the fiscal year ended September 30, 1999 the Company had cash and cash equivalent of $3.6 million, however, during fiscal 2000, additional funds may be needed to finance ongoing operations and to implement the Company's development plans and for other purposes. The Company plans to generate cash from operations and is investigating possible financing and strategic partnering opportunities. FISCAL YEAR The Company's fiscal year ends on the Saturday closest to September 30 and included 53 weeks in fiscal 1998. All other fiscal years presented include 52 weeks. For consistency of presentation, all fiscal periods in this Form 10-K are reported as ending on a calendar month end. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents; investments with maturities between three and twelve months are considered to be short-term investments. Cash equivalents are carried at cost, which approximates market. There were no short-term investments as of September 30, 1999 and 1998. Approximately $0.1 million of the $3.6 million of cash and cash equivalents at September 30, 1999 was restricted under various letters of credit. -29- FOREIGN CURRENCY TRANSLATION There was no foreign currency translation adjustment in fiscal 1999. In prior years, the Company translated the assets and liabilities of its foreign subsidiaries into dollars at the rates of exchange in effect at the end of the period and translated revenues and expenses using the average rate in effect during the period. Gains and losses from these balance sheet translations are included in other comprehensive income in the Consolidated Balance Sheets. Foreign currency transaction gains or losses, which are included in the results of operations, are not material. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using standard costs that approximate cost on a first-in, first-out basis. The Company reviews the levels of its inventory in light of current and forecasted demand to identify and provide reserves for obsolete, slow-moving, or non-salable inventory. Inventories consist of the following (in thousands):
September 30, -------------------------------- 1999 1998 ---- ---- Raw materials $ - $ 20 Work in process 74 238 Finished goods 137 545 -------- --------- $ 211 $ 803 ======== ========= PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists of the following (in thousands): September 30, ---------------------------- 1999 1998 ---- ---- Computer equipment $ 7,076 $ 6,423 Machinery and equipment 111 120 Furniture and fixtures 354 354 Leasehold improvements 45 439 -------- --------- 7,586 7,336 Less accumulated depreciation and amortization (6,860) (7,203) --------- ---------- $ 726 $ 133 ======== =========
Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives (three to four years) or lease terms of the respective assets. OTHER ASSETS Purchased technology and other intangible assets are stated at cost less accumulated amortization. Amortization is recorded utilizing the straight-line method over the useful lives of the respective assets, generally three years. The Company periodically reviews the net realizable value of its intangible assets and adjusts the carrying amount accordingly. CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF In accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company records impairment losses on long-lived assets when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. -30- REVENUE RECOGNITION The Company follows Statement of Position (SOP) 97-2, "Software Revenue Recognition." Revenue from the sale of software, net of estimated returns, is recognized upon either shipment of the physical product or delivery of electronic product, at which time, collection is determined to be probable and the Company has no remaining obligations. Sales to certain resellers are subject to agreements allowing certain rights of return and price protection on unsold merchandise held by these resellers. The Company provides for estimated returns at the time of shipment and for price protection following price declines. Revenue earned under royalty or commission agreements is recognized in the period in which it is earned. WARRANTY EXPENSE The Company provides at the time of sale for the estimated cost to repair or replace products under warranty. The warranty period commences on the end user date of purchase and is normally one year for digital video products. ADVERTISING EXPENSES The Company expenses the costs of advertising as incurred. Amounts have not been material in all periods presented. NET INCOME PER SHARE The Company computes net income per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128. This statement requires the presentation of basic and diluted net income per share. Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common shares outstanding during the period. Dilutive common equivalent shares consist of employee stock options using the treasury stock method. SEGMENT REPORTING The Company operates in one business segment, specifically the development, design and marketing of software for editing digital video. While the Company has several products at varying price points and in various versions, all of the products from which the Company earns revenues are similar. The Company's business practices support the criteria for segment reporting as outlined in Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information. As disclosed under "Management's business recovery plans" above, in 1998 and 1997, the Company operated primarily in one other business segment, the manufacture and sale of monitors and accelerated graphics products OFF BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK The Company sells its products to distributors in the United States and in various foreign countries. The Company performs on-going credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses. FAIR VALUE DISCLOSURES The carrying values of cash and cash equivalents approximate their fair values as of September 30, 1999. Estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. -31- Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. RECENT ACCOUNTING PRONOUNCEMENTS In December 1998, the American Institute of Certified Public Accountants issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 extending the deferral of the application of certain provisions of SOP 97-2, amended by SOP 98-4, through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. The adoption of SOP 98-9 is not expected to have a significant impact on the Company's financial statements. NOTE TWO. COMMITMENTS AND CONTINGENCIES LEASES The Company has an operating lease for its headquarters in Mountain View, California, for a period of three years beginning April 15, 1999, with an option to extend the lease for an additional two years. The base rent is $25,000 per month the first year, $27,500 per month the second year and $30,000 per month for years three through five, if extended. Future annual minimum lease payments under all noncancelable operating leases at September 30, 1999, are as follows (in thousands):
Operating Leases ------ 2000 $314 2001 343 2002 195 ------ Total minimum lease payments $852 ------ ------
Rent expense charged to operations, net of sublease income, amounted to approximately $0.3 million, $0.5 million and $0.6 million for the fiscal years ended September 30, 1999, 1998 and 1997, respectively. Sublease income for fiscal 1999, 1998 and 1997 was approximately $0.2 million, $0.8 million and $1.3 million, respectively. CONTINGENCIES (a) On January 13, 1999 and January 28, 1999, the Company and one of its former directors, Charles Berger, were named as defendants in two shareholder class action lawsuits against Splash Technology Holdings, Inc. ("Splash"), various directors and executives of Splash and certain selling shareholders of Splash. The suits were filed in the United States District Court in Northern District of California and have been consolidated and captioned IN RE SPLASH TECHNOLOGY HOLDINGS INC. SECURITIES LITIGATION (Master File No. C99-0109 SBA). The law firm of Milberg Weiss Bershad Hynes & Lerach LLP has been designated lead counsel for the eight lead plaintiffs. The lawsuit alleges, among other things, that the defendants made or were responsible for material misstatements, and failed to disclose information concerning Splash's business, finances and future business prospects in order to artificially inflate the price of Splash common stock. The complaint does not identify any statements alleged to have been made by Charles Berger or the Company. The complaint further alleges that the Company engaged in a scheme to artificially inflate the price of Splash common stock to reap an artificially large return on the sale of the common stock in order to pay off its debt. The Company and the former director vigorously deny all allegations of wrongdoing and intend to aggressively defend themselves in these matters. Defendants initial motion to dismiss the action was granted with leave to amend, and the complaint has been amended by plaintiffs. (b) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates filed a suit in the United States District Court for the District of Colorado alleging a breach of contract and related claims in the approximate amount of $800,000, maintaining that the Company failed to comply with various return, price protection, inventory balancing and marketing development funding undertakings. In 1997, the Company filed an answer to the -32- complaint and cross-claimed against the plaintiffs and in October 1997 additionally cross claimed against Deutsche Financial, Inc., a factor in the account relationship between the Company and the plaintiffs, seeking the recovery of approximately $2 million. The Company continues to investigate these claims as well as cross claims and expect to vigorously defend and prosecute them as applicable. This case is scheduled for trial in April 2000. (c) The Company is involved in a number of other judicial and administrative proceedings incidental to its business. The Company intends to defend these matters vigorously and although adverse decisions (or settlements) may occur, the final resolution of these lawsuits is not expected to have a material adverse effect on its financial position. However, an adverse resolution and the costs of defense, regardless of the outcome, could have a material adverse effect on the Company's results of operations and financial condition. NOTE THREE. SHAREHOLDERS' EQUITY SHARES SUBJECT TO ISSUANCE As of September 30, 1999, the Company was subject to issuing approximately 10,000 shares of Common Stock associated with the settlement of a securities class action lawsuit in fiscal 1995. STOCK OPTIONS The Company's 1995 Stock Option Plan (the "1995 Plan") authorizes the issuance of up to 921,983 shares of common stock upon the exercise of incentive stock options or nonqualified stock options that may be granted to officers, employees, directors, consultants and independent contractors. Shares available for grant under the 1995 Plan include 157,822 shares which were not issued under a prior plan. Under the 1995 Plan, options are exercisable, subject to vesting, for a term of up to ten years after the grant date. Options may be granted at prices ranging from 85% to 100% of the fair market value of the common stock on the date of grant, as determined by the Board of Directors. Vesting of shares is also determined by the Board of Directors at the date of grant. As of September 30, 1999, 769,831 options were outstanding under the 1995 Plan. The 1995 Plan will expire in December 2005. The Company has also reserved 19,000 shares of common stock for issuance to non-employee directors pursuant to options granted under the 1994 Directors' Stock Option Plan (the "1994 Plan"), including 9,000 shares which were not issued under the Company's prior Directors' Stock Option Plan, which was in effect prior to the approval of the 1994 Plan. Such options may only be nonqualified stock options, must be exercised within ten years from the date of grant, and must be granted in accordance with a non-discretionary formula. Under this formula, each new non-employee director receives an option to purchase 1,000 shares when that director is first appointed to the Board and an option to purchase 250 shares on each anniversary of such director's appointment. As of September 30, 1999, 5,500 options were outstanding under this plan. -33- During fiscal 1999, the Company granted, outside of the Company's Stock Option Plans, 140,000 nonqualified stock options to three employees at an exercise price equal to the fair market value of the Company's Common Stock on the relevant dates. The exercise prices ranged from $2.625 to $3.50. These options are exercisable for a term of ten years and vest over a two year period commencing on the date of grant. An additional 380,000 shares are outstanding under similar plans and other option grants. The following table summarizes the consolidated activity under all of the Company's plans and grants:
Weighted Available for Shares Under Average Grant Option Exercise Price Exercise Price ------------- ------------ ---------------- -------------- Balance at September 30, 1996 267,490 116,816 $12.80 - $172.50 $ 43.40 Authorized 542,162 -- -- -- -- Granted (712,211) 712,211 $ 2.80 - $ 5.90 $ 4.00 Exercised -- (52,579) $ 3.40 - $ 4.70 $ 4.70 Canceled 92,851 (92,851) $ 2.80 - $172.50 $ 28.00 ---------- --------- Balance at September 30, 1997 190,292 683,597 $ 2.80 - $108.75 $ 4.20 Authorized 277,498 -- -- -- -- Granted (458,957) 458,957 $ 1.56 - $ 6.25 $ 2.87 Exercised -- (21,935) $ 3.44 - $ 4.69 $ 4.14 Canceled 275,759 (275,759) $ 2.81 - $ 6.25 $ 3.77 ---------- --------- Balance at September 30, 1998 284,592 844,860 $ 1.56 - $108.75 $ 3.62 Authorized 222,684 -- -- -- -- Granted (515,594) 515,594 $ 0.84 - $ 5.63 $ 2.45 Exercised -- (37,309) $ 0.84 - $ 4.69 $ 2.99 Canceled 166,320 (166,320) $ 0.84 - $ 97.50 $ 4.05 Expired (1,000) -- -- -- -- ---------- --------- Balance at September 30, 1999 157,002 1,156,825 $ 0.84 - $108.75 $ 3.05 ---------- --------- ---------- ---------
The following table summarizes information concerning outstanding and exercisable options at September 30, 1999:
Options Outstanding Options Exercisable ---------------------------------------------------- ----------------------------- Weighted Average Weighted Weighted Range of Options Remaining Average Options Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices Life Price Price ------------------- ----------- ------------ ----------- -------------- ----------- $ 0.84 - $ 2.88 703,682 8.90 Years $ 2.38 336,633 $ 2.51 $ 2.97 - $ 4.06 378,865 8.13 Years $ 3.83 259,052 $ 4.01 $ 4.69 - $108.75 74,278 7.01 Years $ 5.48 40,198 $ 5.46 ----------------- --------- ------- $ 0.84 - $108.75 1,156,825 8.53 Years $ 3.05 635,883 $ 3.31 ========= =======
-34- The Company accounts for stock options in accordance with FASB Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123"). Under FAS 123, the Company may continue following existing accounting rules or adopt a new fair value method of valuing stock-based awards. The Company has elected to continue to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock options plans and the Employee Stock Purchase Plan and has not adopted the alternative fair value method of accounting provided under FAS 123. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to September 30, 1995 under the fair value method of that Statement. The weighted-average grant-date fair value of options granted in fiscal years 1999, 1998 and 1997 were $2.25, $2.18 and $0.30, respectively. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for fiscal years 1999, 1998 and 1997, respectively for employee stock option plans: risk free interest rate of approximately 5.5%, 5.5% and 6%; dividend yield of 0% for all years; volatility factors of the expected market price of the Company's Common Stock of 1.546, 1.148 and 1.077 and a weighted-average expected life of the option of four years. The weighted-average fair value at date of grant for shares purchased through the Employee Stock Purchase Plan during fiscal year 1999 was $1.62. The following assumptions were used for the Employee Stock Purchase plan in 1999: interest rate of 5.5%, dividend yield of 0%, volatility of 1.546 and a weighted-average expected life of one half of one year. For purposes of pro forma disclosures, the estimated fair values of the options are amortized to expense over the related vesting periods. The Company's pro forma net income for 1997 was not materially different from reported amounts. The Company's pro forma information for 1999 and 1998 follows (in thousands except for income per share information):
Years ended September 30, ------------------------- 1999 1998 ---- ---- Net income applicable to common shareholders as reported $5,849 $8,733 Pro forma net income applicable ====== ====== to common shareholders for FAS 123 $4,905 $8,089 Pro forma net income per common share: ====== ====== Pro forma basic net income per share applicable to common shareholders $0.89 $1.46 Pro forma diluted net income per share ===== ===== applicable to common shareholders $0.85 $1.46 Shares used in computing pro forma net income per common ===== ===== share: Shares used in computing pro forma basic net income per common share 5,535 5,522 Shares used in computing pro forma diluted ===== ===== net income per common share 5,747 5,557 ===== =====
Since the estimated fair value of the options are amortized to expense over the related vesting periods, their pro forma effect will not be fully reflected until fiscal year 2002. EMPLOYEE STOCK PURCHASE PLAN The Company's Employee Stock Purchase Plan allows eligible employee participants to purchase shares of the Company's Common Stock at a discount through payroll deductions. Employees purchase shares at 85% of the market value at either the beginning of the offering period or the end of the purchase period, whichever -35- price is lower. The plan consists of one year offering periods with two six-month purchase periods in each offering period. The Company has reserved 137,500 shares of its Common Stock for issuance under the plan, in addition to 15,900 shares reserved under the previous plan. As of September 30, 1999, 122,568 shares remained available for purchase. WARRANTS TO PURCHASE COMMON STOCK The Company has issued three outstanding warrants to purchase its Common Stock. Two, in denominations of 60,000 and 5,000 were issued in 1996 in connection with the Company's debt for equity exchange with various creditors at an exercise price of $10.00 per share and will expire in September and October 2000, respectively. The third warrant for 50,000 shares was issued in November 1998 at a strike price of $1.50 per share in connection with the Company's acquisition of certain technology and will expire in November 2002. See Note 8. NOTE FOUR. FEDERAL AND STATE INCOME TAXES The provision (benefit) for income taxes consists of the following:
Year ended September 30, ---------------------------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Federal: Current $ - $ - $ 50 Foreign: Current - (1,000) 251 State: Current - - 15 ------------- --------- -------- $ - $ (1,000) $ 316 ============= ========== ========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
September 30, ------------------------------ 1999 1998 ---- ---- (in thousands) Deferred tax assets: Net operating loss carryforwards $ 23,239 $ 25,017 Reserves and accruals not currently tax deductible 1,661 3,232 Capitalized research & development expenditures 3,130 2,769 Inventory write-downs 559 1,275 Other - 1,082 --------- --------- Total deferred tax assets 28,589 33,375 Valuation allowance for deferred tax assets (28,589) (33,375) ---------- ---------- Deferred tax assets $ - $ - ========= =========
FASB Statement 109, Accounting for Income Taxes, 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 cumulative net operating losses reported in -36- prior years, predictability of earnings in future periods is uncertain. The Company will evaluate the realizability of the deferred tax asset on a quarterly basis. The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The sources and tax effects of the differences are as follows:
Year ended September 30, --------------------------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Expected tax at statutory rate $ 2,047 $ 2,707 $ 554 Losses previously not benefited (2,047) (2,707) (504) Reversal of previously accrued foreign taxes - (1,000) - State income tax, net of federal tax benefit - - 15 Other - - 251 --------- --------- ---------- $ - $ (1,000) $ 316 ======== ========= ==========
As of September 30, 1999, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $63.0 million and $37.0 million, respectively. The federal loss carryforwards will expire beginning in 2011, if not utilized and the state loss carryforwards will expire beginning in 2000, if not utilized. As a result of the issuance of Common Stock and Series A Convertible Preferred Stock in exchange for certain liabilities of the Company in September 1996, the Company experienced a "change in ownership" as defined under Section 382 of the Internal Revenue Code. Accordingly, utilization of net operating loss and tax credit carryforwards generated prior to September 1996 will be subject to an annual limitation of approximately $2.0 million due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions, except under limited circumstances. NOTE FIVE. STATEMENTS OF CASH FLOWS
Year ended September 30, ---------------------------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 55 $ 495 $ 2,988 ========= ========= ========= Income taxes $ 1 $ 9 $ 8 ========= ========= ========= Supplemental disclosures of non-cash investing and financing activities: Warrant issued for technology $ 73 $ 0 $ 0 ========= ========= =========
NOTE SIX. EXPORT SALES AND MAJOR CUSTOMERS The Company's export sales were approximately $4.2 million, $3.7 million and $4.9 million in the fiscal years ended September 30, 1999, 1998 and 1997, respectively, and included export sales to Europe of approximately $2.8 million, $1.3 million and $1.8 million, respectively. The Pacific, Asia, and Latin America region sales were approximately $1.4 million, $2.4 million and $3.1 million for fiscal years ended September 30, 1999, 1998 and 1997, respectively. During fiscal 1996, the Company entered into exclusive distributor arrangements in Japan and Europe and earns royalties and commissions under such arrangements. In fiscal 1998, -37- the Company modified its relationships with its distributors in Japan and Europe for its digital video software products and terminated the exclusivity provisions. These products are purchased from the Company at a discount from the price list and no commissions are paid. For the fiscal years ended September 30, 1999, 1998 and 1997 the Company earned approximately $0.03 million, $0.74 million, and $2.66 million, respectively in royalties and commissions from Europe and Japan, which are included in the above amounts. Ingram Micro accounted for 20.7%, 53.5% and 66.1% of the Company's net sales during the years ended September 30, 1999, 1998 and 1997, respectively. Sales to Canon U.S.A., Inc. accounted for 18.4% of net sales for fiscal 1999 and $0.0% for fiscal years 1998 and 1997. NOTE SEVEN. LICENSING OF ASSETS TO KOREA DATA SYSTEMS AMERICA, INC. In June 1998, the Company licensed certain technology and assets necessary to conduct its monitor and color publishing business to Korea Data Systems America, Inc. ("KDS"), leaving the Company free to focus on its digital video software business. The brand name and trademark RADIUS was one of the assets so licensed because of its primary association with monitors. In August 1998, the Company amended and restated this license and agreed to sell the licensed assets to KDS pursuant to an asset transfer agreement, subject to certain contingencies at the discretion of KDS. The monitor business has accounted for substantially all of the revenues of the color publishing product line and 55.3% of the Company's revenues during fiscal 1998. Under the license and asset transfer agreement, the Company transferred its Radius, Supermac, PressView and certain other trademarks to KDS and licensed certain intellectual property pertaining to PressView and PrecisionView monitors. The value of the transaction was $6.2 million, which was paid in installments under a note. The Company recognized other income under the license agreement as cash was received on the note. On December 4, 1998, the Company and KDS supplementally agreed to the sale of certain tangible personal property and the transfer of rights in the Radius Emachines and Colormatch trademarks for $100,000 and other consideration. NOTE EIGHT. TECHNOLOGY PURCHASE FROM POST DIGITAL SOFTWARE, INC. On November 23, 1998, the Company acquired certain software and other intangible property from Post Digital Software, Inc. for (i) an initial payment of $50,000, (ii) earnout payments equal to at least $50,000 but not exceeding an aggregate of $700,000, based on subsequent sales of the Company's digital video products incorporating such software and (iii) a warrant to purchase up to 50,000 shares of the Company's Common Stock at an exercise price of $1.50 per share. The warrant is non-forfeitable and exercisable over a four year period through November 23, 2002. The warrant can be exercised for up to 12,000 shares as of May 1, 1999, plus an additional 2,000 shares for each full month that transpires thereafter, up to a total of 50,000 shares. The value of this agreement, as noted below, is included as other assets in the accompanying Consolidated Balance Sheet. The technology is being amortized over a three year period and future royalties based on digital video products sold will be expensed as they are incurred. As of September 30, 1999, the Company has paid approximately $14,000 in royalties. Initial purchase price $ 50,000 Guaranteed earnout 50,000 Value assigned to warrant 73,000 --------- Purchased technology 173,000 Less amortization (39,667) --------- Net purchased technology $ 133,333 =========
-38- NOTE NINE. TRANSACTIONS WITH SPLASH TECHNOLOGY HOLDINGS, INC. ESCROW FUND RELEASE In connection with the Company's sale of its Color Server Group to Splash Technology Holdings, Inc. in January 1996, an escrow fund was established to secure certain indemnification obligations. On December 31, 1998, the balance of the escrow fund of approximately $2.2 million was released to the Company. SALE OF CERTAIN COLOR PUBLISHING TECHNOLOGY On December 4, 1998, the Company agreed to sell certain software and other intangible property associated with its monitor and color publishing business to Splash Technology Holdings, Inc. for $275,000 and other consideration. NOTE TEN. OTHER COMPREHENSIVE INCOME As of October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 requires foreign currency translation adjustments and changes in the fair value of available-for-sale-securities to be included in comprehensive income. However, it has no impact on the net income or shareholders' equity as presented in the financial statements. The following schedule shows the accumulated balances for each item within other comprehensive income:
1999 1998 1997 -------- --------- ------- (in thousands) Unrealized gain (loss) on investments $ - $ - $22,093 Foreign currency translation 54 54 43 -------- --------- ------- Other comprehensive income $ 54 $ 54 $22,136 ======== ========= =======
-39- NOTE ELEVEN. COMPUTATION OF NET INCOME PER COMMON SHARE The following table presents the calculation of basic and diluted earnings per share as required under SFAS 128:
1999 1998 1997 ------- --------- ---------- (in thousands, except per-share amounts) NUMERATOR: Numerator for basic and diluted net income per share - income available to common shareholders $5,849 $8,733 $ 996 ------- --------- ---------- ------- --------- ---------- DENOMINATOR: Denominator for basic net income per share - weighted-average shares outstanding 5,535 5,522 5,389 Effect of dilutive securities: Dilutive potential common shares 212 35 133 ------- --------- ---------- Denominator for diluted net income per share - adjusted weighted-average shares outstanding 5,747 5,557 5,522 ------- --------- ---------- ------- --------- ---------- Basic net income per share $ 1.06 $ 1.58 $ 0.18 ------- --------- ---------- ------- --------- ---------- Diluted net income per share $ 1.02 $ 1.57 $ 0.18 ------- --------- ---------- ------- --------- ----------
Diluted net income per share in 1999, 1998 and 1997 does not include certain stock options in the amounts of 425,760, 750,446 and 341,252, respectively, as those options are anti-dilutive for the periods presented. NOTE TWELVE. EMPLOYEE BENEFIT PLAN The Company has an employee savings plan, which qualifies under Section 401(k) of the Internal Revenue Code (the 401(k) Plan). Under the 401(k) Plan, all eligible employees may defer up to 15% of their pre-tax compensation, but not more than statutory limits. The Company is allowed to make contributions as defined in the 401(k) Plan and as approved by the Board of Directors. Company contributions of $46,972 were made in fiscal 1999. The Company contributed $63,850 and $112,422 in 1998 and 1997, respectively. The Company matches a specified portion of the employee contributions up to a maximum of $1,000 per employee per year. NOTE THIRTEEN. SUBSEQUENT EVENTS (UNAUDITED) AGREEMENT TO MERGE WITH MEDIA 100, INC. The Company entered into a definitive agreement on December 28, 1999 to be acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ: MDEA), a pioneer of streaming media production tools. The merger is intended to be completed as a pooling of interests for accounting purposes and as a tax-free transaction. Under the agreement, Media 100 will issue .5347 shares of common stock for each share of the Company's common stock. The transaction is subject to the approval of both companies' shareholders and other customary closing conditions. The merger is expected to be complete in 90-120 days. The combined company will target Internet desktops with low-cost applications that allow personal computer users to capture, edit, and stream video on the Internet using a single, integrated, and easy-to-use application. The Company also entered into a non-exclusive, four-year OEM development and license agreement with Media 100.by which Media 100 will use the Company's consumer level video editing and effects software with Media 100's Internet streaming media software in exchange for certain royalty payments. -40- SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Balance at Charged to Charged Balance beginning costs and to other at end of Description of period expenses accounts Deductions(1) period ----------- --------- -------- -------- ------------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended September 30, 1997 $2,132 $ 4,706 $ 0 $ 2,080 $4,758 Year ended September 30, 1998 $4,758 $ 30 $ 0 $ 894 $3,894 Year ended September 30, 1999 $3,894 $ 1 $ 0 $ 137 $3,758
- ----------------------------- (1) Uncollectible accounts written off. -41- EX-2.09 2 EXHIBIT 2.09 EXHIBIT 2.09 AGREEMENT AND PLAN OF MERGER BY AND AMONG MEDIA 100 INC., DERRINGER ACQUISITION CORP. and DIGITAL ORIGIN, INC. Dated as of December 28, 1999 TABLE OF CONTENTS ARTICLE I THE MERGER 2 SECTION 1.1 THE MERGER 2 SECTION 1.2 CONSUMMATION OF THE MERGER 2 SECTION 1.3 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION 2 SECTION 1.4 BY-LAWS OF THE SURVIVING CORPORATION 2 SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION 2 SECTION 1.6 CLOSING 3 ARTICLE II CONVERSION AND EXCHANGE OF SECURITIES 3 SECTION 2.1 CONVERSION OF CAPITAL STOCK 3 SECTION 2.2 EXCHANGE OF CERTIFICATES 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY 8 SECTION 3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES 8 SECTION 3.2 ARTICLES OF INCORPORATION AND BY-LAWS 9 SECTION 3.3 CAPITALIZATION 9 SECTION 3.4 AUTHORITY RELATIVE TO THIS AGREEMENT 10 SECTION 3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS 11 SECTION 3.6 SEC FILINGS; FINANCIAL STATEMENTS 12 SECTION 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS 12 SECTION 3.8 NO UNDISCLOSED LIABILITIES 13 SECTION 3.9 ABSENCE OF LITIGATION 13 SECTION 3.10 AGREEMENTS, CONTRACTS AND COMMITMENTS 13 SECTION 3.11 COMPLIANCE; PERMITS 14 SECTION 3.12 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS 14 SECTION 3.13 LABOR MATTERS 16 SECTION 3.14 PROPERTIES; ENCUMBRANCES 17 SECTION 3.15 TAXES 17 SECTION 3.16 ENVIRONMENTAL MATTERS 19 SECTION 3.17 INTELLECTUAL PROPERTY 20 SECTION 3.18 INSURANCE 21 SECTION 3.19 RESTRICTIONS ON BUSINESS ACTIVITIES 21 SECTION 3.20 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS 22 SECTION 3.21 INTERESTED PARTY TRANSACTIONS 22 SECTION 3.22 CHANGE IN CONTROL PAYMENTS 23 SECTION 3.23 YEAR 2000 COMPLIANCE 23 SECTION 3.24 POOLING; TAX MATTERS 24 SECTION 3.25 NO EXISTING DISCUSSIONS 24 SECTION 3.26 OPINION OF FINANCIAL ADVISOR 25 SECTION 3.27 BROKERS 25 SECTION 3.28 AFFILIATES 25 SECTION 3.29 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS 25 SECTION 3.30 ABSENCE OF CERTAIN PAYMENTS 25 SECTION 3.31 FULL DISCLOSURE 25 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB 26 SECTION 4.1 ORGANIZATION AND QUALIFICATION 26 SECTION 4.2 CERTIFICATE OF INCORPORATION AND BY-LAWS 27 SECTION 4.3 CAPITALIZATION 27 SECTION 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT 28 SECTION 4.5 NO CONFLICT, REQUIRED FILINGS AND CONSENTS 29 SECTION 4.6 SEC FILINGS; FINANCIAL STATEMENTS 29 SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS 30 SECTION 4.8 NO UNDISCLOSED LIABILITIES 30 SECTION 4.9 COMPLIANCE 31 SECTION 4.10 ABSENCE OF LITIGATION 31 SECTION 4.11 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS 31 SECTION 4.12 LABOR MATTERS 33 SECTION 4.13 PROPERTIES; ENCUMBRANCES 33 SECTION 4.14 TAXES 34 SECTION 4.15 ENVIRONMENTAL MATTERS 35 SECTION 4.16 INTELLECTUAL PROPERTY 35 SECTION 4.17 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS 37 SECTION 4.18 YEAR 2000 COMPLIANCE 37 SECTION 4.19 BROKERS 38 SECTION 4.20 OWNERSHIP OF MERGER SUB; NO PRIOR ACTIVITIES 38 SECTION 4.21 POOLING; TAX MATTERS 39 SECTION 4.22 AFFILIATES. 39 ii ARTICLE V CONDUCT OF BUSINESS 39 SECTION 5.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER 39 SECTION 5.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER 41 SECTION 5.3 ADVICE OF CHANGES 42 SECTION 5.4 COOPERATION 42 ARTICLE VI ADDITIONAL AGREEMENTS 42 SECTION 6.1 ACCESS TO INFORMATION; CONFIDENTIALITY 42 SECTION 6.2 NO SOLICITATION 43 SECTION 6.3 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT 46 SECTION 6.4 SHAREHOLDERS' AND STOCKHOLDERS' MEETINGS 46 SECTION 6.5 LEGAL CONDITIONS TO MERGER 47 SECTION 6.6 AGREEMENTS WITH RESPECT TO AFFILIATES 48 SECTION 6.7 TAX-FREE REORGANIZATION 48 SECTION 6.8 POOLING ACCOUNTING 48 SECTION 6.9 LETTERS OF ACCOUNTANTS 49 SECTION 6.10 PUBLIC ANNOUNCEMENTS 49 SECTION 6.11 LISTING OF PARENT SHARES 49 SECTION 6.12 OPTIONS 49 SECTION 6.13 CONSENTS 50 SECTION 6.14 INDEMNIFICATION AND INSURANCE 50 SECTION 6.15 ADDITIONAL AGREEMENTS; BEST EFFORTS 51 ARTICLE VII CONDITIONS TO THE MERGER 51 SECTION 7.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER 51 SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB 53 SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY 54 iii ARTICLE VIII TERMINATION 54 SECTION 8.1 TERMINATION 54 SECTION 8.2 EFFECT OF TERMINATION 56 SECTION 8.3 FEES AND EXPENSES 56 ARTICLE IX GENERAL PROVISIONS 57 SECTION 9.1 NONSURVIVAL OF REPRESENTATIONS; WARRANTIES AND AGREEMENTS 57 SECTION 9.2 NOTICES 57 SECTION 9.3 CERTAIN DEFINITIONS 58 SECTION 9.4 AMENDMENT 59 SECTION 9.5 EXTENSION; WAIVER 59 SECTION 9.6 HEADINGS 60 SECTION 9.7 SEVERABILITY 60 SECTION 9.8 ENTIRE AGREEMENT, NO THIRD PARTY BENEFICIARIES 60 SECTION 9.9 ASSIGNMENT 60 SECTION 9.10 INTERPRETATION 60 SECTION 9.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE 60 SECTION 9.12 GOVERNING LAW 61 SECTION 9.13 COUNTERPARTS 61
LIST OF EXHIBITS Exhibit A Merger Agreement Exhibit B Form of Company Affiliate Agreement Exhibit C Form of Parent Affiliate Agreement iv AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of December 28, 1999 (this "Agreement"), by and among Media 100 Inc., a Delaware corporation ("Parent"), Derringer Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and Digital Origin, Inc., a California corporation (the "Company"). WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have each determined that it is advisable and in the best interests of their respective stockholders or shareholders that Parent acquire the Company pursuant to the terms and conditions of this Agreement, and, in furtherance of such acquisition, such Boards of Directors have approved the merger of Merger Sub with and into the Company (the "Merger") in accordance with the terms of this Agreement and the applicable provisions of the California General Corporation Law (the "CGCL") and the Delaware General Corporation Law (the "DGCL"); WHEREAS, for United States federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement shall be, and is hereby, adopted as a plan of reorganization for purposes of Section 368(a) of the Code; and WHEREAS, for accounting purposes, it is intended that the Merger shall be accounted for as a pooling of interests; NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties hereto agree as follows: v ARTICLE I THE MERGER SECTION 1.1 THE MERGER . Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with sections 1100 et seq. of the CGCL, Merger Sub shall be merged with and into the Company at the Effective Time of the Merger. Following the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation ") and shall succeed to and assume all the rights, properties, liabilities and obligations of Merger Sub in accordance with the CGCL and DGCL. SECTION 1.2 CONSUMMATION OF THE MERGER . Upon the terms and subject to the conditions set forth in this Agreement and the Agreement of Merger between Merger Sub and the Company together with the related officers' certificates required by section 1103 of the CGCL, in the form attached to this Agreement as EXHIBIT A (the "Merger Agreement "), the parties hereto shall file the Merger Agreement with the Secretary of State of the State of California, whereupon Merger Sub shall be merged with and into the Company pursuant to sections 1100 et seq. of the CGCL. The parties hereto shall make all other filings, recordings or publications required by the CGCL and DGCL in connection with the Merger. The Merger shall become effective at the time specified in the Merger Agreement (the "Effective Time "). SECTION 1.3 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION . At and after the Effective Time, the Articles of Incorporation attached as ANNEX I to the Merger Agreement, shall be the Articles of Incorporation of the Surviving Corporation, until amended in accordance with the CGCL. SECTION 1.4 BY-LAWS OF THE SURVIVING CORPORATION . At and after the Effective Time, the By-laws of the Company, as in effect immediately prior to the Effective Time, shall be the By-laws of the Surviving Corporation, until amended in accordance with the CGCL. SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION . (a) The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation and shall hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Articles of Incorporation or By-laws of the Surviving Corporation or as otherwise provided by law. In furtherance thereof, the 2 Company shall secure, at the Effective Time, such resignations of its incumbent directors as are necessary to enable the designees of Parent to be elected or appointed to the Board of Directors of the Company. (b) The officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation and shall hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Articles of Incorporation or By-laws of the Surviving Corporation or as otherwise provided by law. SECTION 1.6 CLOSING . Subject to satisfaction of the conditions set forth in this Agreement, the closing of the Merger (the "Closing") shall take place at 10:00 a.m., E.S.T., at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, One Beacon Street, Boston, Massachusetts on a date to be specified by Parent and the Company which shall be no later than the second business day after satisfaction or waiver of each of the conditions set forth in Article VII or on such other date and at such other time and place as Parent and the Company shall agree. The date on which the Closing shall occur is referred to herein as the "Closing Date." ARTICLE II CONVERSION AND EXCHANGE OF SECURITIES SECTION 2.1 CONVERSION OF CAPITAL STOCK . At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of the common stock, no par value, of the Company (the "Company Common Stock") or capital stock of Merger Sub: (a) COMPANY COMMON STOCK. Subject to this Article II, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive 0.5347, (the "Exchange Ratio") of a share of common stock, par value $.01 per share, of Parent (the "Parent Common Stock"), payable upon the surrender of the certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates") that are to be converted, pursuant to this Section 2.1(a), into the right to receive shares of Parent Common Stock. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist and each holder of a Certificate representing any such shares shall cease to have any rights with respect thereto, except (i) dissenters' rights, if any, as described in Section 2.1.(c), or (ii) the right to receive the shares of Parent Common Stock pursuant to this Section 2.1(a), any dividends or other distributions payable pursuant to Section 2.2(c) and any cash in lieu of fractional shares payable pursuant to Section 2.2(d), all to be issued or paid in consideration therefor upon the surrender of such Certificates in accordance with Section 2.2(b), without interest (collectively, the "Merger Consideration"). 3 Notwithstanding the foregoing, the Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, reclassification, stock dividend, reorganization, recapitalization or other like change with respect to Parent Common Stock or Company Common Stock occurring after the date hereof and prior to the Effective Time. (b) COMPANY WARRANTS. The (i) warrant to purchase up to 60,000 shares of Company Common Stock at $10.00 per share dated September 13, 1996 issued by the Company to IBM Credit Corporation, (ii) warrant to purchase up to 5,000 shares of Company Common Stock at $10.00 per share dated October 13, 1996 issued by the Company to Mitsubishi Electronics America, Inc., and (iii) warrant to purchase up to 50,000 shares of Company Common Stock at $1.50 per share dated November 23, 1998 issued by the Company to Post Digital Software, Inc. (collectively, the "Company Warrants"), in each case to the extent issued and outstanding immediately prior to the Effective Time, shall be converted into the right to purchase Parent Common Stock in accordance with their respective terms. (c) APPRAISAL RIGHTS. Holders of all shares of the outstanding capital stock of the Company for which dissenters' rights, if any, shall have been perfected under section 1300 et seq. of the CGCL (the "Dissenting Shares") shall have those rights, but only those rights, of holders of "dissenting shares" under section 1300 et seq. of the CGCL. The Company shall give Parent prompt notice of any demand, purported demand or other communication received by the Company with respect to any Dissenting Shares or shares claimed to be Dissenting Shares and Parent shall have the right to participate in all negotiations and proceedings with respect to such shares. (d) CAPITAL STOCK OF MERGER SUB. Each common share, par value $.01 per share, of Merger Sub ("Merger Sub Common Shares") issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable common share, par value $.01 per share, of the Surviving Corporation. (e) STOCK OPTIONS. Options to purchase shares of Company Common Stock (i) granted under (x) the Company's 1994 Directors' Stock Option Plan, the Company's 1990 Directors' Stock Option Plan, the Company's 1995 Stock Option Plan, the 1988 SuperMac Option Plan or the Company's 1986 Stock Option Plan (collectively, the "Company Stock Option Plans"), or (y) the Company's 1999 Employee Stock Purchase Plan (the "Company ESPP") or (ii) granted to James Given, Charles Berger, Mark Housley, Brady Bruce, Mary Bobel, Cary Capece, Tom Fristoe, Henry Morgan and Michael Glass (the "Other Company Options") shall be treated in the manner set forth in Section 6.12. 4 SECTION 2.2 EXCHANGE OF CERTIFICATES . (a) EXCHANGE AGENT. Prior to the Closing Date, Parent shall designate a bank or trust company to act as Exchange Agent hereunder (the "Exchange Agent"). As soon as practicable after the Effective Time, Parent shall deposit with or for the account of the Exchange Agent stock certificates representing the number of shares of Parent Common Stock issuable pursuant to Section 2.1(a) in exchange for outstanding shares of Company Common Stock, which shares of Parent Common Stock shall be deemed to have been issued at the Effective Time. (b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time, Parent will instruct the Exchange Agent to mail to each holder of record of a Certificate or Certificates (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may specify that are not inconsistent with the terms of this Agreement) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor (i) certificates evidencing that number of whole shares of Parent Common Stock which such holder has the right to receive in accordance with Section 2.1(a) in respect of the shares of Company Common Stock formerly evidenced by such Certificate, (ii) any dividends or other distributions to which such holder is entitled pursuant to Section 2.2(c) and (iii) any cash in lieu of any fractional shares of Parent Common Stock to which such holder is entitled pursuant to Section 2.2(d), after giving effect to any tax withholdings, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of shares of Company Common Stock which is not registered in the transfer records of the Company as of the Effective Time, a certificate representing the proper number of shares of Parent Common Stock may be issued to a transferee if the Certificate evidencing such Company Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer pursuant to this Section 2.2(b) and by evidence that any applicable stock transfer taxes have been paid. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of Company Common Stock will be deemed from and after the Effective Time, for all corporate purposes, to represent only (i) the right to exercise dissenters rights, if any, as described in Section 2.1(c), or (ii) the right to receive upon surrender the Merger Consideration. (c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED PARENT SHARES. No dividends or other distributions with respect to shares of Parent Common Stock for which the record date is after the Effective Time shall be paid to the holder of any 5 unsurrendered Certificate with respect to the shares of Parent Common Stock they are entitled to receive until the holder of such Certificate surrenders such Certificate. Following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock. Promptly following the date which is six months after the Effective Time, the Exchange Agent shall deliver to Parent all cash, certificates and other documents in its possession relating to the transactions described in this Agreement, and any holders of Company Common Stock who have not theretofore complied with this Article II shall look thereafter only to Parent for the shares of Parent Common Stock, any dividends or distributions thereon, and any cash in lieu of fractional shares thereof to which they are entitled pursuant to this Article II. (d) NO FRACTIONAL SHARES. (i) No certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of Certificates pursuant to this Article II; no dividend, stock split or other change in the capital structure of Parent shall relate to any fractional security; and such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder. (ii) As promptly as practicable following the Effective Time, the Exchange Agent will determine the excess of (A) the number of whole shares of Parent Common Stock delivered to the Exchange Agent by Parent pursuant to Section 2.2(a) over (B) the aggregate number of whole shares of Parent Common Stock to be distributed to holders of Company Common Stock pursuant to Section 2.2(b) (such excess being herein called the "Excess Shares"). Following the Effective Time, the Exchange Agent will, on behalf of former shareholders of the Company, sell the Excess Shares at then-prevailing prices on the Nasdaq National Market (the "NASDAQ"). (iii) The Exchange Agent will use reasonable efforts to complete the sale of the Excess Shares as promptly following the Effective Time as, in the Exchange Agent's sole judgment, is practicable consistent with obtaining the best execution of such sales in light of prevailing market conditions. Until the net proceeds of such sale or sales have been distributed to the holders of Company Common Stock, the Exchange Agent will hold such proceeds in trust (the "Common Shares Trust"). Parent shall be entitled to any interest earned on such proceeds until such proceeds have been distributed to the former holders of Company Common Stock. The Surviving Corporation will 6 pay all commissions, transfer taxes and other out-of-pocket transaction costs, including the expenses and compensation of the Exchange Agent incurred in connection with such sale of the Excess Shares. The Exchange Agent will determine the portion of the Common Shares Trust to which each former holder of Company Common Stock is entitled, if any, by multiplying the amount of the aggregate net proceeds comprising the Common Shares Trust by a fraction, the numerator of which is the amount of the fractional share interest to which such former holder of Company Common Stock is entitled (after taking into account all shares of Company Common Stock held at the Effective Time by such holder) and the denominator of which is the aggregate amount of fractional share interests to which all holders of Company Common Stock are entitled. For purposes of this Section 2.2(d), shares of Company Common Stock of any former holder represented by two or more Certificates shall be aggregated and in no event shall any holder be paid an amount of cash in respect of more than one share of Parent Common Stock. (iv) As soon as practicable after the determination of the amount of cash, if any, to be paid to the former holders of Company Common Stock with respect to any fractional share interests, the Exchange Agent will hold such cash amounts for the benefit of, and pay such cash amounts to, such former holders of Company Common Stock subject to and in accordance with the terms of Section 2.2(b). (e) NO LIABILITY. Neither Parent, Merger Sub nor the Company shall be liable to any holder of Company Common Stock or Parent Common Stock, as the case may be, for such shares (or dividends or distributions with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law following the passage of time specified therein. (f) WITHHOLDING RIGHTS. Parent or the Exchange Agent shall be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to any holder of Company Common Stock such amounts as Parent or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Parent Common Stock in respect of which such deduction and withholding was made by Parent or the Exchange Agent. (g) CLOSING OF SHARE TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers on the stock transfer books of the Company or the Surviving Corporation of the shares of Company Common Stock which were outstanding 7 immediately prior to such time. If, after such time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article II. (h) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof the Merger Consideration as provided in this Article II; PROVIDED, HOWEVER, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver an agreement of indemnification in form satisfactory to Parent, or a bond in such sum as Parent may direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Merger Sub that the statements contained in this Article III are true and correct, except as set forth in the Company Disclosure Schedule, dated as of the date hereof, prepared by the Company and delivered to Parent in connection herewith (the "Company Disclosure Schedule"). The Company Disclosure Schedule is arranged in sections corresponding to the numbered and lettered sections contained in this Article III and shall qualify only the corresponding Section in this Article III. SECTION 3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES . The Company and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority necessary to own, lease and operate the properties it purports to own, lease or operate and to carry on its business as it is now being conducted or presently proposed to be conducted. The Company and each of its Subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that could not be expected to have a Company Material Adverse Effect. A true, complete and correct list of all of the Company's Subsidiaries, together with the jurisdiction of incorporation of each Subsidiary, the authorized capitalization of each Subsidiary, and the percentage of each Subsidiary's outstanding capital stock owned by the Company or another Subsidiary, is set forth in Section 3.1 of the Company Disclosure Schedule. The Company does not directly 8 or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity, excluding securities in any publicly traded company held for investment by the Company and comprising less than one percent of the outstanding stock of such company. As used in this Agreement, the word "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which are held by such party or any Subsidiary of such party that do not have a majority of the voting interest in such partnership), (ii) such party or any Subsidiary of such party owns in excess of a majority of the outstanding equity or voting securities or (iii) at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly appointed or controlled by such party or by any one or more of its Subsidiaries. The term "Company Material Adverse Effect" means any change, effect or circumstance that, individually or when taken together with all other changes, effects or circumstances that have occurred or reasonably could be expected to occur prior to the date of determination of the occurrence of the Company Material Adverse Effect, (i) is materially adverse to the business, prospects, assets (including intangible assets), condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole or (ii) could materially delay or prevent the consummation of the transactions contemplated hereby. Changes in economic or market conditions affecting the software industry generally, changes in the Company's stock price, failure to meet the Company's revenue projections for the second quarter of fiscal year 2000 (except as set forth below) or any loss of a supplier, customer or employee resulting from the Merger or its announcement to the extent so resulting will be deemed not to constitute a Company Material Adverse Effect; revenue of 25% or more below the amount set forth in Section 3.1 of the Company Disclosure Schedule for the second quarter of fiscal year 2000 will be deemed to constitute a Company Material Adverse Effect. SECTION 3.2 ARTICLES OF INCORPORATION AND BY-LAWS . The Company has heretofore furnished to Parent a true, complete and correct copy of its Articles of Incorporation, as amended to date (the "Company Charter"), and By-Laws, as amended to date (the "Company By-Laws"), and the charter and by-laws (or equivalent organizational documents), as amended to date, of each of its Subsidiaries (the "Subsidiary Documents"). Such Company Charter, Company By-Laws and Subsidiary Documents are in full force and effect. Neither the Company nor any of its Subsidiaries is in violation of any of the provisions of the Company Charter, Company By-Laws or Subsidiary Documents, as the case may be. SECTION 3.3 CAPITALIZATION . 9 (a) The authorized capital stock of the Company consists of 100,000,000 shares of Company Common Stock, and 2,000,000 shares of preferred stock, no par value per share (the "Company Preferred Stock"). As of December 13, 1999: (i) 5,611,048 shares of Company Common Stock are issued and outstanding, 836,250 shares of Company Common Stock are reserved for issuance upon exercise of options granted pursuant to the Company Stock Option Plans, 122,568 (as of commencement of the current purchase period ending on February 29, 2000) shares of Company Common Stock are reserved for issuance upon exercise of options granted under the Company ESPP, 415,785 shares of Company Common Stock are reserved for issuance upon exercise of the Other Company Options, 115,000 shares of Company Common Stock are reserved for issuance upon exercise of the Company Warrants, and no shares of Company Common Stock are issued and held in the treasury of the Company; and (ii) no shares of Company Preferred Stock are issued and outstanding. All outstanding shares of Company Common Stock are, and all shares of Company Common Stock subject to issuance as specified above, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be, duly authorized, validly issued, fully paid and nonassessable and not subject to or issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the CGCL, the Company Charter or the Company By-Laws or any agreement to which the Company is a party or is otherwise bound. No material change in such capitalization has occurred since December 13, 1999. All of the outstanding shares of capital stock of each of the Company's Subsidiaries are duly authorized, validly issued, fully paid and nonassessable, and all such shares are owned by the Company free and clear of all security interests, liens, claims, pledges, agreements, limitations in voting rights, charges or other encumbrances of any nature whatsoever (collectively, "Liens"). There are no accrued and unpaid dividends with respect to any outstanding shares of capital stock of the Company or any of its Subsidiaries. (b) Except as described in Section 3.3(a) of this Agreement, there are no equity securities of any class of the Company or any of its Subsidiaries or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Except as described in Section 3.3(a) of this Agreement, there are no options, warrants, calls, rights, commitments or agreements of any character to which the Company or any of its Subsidiaries is a party, or by which the Company or any of its Subsidiaries is bound, obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of the Company or any of its Subsidiaries or obligating the Company or any of its Subsidiaries to grant, extend or accelerate the vesting of or enter into any such option, warrant, call, right, commitment or agreement. There are no voting trusts, proxies or other similar agreements or understandings with respect to the shares of capital stock of the Company or any of 10 its Subsidiaries. There are no obligations, contingent or otherwise, of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity. SECTION 3.4 AUTHORITY RELATIVE TO THIS AGREEMENT . Subject only to the approval of the Company's shareholders described below, the Company has all necessary corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it (the "Company Merger Documents") at the Closing and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of the Company Merger Documents and the consummation of the transactions contemplated by the Company Merger Documents have been duly and validly authorized by all necessary corporate action on the part of the Company, subject only to the approval of this Agreement and the Merger by the Company's shareholders (the "Company Voting Proposal") under the CGCL and the Company Charter by the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Company Common Stock. This Agreement has been duly and validly executed and delivered by the Company and constitutes, and when executed and delivered by the Company each of the other Company Merger Documents will constitute, assuming the due authorization, execution and delivery by Parent and Merger Sub, as applicable, the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights and by general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law). The Board of Directors of the Company has determined that it is advisable and in the best interests of the Company's shareholders for the Company to enter into a business combination with Parent upon the terms and subject to the conditions of this Agreement, and has recommended that the Company's shareholders approve the Company Voting Proposal. SECTION 3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS . (a) The execution and delivery of the Company Merger Documents does not, and the performance of the Company Merger Documents by the Company will not, (i) conflict with or violate the Company Charter or Company By-Laws, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any of its Subsidiaries or by which its or any of their respective properties is bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default), or impair the Company's or any of its Subsidiaries' rights or alter the rights 11 or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of the Company or any of its Subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or its or any of their respective properties is bound or affected; other than such conflicts, breaches, defaults, impairments or other effects under (iii) of this Section 3.5(a) that have not had and could not reasonably be expected to have a Company Material Adverse Effect. (b) The execution and delivery of this Agreement or any instrument required hereby to be executed and delivered by the Company at the Closing does not, and the performance of this Agreement by the Company or its Subsidiaries will not, require any consent, approval, authorization or permit of, or filing with or notification to, any court, administrative or regulatory agency or commission or other governmental authority or instrumentality (whether domestic or foreign, a "Governmental Entity"), except (i) the filing of the pre-merger notification report under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing of a Registration Statement on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") in accordance with the Securities Act of 1933, as amended (the "Securities Act"), and the filing of the Proxy Statement/Prospectus with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and the laws of any foreign country and (iv) the filing and recordation of the Merger Agreement or other documents as required by the CGCL. SECTION 3.6 SEC FILINGS; FINANCIAL STATEMENTS . (a) The Company has timely filed all forms, reports, schedules, statements and other documents, including any exhibits thereto, required to be filed by the Company with the SEC, since September 30, 1998 (collectively, the "Company SEC Reports"). The Company SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Company SEC Reports or necessary in order to make the statements in such Company SEC Reports, in light of the circumstances under which they were made, not misleading. None of the 12 Company's Subsidiaries are required to file any forms, reports, schedules, statements or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes), contained in the Company SEC Reports, including any Company SEC Reports filed after the date of this Agreement until the Closing, complied, as of its respective date, in all material respects with all applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, was prepared in accordance with generally accepted accounting principles ("GAAP") (except as may be indicated in the notes thereto) applied on a consistent basis throughout the periods involved and fairly presented the consolidated financial position of the Company and its Subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The audited balance sheet of the Company as of September 30, 1999 is referred to herein as the "Company Balance Sheet." SECTION 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS . Since the date of the Company Balance Sheet, the Company has conducted its business in the ordinary course consistent with past practice and, since such date, there has not occurred: (i) any change, development, event or other circumstance, situation or state of affairs that has had or could reasonably be expected to have a Company Material Adverse Effect; (ii) any amendments to or changes in the Company Charter or Company By-Laws; (iii) any damage to, destruction or loss of any asset of the Company or any of its Subsidiaries (whether or not covered by insurance) that could reasonably be expected to have a Company Material Adverse Effect; (iv) any change by the Company in its accounting methods, principles or practices; (v) any revaluation by the Company of any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice; (vi) any sale of a material amount of assets (tangible or intangible) of the Company; or (vii) any other action or event that would have required the consent of Parent pursuant to Section 5.1 had such action or event occurred after the date of this Agreement. SECTION 3.8 NO UNDISCLOSED LIABILITIES . Except as disclosed in the Company SEC Reports, neither the Company nor any of its Subsidiaries has any liabilities (absolute, accrued, contingent or otherwise), except liabilities (a) adequately reflected in the Company Balance Sheet, (b) incurred in the ordinary course of business consistent with past practice and not required under GAAP to be reflected in the Company Balance Sheet, (c) incurred since the date of the Company Balance Sheet in the ordinary course of business consistent with past practice or (d) incurred in connection with this Agreement. 13 SECTION 3.9 ABSENCE OF LITIGATION . There are no claims, actions, suits, proceedings or investigations (i) pending against the Company or any of its Subsidiaries or any properties or assets of the Company or of any of its Subsidiaries or (ii) to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or assets of the Company or of any of its Subsidiaries, in each case, which claims, actions, suits, proceedings or investigations could reasonably be expected to have a Company Material Adverse Effect. SECTION 3.10 AGREEMENTS, CONTRACTS AND COMMITMENTS . (a) Section 3.10(a) of the Company Disclosure Schedule sets forth a list of (i) all agreements, contracts or other instruments containing non-competition or similar restrictive provisions with respect to the Company or any of its Subsidiaries and (ii) all agreements, contracts or other instruments which, as of the date hereof, the Company is required to file as "material contracts" with the SEC pursuant to the requirements of the Exchange Act. (b) (i) Neither the Company nor any of its Subsidiaries has breached (without cure), is in default under, or has received written notice of any breach of or default under, any agreements, contracts or other instruments required to be disclosed in Section 3.10(a) of the Company Disclosure Schedule (each, a "Material Contract"), (ii) to the Company's knowledge, no other party to any Material Contract has breached or is in default of any of its obligations thereunder, (iii) each Material Contract is in full force and effect and (iv) each Material Contract is a legal, valid and binding obligation of the Company or its Subsidiary and, to the knowledge of the Company or any of its Subsidiaries, each of the other parties thereto, enforceable in accordance with its terms, except that the enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (B) general principles of equity. SECTION 3.11 COMPLIANCE; PERMITS . (a) Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of (and has not received any notices of violation with respect to), any (i) law, rule or regulation, or (ii) order, judgment or decree applicable to the Company or any of its Subsidiaries or by which its or any of their respective properties is bound or affected, and the Company is not aware of any such conflict, default or violation thereunder (other than any conflicts, defaults or violations under (i) of this Section 3.11(a) that have not had and could not reasonably be expected to have a Company Material Adverse Effect). 14 (b) The Company and its Subsidiaries hold all permits, licenses, easements, variances, exemptions, consents, certificates, authorizations, registrations, orders and other approvals from any arbitrator, court, nation, government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial regulatory or administrative functions of, or pertaining to, government that are material to the operation of the business of the Company and its Subsidiaries taken as a whole as it is now being conducted (collectively, the "Company Permits"). The Company Permits are in full force and effect, have not been violated and no suspension, revocation or cancellation thereof has been threatened and there is no action, proceeding or investigation pending or threatened regarding suspension, revocation or cancellation of any Company Permit. SECTION 3.12 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS. (a) Section 3.12(a) of the Company Disclosure Schedule contains a true and complete list of (i) each deferred compensation and each bonus or other incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; (ii) each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")); (iii) each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); (iv) each employment, termination or severance agreement; and (v) each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by the Company or by any trade or business, whether or not incorporated (an "ERISA Affiliate"), that together with the Company would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA, or to which the Company or an ERISA Affiliate is party, whether written or oral, for the benefit of any employee or former employee of the Company or any of its Subsidiaries (collectively, the "Company Plans"). No Company Plan is subject to Section 302 or Title IV of ERISA or Section 412 of the Code. Neither the Company, any of its Subsidiaries nor any ERISA Affiliate has any commitment or formal plan, whether legally binding or not, to create any additional employee benefit plan or modify or change any existing Company Plan that would affect any employee or former employee of the Company or any of its Subsidiaries. (b) With respect to each Company Plan, the Company has heretofore delivered or made available to Parent true and complete copies of each of the following documents: (i) a copy of the Company Plan and any amendments thereto (or if the Company Plan is not a written Company Plan, a description thereof); (ii) a copy of the two most recent annual reports and actuarial reports, if required under ERISA, and the most recent report prepared with respect thereto in accordance with State- 15 ment of Financial Accounting Standards No. 87; (iii) a copy of the most recent Summary Company Plan Description required under ERISA with respect thereto; (iv) if the Company Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement and the latest financial statements thereof; and (v) the most recent determination letter received from the IRS with respect to each Company Plan intended to qualify under Section 401 of the Code. (c) No liability under Title IV or Section 302 of ERISA has been incurred by the Company or any ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to the Company or any ERISA Affiliate of incurring any such liability, other than liability for premiums due to the Pension Benefit Guaranty Corporation (which premiums have been paid when due). (d) All contributions required to be made with respect to any Company Plan on or prior to the Effective Time have been timely made or are reflected on the Company Balance Sheet. (e) Neither the Company nor any of its Subsidiaries, any Company Plan, any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction in connection with which the Company or any of its Subsidiaries, any Company Plan, any such trust, or any trustee or administrator thereof, or any party dealing with any Company Plan or any such trust could be subject to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976 of the Code. (f) Each Company Plan has been operated and administered in all material respects in accordance with its terms and applicable law, including but not limited to ERISA and the Code. There are no pending, threatened or anticipated claims by or on behalf of any Company Plan, by any employee or beneficiary covered under any such Company Plan, or otherwise involving any such Company Plan (other than routine claims for benefits). (g) Each Company Plan intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified and the trusts maintained thereunder are exempt from taxation under Section 501(a) of the Code. Each Company Plan intended to satisfy the requirements of Section 501(c)(9) has satisfied such requirements. (h) No Company Plan provides medical, surgical, hospitalization, death or similar benefits (whether or not insured) for employees or former employees of the Company or any of its Subsidiaries for periods extending beyond their retirement or other termination of service, other than (i) coverage mandated by applicable law, (ii) death benefits under any "pension plan," or (iii) benefits the full cost of which is 16 borne by the current or former employee (or his beneficiary). No condition exists that would prevent the Company or any of its Subsidiaries from amending or terminating any Company Plan providing health or medical benefits in respect of any active or former employee of the Company or any of its Subsidiaries. (i) No amounts payable under the Company Plans have failed, or as a result of the transactions contemplated hereby will fail, to be deductible for federal income tax purposes by virtue of Sections 162(m) or 280G of the Code. (j) The consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee or officer of the Company or any ERISA Affiliate to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer. SECTION 3.13 LABOR MATTERS . (a) There are no controversies pending or, to the knowledge of the Company or any of its Subsidiaries, threatened, between the Company or any of its Subsidiaries and any of their respective employees, consultants or independent contractors; (b) neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company or its Subsidiaries, nor does the Company or any of its Subsidiaries know of any activities or proceedings of any labor union to organize any such employees; and (c) neither the Company nor any of its Subsidiaries has any knowledge of any labor disputes, strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of, or consultants or independent contractors to, the Company or any of its Subsidiaries. SECTION 3.14 PROPERTIES; ENCUMBRANCES . The Company and each of its Subsidiaries have good, valid and marketable title to, or a valid leasehold interest in, all the tangible properties and assets which it purports to own or lease (real, personal and mixed), including, without limitation, all the properties and assets reflected in the Company Balance Sheet (except for personal property sold since the date of the Company Balance Sheet in the ordinary course of business consistent with past practice). All properties and assets reflected in the Company Balance Sheet are free and clear of all Liens, except for Liens reflected on the Company Balance Sheet and Liens for current taxes not yet due and other Liens that do not materially detract from the value or impair the use of the property or assets subject thereto. SECTION 3.15 TAXES . (a) The Company and each of its Subsidiaries have timely filed with the appropriate taxing authorities all Tax Returns required to be filed by them (giving effect to valid extensions) and all such Tax Returns are true, correct and complete in all material respects. Each group of corporations with which the Company or any of 17 its Subsidiaries has filed (or was required to file) consolidated, combined, unitary or similar Tax Returns (an "Affiliated Group") has timely filed all income and other material Tax Returns that it was required to file (giving effect to valid extensions) with respect to any period in which the Company or any of its Subsidiaries was a member of such Affiliated Group (each such Tax Return, an "Affiliated Return") and all such Affiliated Returns are true, correct and complete in all material respects. All material Taxes due and owing by the Company and its Subsidiaries have been timely paid or adequately reserved for. There are no Tax Liens on any assets of the Company or any Subsidiary thereof other than liens relating to current Taxes not yet due and payable. Neither the Company, any of its Subsidiaries nor any member of any Affiliated Group has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax. No power of attorney has been granted with respect to any matter relating to Taxes of the Company or any of its Subsidiaries which is currently in force. (b) Neither the Company nor any of its Subsidiaries is, or has been, a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (c) The Company and each of its Subsidiaries have complied in all material respects with all applicable laws, rules and regulations relating to Taxes required to be withheld or collected, including, without limitation, Taxes required to be withheld pursuant to Sections 1441 and 1442 of the Code and Taxes required to be withheld from employee wages. The Company has delivered to Parent true, correct and complete copies of all (i) income and other material Tax Returns filed by the Company and each of its Subsidiaries and (ii) Affiliated Returns, in each case since the date of September 28, 1996. None of the Company, any of its Subsidiaries or any member of any Affiliated Group has received any notice of any audit examination, deficiency, refund litigation, proposed adjustment or matter in controversy with respect to any Taxes or Tax Return of the Company, any of its Subsidiaries or any Affiliated Group, and no audits or other administrative proceedings or court proceedings with respect to any Taxes or Tax Return of the Company, any of its Subsidiaries or any Affiliated Group are in progress. No taxing authority has asserted that the Company, any of its Subsidiaries or any Affiliated Group was required to file any Tax Return that was not filed. Neither the Company nor any of its Subsidiaries is a "consenting corporation" within the meaning of Section 341(f) of the Code or has agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries is a party to or bound by any Tax indemnity, sharing, allocation, or similar contract or arrangement. Neither the Company nor any of its Subsidiaries is or has ever been a member of a group of corporations with 18 which it has filed (or been required to file) consolidated, combined, unitary or similar Tax Returns, other than a group of which only the Company and its Subsidiaries are or were members. Neither the Company nor any of its Subsidiaries has agreed to, or is required to, make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. (d) The statute of limitations for the assessment of Taxes has expired for all Tax Returns of the Company and its Subsidiaries and any Affiliated Group, or those Tax Returns have been audited and closed by the appropriate taxing authorities. The Company has delivered to Parent true, correct and complete copies of each of (i) all audit reports, letter rulings, technical advice memoranda and similar documents issued by a taxing authority relating to Taxes of, or with respect to, the Company or any of its Subsidiaries and (ii) any closing agreements entered into by the Company or any of its Subsidiaries with any taxing authority. (e) For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes, fees, levies, duties, tariffs, imposts and governmental impositions or charges of any kind in the nature of (or similar to) taxes, payable to any federal, state, local or foreign taxing authority, including without limitation (i) income, franchise, profits, gross receipts, AD VALOREM, net worth, value added, sales, use, service, real or personal property, special assessments, capital stock, license, payroll, withholding, employment, social security, workers' compensation, unemployment compensation, utility, severance, production, excise, stamp, occupation, premium, windfall profits, transfer and gains taxes and (ii) interest, penalties, additional taxes and additions to tax imposed with respect thereto; and "Tax Returns" shall mean returns, reports, declarations, schedules, certificates, information statements and other similar documents with respect to Taxes (including any supporting information) required to be filed with the IRS or any other taxing authority, domestic or foreign, including, without limitation, consolidated, combined or unitary tax returns, claims for refund, amended returns, or declarations of estimated Tax. SECTION 3.16 ENVIRONMENTAL MATTERS . (a) The Company and its Subsidiaries are in full compliance with all applicable Environmental Laws; neither the Company nor any of its Subsidiaries has received any communication whether from a Governmental Entity, citizens group, employee or otherwise, that alleges that the Company or any of its Subsidiaries are not in such full compliance; and, to the Company's best knowledge, there are no circumstances that may prevent, interfere with, such full compliance in the future. (b) There is no Environmental Claim pending or threatened against the Company or any of its Subsidiaries or, to the Company's knowledge, against any person or entity whose liability for any Environmental Claim the Company or any of its Subsidiaries have or may have retained or assumed either contractually or by operation of law. 19 (c) There are no past or present actions, activities, circumstances, conditions, events or incidents, including the Release, emission, discharge or disposal of any Hazardous Materials, that could form the basis of any Environmental Claim against the Company or any of its Subsidiaries or, to the Company's knowledge, against any person or entity whose liability for any Environmental Claim the Company or any of its Subsidiaries have or may have retained or assumed either contractually or by operation of law. (d) The Company and its Subsidiaries have delivered or otherwise made available for inspection to Parent true, complete and correct copies and results of any audits, reports, studies, analyses, tests or monitoring possessed or initiated by the Company or its Subsidiaries pertaining to Hazardous Materials in, on, beneath or adjacent to any property currently or formerly owned, operated or leased by the Company or its Subsidiaries or regarding the Company's or its Subsidiaries' compliance with applicable Environmental Laws. (e) "Environmental Claim" means any claim, action, cause of action, investigation or notice by any person or entity alleging potential liability arising out of, based on or resulting from (i) the presence, or release into the environment, of any Hazardous Material at any location, whether or not owned by the Company or any of its Subsidiaries or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. (f) "Environmental Laws" means all federal, state, local and foreign laws and regulations relating to pollution or protection of human health or the environment, including without limitation laws and regulations relating to emissions, discharges, releases or threatened releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials and all laws and regulations with regard to record keeping, notification, disclosure and reporting requirements respecting Hazardous Materials. (g) "Hazardous Materials" means chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products, all substances defined as Hazardous Substances, Hazardous Wastes, Oils, Pollutants or Contaminants in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. Section 300.5, or defined as such by, or otherwise regulated under, any Environmental Law. (h) "Release" means any release, spill, emission, discharge, leaking, pumping, injection, deposit, disposal, dispersal, leaching or migration into the indoor or outdoor environment (including, without limitation, ambient air, surface water, 20 groundwater and surface or subsurface strata) or into or out of any property, including the movement of Hazardous Materials through or in the air, soil, surface water, groundwater or property. SECTION 3.17 INTELLECTUAL PROPERTY . (a) The Company or its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable rights to use (free and clear of all liens and encumbrances), all trademarks, service marks, trade names, copyrights, Internet domain names, mask works, including any registrations or applications for registration thereof, patents and patent applications, and trade secrets, including technology, know-how, processes, schematics, computer software programs or applications, and all other tangible or intangible proprietary information or material, that is used in the business of the Company and its Subsidiaries as currently conducted (the "Company Intellectual Property Rights"). Set forth in Section 3.17(a) of the Company Disclosure Schedule is a list of all Company-owned patents and patent applications, registered and unregistered trademarks and service marks, and copyright and mask work registrations. (b) Either the Company or one of its Subsidiaries is the sole and exclusive owner of all right, title and interest in and to (free and clear of any Liens), or is the exclusive or non-exclusive licensee of, the Company Intellectual Property Rights, and, in the case of Company Intellectual Property Rights owned by the Company or any of its Subsidiaries, has sole and exclusive rights (and is not contractually obligated to pay any compensation to any third party in respect thereof) to the use thereof and the material covered thereby. No claims have been asserted or, to the Company's knowledge, are threatened by any person (i) to the effect that the manufacture, sale, licensing or use of any of the products or services of the Company or any of its Subsidiaries as now manufactured, sold or licensed or used or proposed for manufacture, use, sale or licensing by the Company or any of its Subsidiaries infringes any intellectual property rights of any third party, (ii) against the use by the Company or any of its Subsidiaries of any trademarks, service marks, trade names, trade secrets, copyrights, patents, technology or know-how used in the business of the Company and its Subsidiaries as currently conducted or as presently proposed to be conducted, or (iii) challenging the ownership or use by the Company or any of its Subsidiaries or the validity of any of the Company Intellectual Property Rights. All patents and trademark, service mark, copyright and mask work registrations held by the Company and its Subsidiaries and used in the business of the Company or its Subsidiaries as currently conducted or as presently proposed to be conducted are valid, subsisting, in full force and effect, and have not lapsed, expired or been cancelled or abandoned. To the knowledge of the Company, there is no unauthorized use, infringement or misappropriation of any of the Company Intellectual Property Rights by any third party, including any employee or former employee of the Company or any of its Subsidiaries. No Company Intellectual 21 Property Right or product or service of the Company or any of its Subsidiaries is subject to any outstanding decree, order, judgment or stipulation restricting in any manner the use, sale or licensing thereof by the Company or any of its Subsidiaries. No current or former partner, director, officer or employee of the Company or any of its Subsidiaries will, after giving effect to the transactions contemplated hereby, own or retain any rights in or to any of the Company Intellectual Property. Neither the Company nor any of its Subsidiaries has entered into any agreement under which the Company or its Subsidiaries is restricted from using or licensing any Company Intellectual Property Right in any manner anywhere in the world, or selling or otherwise distributing any of its products or services. (c) Neither the Company nor any Subsidiary is, or as a result of the execution or delivery of this Agreement or the performance of its obligations hereunder will be in violation of any license, sublicense, agreement or instrument to which the Company or such Subsidiary is a party or otherwise bound, nor will the consummation of the transactions contemplated hereby result in any material loss or impairment of the Company or any Subsidiary's ownership of or right to use any of the Company Intellectual Property, nor require the consent of any Governmental Entity or third party with respect to any of the Company Intellectual Property. SECTION 3.18 INSURANCE . To the Company's best knowledge, after reasonable inquiry, all fire and casualty, general liability, business interruption, product liability, sprinkler and water damage insurance policies and other forms of insurance maintained by the Company or any of its Subsidiaries are with reputable insurance carriers, provide adequate coverage for all normal risks incident to the business of the Company and its Subsidiaries and their respective properties and assets and are in character and amount and with such deductibles and retained amounts as generally carried by persons engaged in similar businesses and subject to the same or similar perils or hazards. SECTION 3.19 RESTRICTIONS ON BUSINESS ACTIVITIES . Except for this Agreement, there is no agreement, judgement, injunction, order or decree binding upon the Company or any of its Subsidiaries which has or could be expected to have the effect of prohibiting or impairing any business practice of the Company or any of its Subsidiaries, acquisition of property by the Company or any of its Subsidiaries or the conduct of business by the Company or any of its Subsidiaries as currently conducted or as proposed to be conducted by the Company. SECTION 3.20 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS . The information supplied by the Company for inclusion in the Registration Statement shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in 22 the light of the circumstances under which they were made, not misleading. The information supplied by the Company for inclusion or incorporation by reference in the proxy statement/prospectus (as amended or supplemented, the "Proxy Statement/ Prospectus") to be sent to the shareholders of the Company in connection with the meeting of the shareholders of the Company to consider the Company Voting Proposal (the "Company Shareholders Meeting"), and stockholders of Parent in connection with the meeting of the stockholders of Parent to consider the issuance of the Parent Common Stock in the Merger (the "Parent Stockholders Meeting"), shall not, on the date the Proxy Statement/Prospectus (or any amendment thereof or supplement thereto) is first mailed to shareholders of the Company and stockholders of Parent or at the time of the Company Shareholders Meeting and the time of the Parent Stockholders Meeting contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statements made therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company Shareholders Meeting and the Parent Stockholders Meeting which has become false or misleading. If at any time prior to the later of the Company Shareholders Meeting and the Parent Stockholders Meeting any event relating to the Company or any of its respective affiliates, officers or directors should be discovered by the Company which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/Prospectus, the Company shall promptly inform Parent. The Proxy Statement/Prospectus shall comply in all material respects as to form and substance with the requirements of the Securities Act, the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Merger Sub which is contained in the Registration Statement or the Proxy Statement/Prospectus. SECTION 3.21 INTERESTED PARTY TRANSACTIONS . Since the date of the Company's proxy statement dated January 19, 1999, no event has occurred that would be required to be reported as a Certain Relationship or Related Transaction, pursuant to Item 404 of Regulation S-K promulgated by the SEC. SECTION 3.22 CHANGE IN CONTROL PAYMENTS . Neither the Company nor any of its Subsidiaries have any agreements, other than as previously disclosed in Section 3.12 of the Company Disclosure Schedule, to which they are parties, or to which they are subject, pursuant to which payments may be required upon, or may become payable directly or indirectly as a result of, a change of control of the Company. SECTION 3.23 YEAR 2000 COMPLIANCE . 23 (a) All of (i) the internal systems used in the business or operations of the Company and its Subsidiaries, including without limitation computer hardware systems, software, applications, firmware, equipment containing embedded microchips and other embedded systems and (ii) the software, hardware, firmware and other technology that constitute part of the products and services manufactured, marketed, licensed or sold by the Company or any of its Subsidiaries to third parties are Year 2000 Compliant. (b) To the Company's knowledge, all third-party systems used in connection with the business, products, services or operations of the Company or any of its Subsidiaries, including without limitation any system belonging to any of the Company's or its Subsidiaries' vendors, co-venturers, service providers or customers are Year 2000 Compliant. The Company and its Subsidiaries have received satisfactory written assurances and warranties from all of their respective vendors, co-venturers, service providers and customers that are material to the ongoing operation of the business of the Company and its Subsidiaries that past and future products, software, equipment, components or systems provided by such parties are (or in the case of future products, will be) Year 2000 Compliant. (c) The Company has conducted "year 2000" audits with respect to (i) each of the internal systems used in the business, products, services and operations of the Company and its Subsidiaries, including without limitation computer hardware systems, software, applications, firmware, equipment containing embedded microchips and other embedded systems and (ii) all of the software, applications, hardware, firmware and other technology which constitute part of the products and services manufactured, marketed, performed or sold by the Company or any of its Subsidiaries or licensed by the Company or any of its Subsidiaries to third parties. The Company has obtained "year 2000" certifications with respect to all material third-party systems used in connection with the business or operations of the Company and its Subsidiaries, including without limitation systems belonging to the vendors, co-venturers, service providers and customers of the Company of any or its Subsidiaries. The Company has made available to Parent true, complete and correct copies of all "year 2000" audits, certifications, reports and other similar documents that have been prepared or performed by or on behalf of the Company or any third party with respect to the systems, business, operations, products or services of the Company or any of its Subsidiaries. (d) Neither the Company nor any of its Subsidiaries has provided any representation, warranty or guarantee for any product sold or licensed, or service provided, by the Company or its Subsidiaries to the effect that such product or service (i) complies with or accounts for the fact of the year change from December 31, 1999 to January 1, 2000, (ii) will not be adversely affected with respect to functionality, interoperability, connectivity, performance, reliability or volume capacity (including without limitation the processing storage, recall and reporting of 24 data) by the passage of any date, including without limitation the year change from December 31, 1999 to January 1, 2000 or (iii) is otherwise Year 2000 Compliant. (e) For purposes of this Agreement, "Year 2000 Compliant" means that the applicable system, product, service or item: (i) will accurately receive, record, store, provide, recognize, recall and process all date and time data from, during, into and between the years 1999, 2000 and 2001, and all years pertinent thereafter; (ii) will accurately perform all date-dependent calculations and operations (including without limitation, mathematical operations, sorting, comparing and reporting) from, during, into and between the years 1999, 2000 and 2001, and all pertinent years thereafter; and (iii) will not malfunction, cease to function or provide invalid or incorrect results as a result of (A) the change of years from 1999 to 2000 or from 2000 to 2001, (B) date data, including date data which represents or references different centuries, different dates during 1999, 2000 and 2001, or more than one century or (C) the occurrence of any particular date; in each case without human intervention, provided, in each case, that all software, applications, hardware and other systems used in conjunction with such system or item that are not owned or licensed by the Company or its Subsidiaries correctly exchange date data with or provide data to such system or item. SECTION 3.24 POOLING; TAX MATTERS . Neither the Company nor any of its affiliates has taken or agreed to take any action or failed to take any action, or has any reason to believe that any conditions exist, that would prevent (a) Parent from accounting for the business combination to be effected by the Merger as a pooling of interests or (b) the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code. SECTION 3.25 NO EXISTING DISCUSSIONS . As of the date hereof, the Company is not engaged, directly or indirectly, in any discussions or negotiations with any other party with respect to an Acquisition Proposal (as defined in Section 6.2(b)) or any other substantially similar proposal. SECTION 3.26 OPINION OF FINANCIAL ADVISOR . The financial advisor of the Company, First Security Van Kasper, has delivered to the Company an opinion dated the date of this Agreement to the effect that as of the date of this Agreement, the Merger Consideration is fair, from a financial point of view, to the shareholders of the Company. The Company has provided a complete and correct copy of such opinion to Parent. 25 SECTION 3.27 BROKERS . No broker, finder or investment banker (other than First Security Van Kasper, whose brokerage, finder's or other fee will be paid by the Company) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or any of its Subsidiaries. The Company has heretofore furnished to Parent a complete and correct copy of all agreements between the Company and First Security Van Kasper pursuant to which such firm would be entitled to any payment relating to the transactions contemplated hereunder. SECTION 3.28 AFFILIATES . Section 3.28 of the Company Disclosure Schedule contains a true, complete and correct list of all persons who, as of the date hereof, to the best knowledge of the Company, may be deemed to be affiliates of the Company excluding all its Subsidiaries but including all directors and executive officers of the Company. SECTION 3.29 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS . Each current and former employee and officer of the Company has executed an Agreement Regarding Confidential Information and Inventions, or an Employee Proprietary Information Agreement or similar such agreement, in substantially the form previously provided or made available to Parent. The Company is not aware that any of the current or former employees of the Company is in violation thereof. SECTION 3.30 ABSENCE OF CERTAIN PAYMENTS . Neither the Company, nor, to the Company's knowledge, any of its affiliates or any of their respective officers, directors, employees or agents or other people acting on behalf of any of them have: (i) engaged in any activity prohibited by the United States Foreign Corrupt Practices Act of 1977 or any other similar law, regulation, decree, directive or order of any Governmental Entity and (ii) without limiting the generality of the preceding clause (i), used any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to government officials or others. Neither the Company, nor, to the Company's knowledge, any of its affiliates or any of their respective directors, officers, employees or agents of other persons acting on behalf of any of them, has accepted or received any unlawful contributions, payments, gifts or expenditures. SECTION 3.31 FULL DISCLOSURE . To the Company's best knowledge, after reasonable inquiry, no representation or warranty by the Company in this Agreement and no statement contained in any schedule or certificate furnished or to be furnished by the Company to Parent, or any of its representatives pursuant to the provisions hereof taken as a whole, contains as of the date hereof any untrue statement of material fact or omits to state any material fact necessary in order to make the 26 statements herein or therein, in light of the circumstances under which they were made, not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub represent and warrant to the Company that the statements contained in this Article IV are true and correct, except as set forth in the Parent Disclosure Schedule, dated as of the date hereof, prepared by Parent and delivered to the Company in connection herewith (the "Parent Disclosure Schedule"). The Parent Disclosure Schedule is arranged in sections corresponding to the numbered and lettered sections contained in this Article IV and shall qualify only the corresponding Section in this Article IV. SECTION 4.1 ORGANIZATION AND QUALIFICATION . Parent and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its respective incorporation and has the requisite corporate power and authority necessary to own, lease and operate the properties it purports to own, lease or operate and to carry on its business as it is now being conducted or presently proposed to be conducted. Parent and each of its Subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that could not reasonably be expected to have a Parent Material Adverse Effect. A true, complete and correct list of all of Parent's Subsidiaries, together with the jurisdiction of incorporation of each Subsidiary, the authorized capitalization of each Subsidiary, and the percentage of each Subsidiary's outstanding capital stock owned by Parent or another Subsidiary, is set forth in Section 4.1 of the Parent Disclosure Schedule. Parent does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity, excluding securities in any publicly traded company held for investment by Parent and comprising less than one percent of the outstanding stock of such company. The term "Parent Material Adverse Effect" means any change, effect or circumstance that, individually or when taken together with all other such similar or related changes, effects or circumstances that have occurred or could reasonably be expected to occur prior to the date of determination of the occurrence of the Parent Material Adverse Effect, (i) is materially adverse to the business, prospects, assets (including intangible assets), condition (financial or otherwise) or results of operations of Parent and its Subsidiaries taken as a whole or (ii) could materially delay or prevent the consummation of the transactions 27 contemplated hereby. Changes in economic or market conditions affecting the computer peripherals or computer software industries generally, changes in Parent's stock price, failure to meet Parent's revenue projections for the first quarter of fiscal year 2000 (except as set forth below) or any loss of a supplier, customer or employee resulting from the Merger or its announcement to the extent so resulting will be deemed not to constitute a Parent Material Adverse Effect; revenue for the first quarter of fiscal year 2000 of 25% or more below the amount set forth in Section 4.1 of the Parent Disclosure Schedule will be deemed to constitute a Parent Material Adverse Effect. SECTION 4.2 CERTIFICATE OF INCORPORATION AND BY-LAWS . Parent has heretofore furnished to the Company a true, complete and correct copy of its Certificate of Incorporation, as amended to date (the "Parent Charter"), and By-Laws, as amended to date (the "Parent By-Laws"). Such Parent Charter and Parent By-Laws are in full force and effect. Parent is not in violation of any of the provisions of the Parent Charter or Parent By-Laws. SECTION 4.3 CAPITALIZATION . (a) The authorized capital stock of Parent consists of 25,000,000 shares of Parent Common Stock, and 1,000,000 shares of preferred stock, par value $.01 per share (the "Parent Preferred Stock"). As of November 30, 1999: (i) 8,485,714 shares of Parent Common Stock are issued and outstanding, 1,826,309 shares of Parent Common Stock are reserved for issuance upon exercise of options granted pursuant to Parent's 1982 Key Employee Incentive Plan, 1986 Employee Stock Purchase Plan and 1992 Key Employee Incentive Plan; and no shares of Parent Common Stock are issued and held in the treasury of Parent; and (ii) no shares of Parent Preferred Stock are issued and outstanding. All outstanding shares of Parent Common Stock are, and all shares of Parent Common Stock subject to issuance as specified above, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be, duly authorized, validly issued, fully paid and nonassessable and not subject to or issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the DGCL, Parent Charter or Parent By-Laws or any agreement to which Parent is a party or is otherwise bound. No material change in such capitalization has occurred since November 30, 1999. All of the outstanding shares of capital stock of each of Parent's Subsidiaries are duly authorized, validly issued, fully paid and nonassessable, and all such shares are owned by Parent free and clear of all Liens. There are no accrued and unpaid dividends with respect to any outstanding shares of capital stock of Parent or any of its Subsidiaries. (b) Except as described in Section 4.3(a) of this Agreement, there are no equity securities of any class of Parent or any of its Subsidiaries or any security 28 exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Except as described in Section 4.3(a) of this Agreement, there are no options, warrants, calls, rights, commitments or agreements of any character to which Parent or any of its Subsidiaries is a party, or by which Parent or any of its Subsidiaries is bound, obligating Parent or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of Parent or any of its Subsidiaries or obligating Parent or any of its Subsidiaries to grant, extend or accelerate the vesting of or enter into any such option, warrant, call, right, commitment or agreement. To Parent's knowledge, there are no voting trusts, proxies or other similar agreements or understandings with respect to the shares of capital stock of Parent or any of its Subsidiaries There are no obligations, contingent or otherwise, of Parent or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of Parent or any of its Subsidiaries or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity. (c) All of the shares of Parent Common Stock to be issued in the Merger will be, when issued in accordance with this Agreement, duly authorized, validly issued, fully paid and nonassessable. (d) The authorized capital stock of Merger Sub consists of 100 Merger Sub Common Shares, all of which are issued and outstanding and fully paid and nonassessable. SECTION 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT . Subject only to the approval of Parent's stockholders described below, each of Parent and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it (the "Parent Merger Documents") at the Closing and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of the Parent Merger Documents and the consummation of the transactions contemplated by the Parent Merger Documents have been duly and validly authorized by all necessary corporate action on the part of Parent and Merger Sub, subject only to the approval of the holders of Parent Common Stock of the issuance of the Parent Common Stock in the Merger at a meeting where a quorum is present by a majority of the votes properly cast (the "Parent Voting Proposal"). This Agreement has been duly and validly executed and delivered by Parent and Merger Sub and constitutes, and when executed and delivered by Parent and Merger Sub, as applicable, each of the other Parent Merger Documents will constitute, assuming the due authorization, execution and delivery by the Company, the legal and binding obligation of each of Parent and Merger Sub, as applicable, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights and by general equitable 29 principles (regardless of whether enforceability is considered in a proceeding in equity or at law). The Board of Directors of Parent has determined that it is advisable and in the best interests of Parent's stockholders for Parent to issue the shares to the Company's shareholders on the terms and subject to the conditions of this Agreement, and has recommended that Parent's stockholders approve the Parent Stockholder Proposal. SECTION 4.5 NO CONFLICT, REQUIRED FILINGS AND CONSENTS . (a) The execution and delivery of the Parent Merger Documents by Parent and Merger Sub do not, and the performance of this Agreement by Parent and Merger Sub will not, (i) conflict with or violate the Parent Charter, the Parent By-Laws, the Certificate of Incorporation of Merger Sub or the By-Laws of Merger Sub, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent or Merger Sub by which its or their respective properties are bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default), or impair Parent's or any of its Subsidiaries' rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of Parent or any of its Subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any of its Subsidiaries is a party or by which Parent or any of its Subsidiaries or its or any of their respective properties is bound or affected; other than such conflicts, breaches, defaults, impairments or other effects under (iii) of this Section 4.5(a) that have not had and could not reasonably be expected to have a Parent Material Adverse Effect. (b) The execution and delivery of this Agreement or any instrument required hereby to be executed and delivered by Parent and Merger Sub does not, and the performance of this Agreement by Parent and Merger Sub will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) the filing of the pre-merger notification report under the HSR Act, (ii) the filing of the Registration Statement with the SEC in accordance with the Securities Act, and the filing of the Proxy Statement/Prospectus with the SEC under the Exchange Act, (iii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and the laws of any foreign country and (iv) the filing and recordation of the Merger Agreement or other documents as required by the CGCL and the DGCL. 30 SECTION 4.6 SEC FILINGS; FINANCIAL STATEMENTS . (a) Parent has timely filed all forms, reports, schedules, statements and other documents required to be filed by Parent with the SEC since November 30, 1998 (collectively, the "Parent SEC Reports"). The Parent SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Parent SEC Reports or necessary in order to make the statements in such Parent SEC Reports, in light of the circumstances under which they were made, not misleading. None of Parent's Subsidiaries are required to file any forms, reports, schedules, statements or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes), contained in the Parent SEC Reports, including any Parent SEC Reports filed after the date of this Agreement until the Closing, complied, as of its respective date, in all material respects with all applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, was prepared in accordance with GAAP applied on a consistent basis throughout the periods involved and fairly presented the consolidated financial position of Parent and its Subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS . Since the date of the unaudited balance sheet of Parent as of November 30, 1999 (the "Parent Balance Sheet"), a copy of which has been previously supplied to the Company by Parent, and except as disclosed in the Parent SEC Reports, Parent has conducted its business in the ordinary course consistent with past practice and, since such date, there has not occurred: (i) any change, development, event or other circumstance, situation or state of affairs that has had or could reasonably be expected to have a Parent Material Adverse Effect; (ii) any amendments to or changes in the Parent Charter or Parent By-Laws; (iii) any damage to, destruction or loss of any asset of Parent or any of its Subsidiaries (whether or not covered by insurance) that could reasonably be expected to have a Parent Material Adverse Effect; (iv) any change by Parent in its accounting methods, principles or practices; (v) any revaluation by Parent of any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice; or (vi) any sale of a material amount of assets (tangible or 31 intangible) of Parent other than in the ordinary course of business and consistent with past practice. SECTION 4.8 NO UNDISCLOSED LIABILITIES . Except as disclosed in the Parent SEC Reports or in the Parent Balance Sheet, to Parent's knowledge, neither Parent nor any of its Subsidiaries has any liabilities (absolute, accrued, contingent or otherwise), except liabilities (a) adequately reflected in the Parent Balance Sheet, (b) incurred in the ordinary course of business consistent with past practice and not required under GAAP to be reflected in the Parent Balance Sheet, (c) incurred since the date of the Parent Balance Sheet in the ordinary course of business consistent with past practice or (d) incurred in connection with this Agreement. SECTION 4.9 COMPLIANCE . To Parent's knowledge, neither Parent nor any of its Subsidiaries is in conflict with, or in default or violation of (and has not received any notices of violation with respect to), any (i) law, rule or regulation, or (ii) order, judgment or decree applicable to Parent or any of its Subsidiaries or by which its or any of their respective properties is bound or affected, and Parent is not aware of any such conflict, default or violation thereunder (other than any conflicts, defaults or violations under (i) of this Section 4.9 that have not had and could not reasonably be expected to have a Parent Material Adverse Effect). SECTION 4.10 ABSENCE OF LITIGATION . Except as disclosed in the Parent SEC Reports, there are no claims, actions, suits, proceedings or investigations (i) pending against Parent or any of its Subsidiaries or any properties or assets of Parent or of any of its Subsidiaries or (ii) to the knowledge of Parent, threatened against Parent or any of its Subsidiaries, or any properties or assets of Parent or of any of its Subsidiaries, in each case, which claims, actions, suits, proceedings or investigations could reasonably be expected to have a Parent Material Adverse Effect. SECTION 4.11 EMPLOYEE BENEFIT PLANS, OPTIONS AND EMPLOYMENT AGREEMENTS. (a) Section 4.11(a) of the Parent Disclosure Schedule contains a true and complete list of (i) each deferred compensation and each bonus or other incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; (ii) each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of ERISA); (iii) each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); (iv) each employment, termination or severance agreement; and (v) each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by Parent or by any trade or business, whether or not incorporated (a "Parent ERISA 32 Affiliate"), that together with Parent would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA, or to which Parent or a Parent ERISA Affiliate is party, whether written or oral, for the benefit of any employee or former employee of Parent or any of its Subsidiaries (collectively, the "Parent Plans"). No Parent Plan is subject to Section 302 or Title IV of ERISA or Section 412 of the Code. Neither Parent, any of its Subsidiaries nor any Parent ERISA Affiliate has any commitment or formal plan, whether legally binding or not, to create any additional employee benefit plan or modify or change any existing Parent Plan that would affect any employee or former employee of Parent or any of its Subsidiaries. (b) With respect to each Parent Plan, Parent has heretofore delivered or made available to the Company true and complete copies of each of the following documents: (i) a copy of the Parent Plan and any amendments thereto (or if the Parent Plan is not a written Parent Plan, a description thereof); (ii) a copy of the two most recent annual reports and actuarial reports, if required under ERISA, and the most recent report prepared with respect thereto in accordance with Statement of Financial Accounting Standards No. 87; (iii) a copy of the most recent Summary Parent Plan Description required under ERISA with respect thereto; (iv) if the Parent Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement and the latest financial statements thereof; and (v) the most recent determination letter received from the IRS with respect to each Parent Plan intended to qualify under Section 401 of the Code. (c) No liability under Title IV or Section 302 of ERISA has been incurred by Parent or any Parent ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to Parent or any Parent ERISA Affiliate of Parent incurring any such liability, other than liability for premiums due to the Pension Benefit Guaranty Corporation (which premiums have been paid when due). (d) All contributions required to be made with respect to any Parent Plan on or prior to the Effective Time have been timely made or are reflected on the Parent Balance Sheet. (e) Neither Parent nor any of its Subsidiaries, any Parent Plan, any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction in connection with which Parent or any of its Subsidiaries, any Parent Plan, any such trust, or any trustee or administrator thereof, or any party dealing with any Parent Plan or any such trust could be subject to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976 of the Code. (f) Each Parent Plan has been operated and administered in all material respects in accordance with its terms and applicable law, including but not limited to ERISA and the Code. There are no pending, threatened or anticipated claims by or on behalf of any Parent Plan, by any employee or beneficiary covered under any 33 such Parent Plan, or otherwise involving any such Parent Plan (other than routine claims for benefits). (g) Each Parent Plan intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified and the trusts maintained thereunder are exempt from taxation under Section 501(a) of the Code. Each Parent Plan intended to satisfy the requirements of Section 501(c)(9) has satisfied such requirements. (h) No Parent Plan provides medical, surgical, hospitalization, death or similar benefits (whether or not insured) for employees or former employees of Parent or any of its Subsidiaries for periods extending beyond their retirement or other termination of service, other than (i) coverage mandated by applicable law, (ii) death benefits under any "pension plan," or (iii) benefits the full cost of which is borne by the current or former employee (or his beneficiary). No condition exists that would prevent Parent or any of its Subsidiaries from amending or terminating any Parent Plan providing health or medical benefits in respect of any active or former employee of Parent or any of its Subsidiaries. (i) No amounts payable under the Parent Plans have failed, or as a result of the transactions contemplated hereby will fail, to be deductible for federal income tax purposes by virtue of Sections 162(m) or 280G of the Code. (j) The consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee or officer of Parent or any Parent ERISA Affiliate to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer. SECTION 4.12 LABOR MATTERS . (a) There are no controversies pending or, to the knowledge of Parent or any of its Subsidiaries, threatened, between Parent or any of its Subsidiaries and any of their respective employees, consultants or independent contractors; (b) neither Parent nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by Parent or its Subsidiaries, nor does Parent or any of its Subsidiaries know of any activities or proceedings of any labor union to organize any such employees; and (c) neither Parent nor any of its Subsidiaries has any knowledge of any labor disputes, strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of, or consultants or independent contractors to, Parent or any of its Subsidiaries. SECTION 4.13 PROPERTIES; ENCUMBRANCES . Parent and each of its Subsidiaries have good, valid and marketable title to, or a valid leasehold interest in, all the tangible properties and assets which it purports to own or lease (real, personal 34 and mixed), including, without limitation, all the properties and assets reflected in the Parent Balance Sheet (except for personal property sold since the date of the Parent Balance Sheet in the ordinary course of business consistent with past practice). All properties and assets reflected in the Parent Balance Sheet are free and clear of all Liens, except for Liens reflected on the Parent Balance Sheet and Liens for current taxes not yet due and other Liens that do not materially detract from the value or impair the use of the property or assets subject thereto. SECTION 4.14 TAXES . (a) Parent and each of its Subsidiaries have timely filed with the appropriate taxing authorities all Tax Returns required to be filed by them (giving effect to valid extensions) and all such Tax Returns are true, correct and complete in all material respects. Each group of corporations with which Parent or any of its Subsidiaries has filed (or was required to file) consolidated, combined, unitary or similar Tax Returns (an "Parent Affiliated Group") has timely filed all income and other material Tax Returns that it was required to file (giving effect to valid extensions) with respect to any period in which Parent or any of its Subsidiaries was a member of such Parent Affiliated Group (each such Tax Return, a "Parent Affiliated Return") and all such Parent Affiliated Returns are true, correct and complete in all material respects. All material Taxes due and owing by Parent and its Subsidiaries have been timely paid or adequately reserved for. There are no Tax Liens on any assets of Parent or any Subsidiary thereof other than liens relating to current Taxes not yet due and payable. Neither Parent, any of its Subsidiaries nor any member of any Affiliated Group has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax. No power of attorney has been granted with respect to any matter relating to Taxes of Parent or any of its Subsidiaries which is currently in force. (b) Neither Parent nor any of its Subsidiaries is, or has been, a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (c) Parent and each of its Subsidiaries have complied in all material respects with all applicable laws, rules and regulations relating to Taxes required to be withheld or collected, including, without limitation, Taxes required to be withheld pursuant to Sections 1441 and 1442 of the Code and Taxes required to be withheld from employee wages. None of Parent, any of its Subsidiaries or any member of any Parent Affiliated Group has received any notice of any audit examination, deficiency, refund litigation, proposed adjustment or matter in controversy with respect to any Taxes or Tax Return of Parent, any of its Subsidiaries or any Parent Affiliated Group, and no audits or other administrative proceedings or court proceedings with respect to any Taxes or Tax Return of Parent, any of its Subsidiaries or any Parent Affiliated Group are in progress. No taxing authority has asserted that Parent, any of its 35 Subsidiaries or any Parent Affiliated Group was required to file any Tax Return that was not filed. Neither Parent nor any of its Subsidiaries is a "consenting corporation" within the meaning of Section 341(f) of the Code or has agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by Parent or any of its Subsidiaries. Neither Parent nor any of its Subsidiaries is a party to or bound by any Tax indemnity, sharing, allocation, or similar contract or arrangement. Neither Parent nor any of its Subsidiaries is or has ever been a member of a group of corporations with which it has filed (or been required to file) consolidated, combined, unitary or similar Tax Returns, other than a group of which only Parent and its Subsidiaries are or were members. Neither Parent nor any of its Subsidiaries has agreed to, or is required to, make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. (d) The statute of limitations for the assessment of Taxes has expired for all Tax Returns of Parent and its Subsidiaries and any Parent Affiliated Group, or those Tax Returns have been audited and closed by the appropriate taxing authorities. SECTION 4.15 ENVIRONMENTAL MATTERS . (a) Parent and its Subsidiaries are in full compliance with all applicable Environmental Laws; neither Parent nor any of its Subsidiaries has received any communication whether from a Governmental Entity, citizens group, employee or otherwise, that alleges that Parent or any of its Subsidiaries are not in such full compliance; and, to Parent's best knowledge, there are no circumstances that may prevent, interfere with, such full compliance in the future. (b) There is no Environmental Claim pending or threatened against Parent or any of its Subsidiaries or, to Parent's knowledge, against any person or entity whose liability for any Environmental Claim Parent or any of its Subsidiaries have or may have retained or assumed either contractually or by operation of law. (c) There are no past or present actions, activities, circumstances, conditions, events or incidents, including the Release, emission, discharge or disposal of any Hazardous Materials, that could form the basis of any Environmental Claim against Parent or any of its Subsidiaries or, to Parent's knowledge, against any person or entity whose liability for any Environmental Claim Parent or any of its Subsidiaries have or may have retained or assumed either contractually or by operation of law. 36 (d) Parent and its Subsidiaries have delivered or otherwise made available for inspection to Parent true, complete and correct copies and results of any audits, reports, studies, analyses, tests or monitoring possessed or initiated by Parent or its Subsidiaries pertaining to Hazardous Materials in, on, beneath or adjacent to any property currently or formerly owned, operated or leased by Parent or its Subsidiaries or regarding Parent's or its Subsidiaries' compliance with applicable Environmental Laws. SECTION 4.16 INTELLECTUAL PROPERTY . (a) To Parent's knowledge, Parent or its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable rights to use (free and clear of all liens and encumbrances), all trademarks, service marks, trade names, copyrights, Internet domain names, mask works, including any registrations or applications for registration thereof, patents and patent applications, and trade secrets, including technology, know-how, processes, schematics, computer software programs or applications, and all other tangible or intangible proprietary information or material, that is used in the business of Parent and its Subsidiaries as currently conducted (the "Parent Intellectual Property Rights"). (b) To Parent's knowledge, either Parent or one of its Subsidiaries is the sole and exclusive owner of all right, title and interest in and to (free and clear of any Liens), or is the exclusive or non-exclusive licensee of, the Parent Intellectual Property Rights, and, in the case of Parent Intellectual Property Rights owned by Parent or any of its Subsidiaries, has sole and exclusive rights (and is not contractually obligated to pay any compensation to any third party in respect thereof) to the use thereof and the material covered thereby. No claims have been asserted or, to Parent's knowledge, are threatened by any person (i) to the effect that the manufacture, sale, licensing or use of any of the products or services of Parent or any of its Subsidiaries as now manufactured, sold or licensed or used or proposed for manufacture, use, sale or licensing by Parent or any of its Subsidiaries infringes any intellectual property rights of any third party, (ii) against the use by Parent or any of its Subsidiaries of any trademarks, service marks, trade names, trade secrets, copyrights, patents, technology or know-how used in the business of Parent and its Subsidiaries as currently conducted or as presently proposed to be conducted, or (iii) challenging the ownership or use by Parent or any of its Subsidiaries or the validity of any of the Parent Intellectual Property Rights. To Parent's knowledge, all patents and trademark, service mark, copyright and mask work registrations held by Parent and its Subsidiaries and used in the business of Parent or its Subsidiaries as currently conducted or as presently proposed to be conducted are valid, subsisting, in full force and effect, and have not lapsed, expired or been canceled or abandoned. To Parent's knowledge, there is no unauthorized use, infringement or misappropriation of any of the Parent Intellectual Property Rights by any third party, including any employee or former employee of Parent or any of its Subsidiaries. To 37 Parent's knowledge, no Parent Intellectual Property Right or product or service of Parent or any of its Subsidiaries is subject to any outstanding decree, order, judgment or stipulation restricting in any manner the use, sale or licensing thereof by Parent or any of its Subsidiaries. To Parent's knowledge, no current or former partner, director, officer or employee of Parent or any of its Subsidiaries will, after giving effect to the transactions contemplated hereby, own or retain any rights in or to any of the Parent Intellectual Property. To Parent's knowledge, neither Parent nor any of its Subsidiaries has entered into any agreement under which Parent or its Subsidiaries is restricted from using or licensing any Parent Intellectual Property Right in any manner anywhere in the world, or selling or otherwise distributing any of its products or services. (c) To Parent's knowledge, neither Parent nor any Subsidiary is, or as a result of the execution or delivery of this Agreement or the performance of its obligations hereunder will be in violation of any license, sublicense, agreement or instrument to which Parent or such Subsidiary is a party or otherwise bound, nor will the consummation of the transactions contemplated hereby result in any material loss or impairment of Parent or any Subsidiary's ownership of or right to use any of the Parent Intellectual Property, nor require the consent of any Governmental Entity or third party with respect to any of the Parent Intellectual Property. SECTION 4.17 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS . The information supplied by Parent for inclusion in the Registration Statement shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The information supplied by Parent for inclusion or incorporation by reference in the Proxy Statement/Prospectus to be sent to the stockholders of Parent and the shareholders of the Company in connection with the Parent Stockholders Meeting and the Company Shareholders Meeting, shall not, on the date the Proxy Statement/Prospectus (or any amendment thereof or supplement thereto) is first mailed to stockholders of Parent or shareholders of the Company or at the time of the Parent Stockholders Meeting or the Company Shareholders Meeting, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statements made therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Parent Stockholders Meeting or the Company Shareholders Meeting which has become false or misleading. If at any time prior to the Parent Stockholders Meeting or the Company Shareholders Meeting any event relating to Parent or any of its respective affiliates, officers or directors should be discovered by Parent which should be set forth in an amendment to the 38 Registration Statement or a supplement to the Proxy Statement/Prospectus, Parent shall promptly inform the Company. The Registration Statement shall comply in all material respects as to form and substance with the requirements of the Securities Act, the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, Parent makes no representation or warranty with respect to any information supplied by the Company which is contained in any of the foregoing documents. SECTION 4.18 YEAR 2000 COMPLIANCE . (a) All of (i) the internal systems used in the business or operations of Parent and its Subsidiaries, including without limitation computer hardware systems, software, applications, firmware, equipment containing embedded microchips and other embedded systems and (ii) the software, hardware, firmware and other technology that constitute part of the products and services manufactured, marketed, licensed or sold by Parent or any of its Subsidiaries to third parties are Year 2000 Compliant. (b) To Parent's knowledge, all third-party systems used in connection with the business, products, services or operations of Parent or any of its Subsidiaries, including without limitation any system belonging to any of Parent's or its Subsidiaries' vendors, co-venturers, service providers or customers are Year 2000 Compliant. Parent and its Subsidiaries have received satisfactory written assurances and warranties from all of their respective vendors, co-venturers, service providers and customers that are material to the ongoing operation of the business of Parent and its Subsidiaries that past and future products, software, equipment, components or systems provided by such parties are (or in the case of future products, will be) Year 2000 Compliant. (c) Parent has conducted "year 2000" audits with respect to (i) each of the internal systems used in the business, products, services and operations of Parent and its Subsidiaries, including without limitation computer hardware systems, software, applications, firmware, equipment containing embedded microchips and other embedded systems and (ii) all of the software, applications, hardware, firmware and other technology which constitute part of the products and services manufactured, marketed, performed or sold by Parent or any of its Subsidiaries or licensed by Parent or any of its Subsidiaries to third parties. Parent has obtained "year 2000" certifications with respect to all material third-party systems used in connection with the business or operations of Parent and its Subsidiaries, including without limitation systems belonging to the vendors, co-venturers, service providers and customers of Parent of any or its Subsidiaries. Parent has made available to the Company true, complete and correct copies of all "year 2000" audits, certifications, reports and other similar documents that have been prepared or performed by or on 39 behalf of Parent or any third party with respect to the systems, business, operations, products or services of Parent or any of its Subsidiaries. (d) Neither Parent nor any of its Subsidiaries has provided any representation, warranty or guarantee for any product sold or licensed, or service provided, by Parent or its Subsidiaries to the effect that such product or service (i) complies with or accounts for the fact of the year change from December 31, 1999 to January 1, 2000, (ii) will not be adversely affected with respect to functionality, interoperability, connectivity, performance, reliability or volume capacity (including without limitation the processing storage, recall and reporting of data) by the passage of any date, including without limitation the year change from December 31, 1999 to January 1, 2000 or (iii) is otherwise Year 2000 Compliant. SECTION 4.19 BROKERS . No broker, finder or investment banker (other than U.S. Bancorp Piper Jaffray Inc. whose brokerage, finder's or other fee will be paid by Parent) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent. SECTION 4.20 OWNERSHIP OF MERGER SUB; NO PRIOR ACTIVITIES . As of the date hereof and as of the Effective Time, except for obligations or liabilities incurred in connection with its incorporation or organization and the transactions contemplated by this Agreement and except for this Agreement and any other agreements or arrangements contemplated by this Agreement, Merger Sub has not and will not have incurred, directly or indirectly, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. SECTION 4.21 POOLING; TAX MATTERS . Neither Parent nor any of its affiliates has taken or agreed to take any action or failed to take any action, or has any reason to believe that any conditions exist, that would prevent (a) Parent from accounting for the business combination to be effected by the Merger as a pooling of interests or (b) the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code. SECTION 4.22 AFFILIATES. Section 4.22 of the Parent Disclosure Schedule contains a true, complete and correct list of all persons who, as of the date hereof, to the best knowledge of Parent, may be deemed to be affiliates of Parent excluding all its Subsidiaries but including all directors and executive officers of Parent. 40 ARTICLE V CONDUCT OF BUSINESS SECTION 5.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER . The Company covenants and agrees that, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, unless Parent shall otherwise agree in writing or in accordance with Section 6.2(b), the Company shall conduct its business and shall cause the businesses of its Subsidiaries to be conducted only in, and the Company and its Subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice and in compliance in all material respects with all applicable laws and regulations; and the Company shall use commercially reasonable best efforts to preserve substantially intact the business organization of the Company and its Subsidiaries, to keep available the services of the current officers, employees and consultants of the Company and its Subsidiaries and to preserve the present relationships of the Company and its Subsidiaries with customers, suppliers and other persons with which the Company or any of its Subsidiaries has significant business relations. By way of amplification and not limitation, except (x) as set forth in Section 5.1 of the Company Disclosure Schedule, (y) as contemplated by this Agreement or (z) in accordance with Section 6.2(b), the Company shall not and shall not permit its Subsidiaries to, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of Parent: (a) amend or otherwise change the Company Charter, Company By-Laws or any Subsidiary Document; (b) issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including, without limitation, any phantom interest) in the Company or any of its Subsidiaries, other than Company Common Stock pursuant to the exercise of (x) options currently outstanding, under the Company Stock Option Plans or the Company ESPP, in each case, in accordance with their current terms, (y) the Other Company Options in accordance with their current terms or (z) the warrants in accordance with their current terms; (c) sell, pledge, dispose of or encumber any assets of the Company or any of its Subsidiaries (except for sales of assets in the ordinary course of business and in a manner consistent with past practice); 41 (d) (i) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, except that a wholly owned Subsidiary of the Company may declare and pay a dividend to its parent, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) amend the terms or change the period of exercisability of, purchase, repurchase, redeem or otherwise acquire, or permit any Subsidiary to purchase, repurchase, redeem or otherwise acquire, any of its securities or any securities of its Subsidiaries, or any option, warrant or right, directly or indirectly, to acquire any such securities, or propose to do any of the foregoing, other than Company Common Stock pursuant to the exercise of options currently outstanding, under the Company Stock Option Plans or the Company ESPP, in each case, in accordance with their current terms, (y) the Other Company Options in accordance with their current terms or (z) the warrants in accordance with their current terms; (e) (i) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans or advances or capital contributions to or investments in any other person, except in the ordinary course of business and consistent with past practice; (iii) enter into or amend any material contract or agreement, or enter into, renew, amend or terminate any lease relating to real property; or (iv) authorize any capital expenditures or purchase of fixed assets which are, in the aggregate, in excess of $100,000 for the Company and its Subsidiaries taken as a whole; (f) except as disclosed in Section 5.1(f) of the Company Disclosure Schedule, increase the compensation payable or to become payable to its directors, officers or employees (except such increases payable to non-officer employees made in the ordinary course of business consistent with past practice), grant any severance or termination pay to, or enter into or amend any employment or severance agreement with, any director, officer or other employee of the Company or any of its Subsidiaries, establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any current or former directors, officers or employees, pay any bonuses to any officer of the Company, materially change any actuarial assumption or other assumption used to calculate funding obligations with respect to any pension or retirement plan, or change the manner in which contributions to any such plan are made or the basis on which such contributions are determined; 42 (g) take any action to change accounting policies or procedures (including, without limitation, procedures with respect to revenue recognition, payments of accounts payable and collection of accounts receivable), except as required by GAAP; (h) make any Tax election or settle or compromise any Tax liability or agree to an extension of a statute of limitations or file any amended Tax Returns or claims for refund; (i) except for the settlement of existing lawsuits disclosed in Section 5.1(i) of the Company Disclosure Schedule solely in exchange for the payment of not more than $50,000 per lawsuit (and $100,000 in the aggregate for all such lawsuits) in cash, pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in the financial statements contained in the Company SEC Reports filed prior to the date of this Agreement or incurred in the ordinary course of business and consistent with past practice; or (j) take, or agree in writing or otherwise to take, any of the actions described in Sections 5.1(a) through (i) above, or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue or incorrect or prevent the Company from performing or cause the Company not to perform its covenants hereunder, in each case, such that the conditions set forth in Sections 7.2(a) or 7.2(b), as the case may be, would not be satisfied. SECTION 5.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER . Parent covenants and agrees that, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, unless the Company shall otherwise agree in writing, Parent shall conduct its business and shall cause the businesses of its Subsidiaries to be conducted only in the ordinary course of business and in compliance in all material respects with all applicable laws and regulations; and Parent shall use commercially reasonable best efforts to preserve substantially intact the business organization of Parent and its Subsidiaries, to keep available the services of the current officers, employees and consultants of Parent and its Subsidiaries and to preserve the present relationships of Parent and its Subsidiaries with customers, suppliers and other persons with which Parent or any of its Subsidiaries has significant business relations. SECTION 5.3 ADVICE OF CHANGES . Parent and the Company shall promptly advise the other party orally and in writing to the extent it has knowledge of (i) any representation or warranty made by it (and, in the case of Parent, made by 43 Merger Sub) contained in this Agreement becoming untrue or inaccurate in any material respect, (ii) the failure by it (and, in the case of Parent, by Merger Sub) to comply in any material respect with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement and (iii) any change or event having, or which could reasonably be expected to have, a Company Material Adverse Effect or a Parent Material Adverse Effect, as the case may be, on such party or the ability for the conditions set forth in Article VII to be satisfied; PROVIDED, HOWEVER, that no such notification shall affect in any manner the representations, warranties, covenants or agreements of the parties (or remedies with respect thereto) or any matter set forth in the Company Disclosure Schedule, the Parent Disclosure Schedule or the conditions to the obligations of the parties under this Agreement. SECTION 5.4 COOPERATION . Subject to compliance with applicable law, from the date hereof until the Effective Time, (a) representatives of the Company shall confer on a regular and frequent basis with one or more representatives of Parent to discuss operational matters that are material and the general status of ongoing operations and (b) each of Parent and the Company shall promptly provide the other party or its counsel with copies of all filings made by such party with any Governmental Entity in connection with this Agreement, the Merger and the transactions contemplated hereby and thereby. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.1 ACCESS TO INFORMATION; CONFIDENTIALITY . (a) The Company shall (and shall cause its Subsidiaries and its and their respective officers, directors, employees, auditors and agents to) afford to Parent and to Parent's officers, employees, financial advisors, legal counsel, accountants, consultants and other representatives access during normal business hours throughout the period prior to the Effective Time to all of its books and records and its properties, plants and personnel and, during such period, the Company shall furnish promptly to Parent a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal securities laws, provided that no investigation pursuant to this Section 6.1(a) shall affect any representations or warranties made herein or the conditions to the obligations of the respective parties to consummate the Merger. (b) Parent shall (and shall cause its Subsidiaries and its and their respective officers, directors, employees, auditors and agents to) afford to the Company and to the Company's officers, employees, financial advisors, legal 44 counsel, accountants, consultants and other representatives access during normal business hours throughout the period prior to the Effective Time to all of its books and records and its properties, plants and personnel and, during such period, Parent shall furnish promptly to the Company a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal securities laws, provided that no investigation pursuant to this Section 6.1(b) shall affect any representations or warranties made herein or the conditions to the obligations of the respective parties to consummate the Merger. (c) Unless otherwise required by law, each party agrees that it (and its Subsidiaries and its and their respective representatives) shall hold in confidence all non-public information acquired in accordance with the terms of the Mutual Agreement of Confidentiality dated November 11, 1999 between Parent and the Company (the "Confidentiality Agreement"); provided, however, that the termination date of the Confidentiality Agreement is hereby extended to June 30, 2000. SECTION 6.2 NO SOLICITATION . (a) From and after the date of this Agreement until the earlier of the termination of this Agreement in accordance with its terms or the Effective Time, the Company and its Subsidiaries and affiliates shall not, directly or indirectly, through any officer, director, employee, advisor, financial advisor, representative or agent (and it shall cause such officers, directors, employees, advisors, financial advisors, representatives and agents not to, directly or indirectly), (i) solicit, initiate, facilitate or encourage any inquiries or proposals that constitute, or could be expected to lead to, an Acquisition Proposal or (ii) engage in negotiations or discussions concerning, or provide any non-public information with respect to the Company and its Subsidiaries to any person making or proposing to make, any Acquisition Proposal; PROVIDED, HOWEVER, that if, at any time prior to the date of the Company Shareholders Meeting, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, the Company may, in response to an unsolicited Acquisition Proposal, and subject to the Company's compliance with Section 6.2(c), (x) furnish information with respect to the Company and its Subsidiaries to any person making such Acquisition Proposal pursuant to a confidentiality agreement containing terms no less favorable to the Company than the Confidentiality Agreement and (y) participate in discussions or negotiations regarding such Acquisition Proposal. (b) From and after the date of this Agreement until the earlier of the termination of this Agreement in accordance with its terms or the Effective Time, neither the Board of Directors of the Company nor any committee thereof shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse 45 to Parent, the approval or recommendation by such Board of Directors or such committee of the Company Voting Proposal, (ii) approve or recommend, or propose publicly to approve or recommend, any Acquisition Proposal, or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or similar agreement related to any Acquisition Proposal; PROVIDED, HOWEVER, that if, at any time prior to the date of the Company Shareholders Meeting, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, the Board of Directors of the Company may, in response to an unsolicited Superior Proposal, and subject to the Company's compliance with Section 6.2(c), (x) take any action prohibited by clause (i) of this sentence or (y) if prior to taking any action prohibited by clauses (ii) or (iii) of this sentence the Company terminates this Agreement pursuant to Section 8.1(g) and pays to Parent all amounts due Parent in connection with such termination pursuant to Sections 8.3(b) and (c) in accordance therewith, take any action prohibited by clauses (ii) or (iii) of this sentence. For purposes of this Agreement, "Acquisition Proposal" means any inquiry, proposal or offer from any person relating to any direct or indirect acquisition or purchase of a business that constitutes 15% or more of the net revenues, net income or the assets of the Company and its Subsidiaries, taken as a whole, or 15% or more of any class of equity securities of the Company or any of its Subsidiaries, any tender offer or exchange offer that if consummated would result in any person beneficially owning 15% or more of any class of equity securities of the Company or any of its Subsidiaries, or any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company or any of its Subsidiaries, other than the transactions contemplated by this Agreement. For purposes of this Agreement, a "Superior Proposal" means any proposal made by a third party to acquire, directly or indirectly, including pursuant to a tender offer, exchange offer, merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction, for consideration consisting of cash or securities, more than 50% of the combined voting power of the shares of Company Common Stock then outstanding or all or substantially all the assets of the Company and otherwise on terms which the Board of Directors of the Company determines in its good faith judgment (based on the advice of a financial advisor of nationally recognized reputation, including First Security Van Kasper) to be more favorable to the Company's shareholders than the Merger and for which financing, to the extent required, is then committed. (c) The Company, its Subsidiaries and affiliates (and their respective officers, directors, employees, advisors, financial advisors, representatives and agents) shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any person (other than Parent or its representatives) conducted heretofore with respect to any Acquisition Proposal. The Company shall 46 notify Parent immediately after receipt by the Company (or its counsel, advisors or agents) of any Acquisition Proposal or any request for nonpublic information in connection with an Acquisition Proposal or for access to the properties, books or records of the Company or any of its Subsidiaries by any person or entity that informs the Company that it is considering making, or has made, an Acquisition Proposal. Such notice to Parent shall be made orally and in writing and shall indicate in detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. The Company shall keep Parent informed of all developments and the status of any Acquisition Proposal, any negotiations or discussions with respect to any Acquisition Proposal or any request for nonpublic information in connection with any Acquisition Proposal or for access to the properties, books or records of the Company or any of its Subsidiaries by any person or entity that is considering making, or has made, an Acquisition Proposal. The Company shall give Parent five business days advance notice of its intention to exercise its rights under the proviso to (i) Section 6.2(a) specifying the material terms and conditions of the Acquisition Proposal with respect to which it intends to exercise such rights and identifying the person making such Acquisition Proposal, or (ii) Section 6.2(b) specifying the material terms and conditions of the Superior Proposal with respect to which it intends to exercise such rights and identifying the person making such Superior Proposal. The Company shall provide Parent with (i) copies of all documents received from any person or entity that is considering making or has made an Acquisition Proposal and (ii) copies of all documents to be delivered or sent to any person or entity that is considering making or has made an Acquisition Proposal. (d) Nothing contained in this Section 6.2 shall prohibit the Company from taking and disclosing to its shareholders a position with respect to a tender or exchange offer by a third party contemplated by Rule 14d-9 or 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's shareholders if, in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, failure so to disclose would be inconsistent with its obligations under applicable law; PROVIDED, HOWEVER, that, except as expressly provided in Sections 6.2(b) and 6.4, neither the Company nor its Board of Directors nor any committee thereof shall withdraw or modify, in a manner adverse to Parent, or propose publicly to withdraw or modify, in a manner adverse to Parent, its position with respect to the Company Voting Proposal or approve or recommend, or propose publicly to approve or recommend, an Acquisition Proposal. 47 SECTION 6.3 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT . (a) As promptly as practicable after execution of this Agreement, Parent and the Company shall in consultation with each other prepare, and shall file with the SEC, preliminary joint proxy materials which shall constitute the Proxy Statement/Prospectus. As promptly as practicable after comments are received from the SEC thereon and after the furnishing by the Company and Parent of all information required to be contained therein, (i) Parent and the Company shall file with the SEC the Proxy Statement/Prospectus and (ii) Parent shall file with the SEC the Registration Statement. The Company and Parent shall use all reasonable efforts to cause the Registration Statement to become effective as soon thereafter as practicable. (b) The Company shall use all reasonable efforts to mail the Proxy Statement/Prospectus to the shareholders of the Company and Parent shall use all reasonable efforts to mail the Proxy Statement/Prospectus to the stockholders of Parent as soon as practicable after the Registration Statement is declared effective by the SEC. (c) The Company shall furnish Parent with all information concerning the Company and the holders of its capital stock and shall take such other action as Parent may request pursuant to this Agreement in connection with the Registration Statement and the issuance of the shares of Parent Common Stock. (d) The Company and Parent shall make any necessary filing with respect to the Merger under the Securities Act and the Exchange Act and the rules and regulations thereunder. 48 SECTION 6.4 SHAREHOLDERS' AND STOCKHOLDERS' MEETINGS . (a) The Company shall, subject to and in accordance with applicable law and the Company Charter and Company By-Laws, promptly and duly call, give notice of, convene and hold the Company Shareholders Meeting to be held as promptly as practicable following the date upon which the Registration Statement becomes effective for the purpose of voting on the Company Voting Proposal. The Company will, through its Board of Directors, recommend to its shareholders the approval of the Company Voting Proposal and the other transactions contemplated, which recommendation shall be included in the Proxy Statement/Prospectus, and will use its best efforts to solicit from its shareholders proxies in favor of the Company Voting Proposal; PROVIDED, HOWEVER, that the Board of Directors of the Company may withdraw or modify, in a manner adverse to Parent, such recommendation (i) if a Superior Proposal has been made and remains in effect, then if the Board of Directors of the Company is permitted to do so under Section 6.2(b) or (ii) if no Acquisition Proposal or Superior Proposal has been made, then if, at any time prior to the date of the Company Shareholders Meeting, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's stockholders under applicable law. (b) At or prior to the Closing, the Company shall deliver to Parent a certificate of its Corporate Secretary setting forth the voting results from the Company Shareholders Meeting. (c) Parent shall, subject to and in accordance with applicable law and the Parent Charter and Parent By-Laws, promptly and duly call, give notice of, convene and hold the Parent Stockholders Meeting to be held as promptly as practicable following the date upon which the Registration Statement becomes effective for the purpose of voting on the Parent Stockholder Proposal. Parent will, through its Board of Directors, recommend to its stockholders the approval of the Parent Voting Proposal and will use its best efforts to solicit from its stockholders proxies in favor of the Parent Voting Proposal. In addition to a proposal that four of its five existing directors be reelected to it's Board of Directors, Parent will include in the Proxy Statement/Prospectus, a proposal that Mark Housley and Carl Rosendahl be elected to it's Board of Directors, effective as of the Effective Time. Management of Parent shall recommend to the Board of Directors of Parent that Parent include in the Proxy Statement/Prospectus a proposal to increase the number of shares reserved for issuance under the Parent's Stock Option Plan by an amount to be determined by the management of Parent to be prudent under the circumstances. 49 (d) At or prior to the Closing, Parent shall deliver to the Company a certificate of its Corporate Secretary setting forth the voting results from the Parent Stockholders Meeting. SECTION 6.5 LEGAL CONDITIONS TO MERGER . Each of Parent and, subject to Section 6.2, the Company will use its commercially reasonable best efforts to comply promptly with all legal requirements which may be imposed with respect to the Merger (which actions shall include, without limitation, furnishing all information required under the HSR Act and in connection with approvals of or filings with any other Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their Subsidiaries in connection with the Merger. Each of Parent and the Company will, and will cause its Subsidiaries to, take all actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity required to be obtained or made by Parent, the Company or any of their Subsidiaries in connection with the Merger or taking of any action contemplated thereby or by this Agreement. SECTION 6.6 AGREEMENTS WITH RESPECT TO AFFILIATES . (a) The Company will use its commercially reasonable best efforts to cause each person who is identified in Section 3.28 of the Company Disclosure Schedule and any other person who may be or become an "affiliate" of the Company as of the time of the Company Shareholders Meeting for purposes of (i) Rule 145 under the Securities Act ("Rule 145") or (ii) qualifying the merger for pooling of interests accounting treatment under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations to deliver to Parent, as soon as practicable but not later than thirty days preceding the Effective Time, a written agreement (a "Company Affiliate Agreement") in connection with restrictions on affiliates under Rule 145 and pooling of interests accounting treatment, substantially in the form of EXHIBIT B hereto. The Company shall provide prompt notice to Parent of any such other person who may be or become an "affiliate" of the Company as of the time of the Company Shareholders Meeting who is not identified in Section 3.28 of the Company Disclosure Schedule. (b) Parent will use its commercially reasonable best efforts to cause each person who is identified in Section 4.22 of the Parent Disclosure Schedule and any other person who may be or become an "affiliate" of Parent as of the time of the Parent Stockholders Meeting for purposes of qualifying the merger for pooling of interests accounting treatment under Opinion 16 of the Accounting Principles Board 50 and applicable SEC rules and regulations to deliver to the Company, as soon as practicable but not later than thirty days preceding the Effective Time, a written agreement (a "Parent Affiliate Agreement") in connection with restrictions on affiliates under pooling of interests accounting treatment, substantially in the form of EXHIBIT C hereto. Parent shall provide prompt notice to the Company of any such other person who may be or become an "affiliate" of Parent as of the time of the Parent Stockholders Meeting who is not identified in Section 4.22 of the Parent Disclosure Schedule. SECTION 6.7 TAX-FREE REORGANIZATION . Parent and the Company intend that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. Parent and the Company shall each use its commercially reasonable best efforts to cause the Merger to so qualify. Neither Parent nor the Company shall knowingly take any action, or knowingly fail to take any action, that could jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. SECTION 6.8 POOLING ACCOUNTING . Parent and the Company shall each use its commercially reasonable best efforts to cause the business combination to be effected by the Merger to be accounted for as a pooling of interests for accounting purposes. Neither Parent nor the Company shall knowingly take any action, or knowingly fail to take any action, that could jeopardize the treatment of the Merger as a pooling of interests for accounting purposes. Each of Parent and the Company agrees to take such commercially reasonable action as may be required to negate the impact of any past actions which to its knowledge could jeopardize the treatment of the Merger as a pooling of interests for accounting purposes. SECTION 6.9 LETTERS OF ACCOUNTANTS . (a) Parent shall use its commercially reasonable best efforts to cause to be delivered to the Company (i) a copy of a letter of Arthur Andersen LLP, Parent's independent auditors, dated a date within two business days before the date on which the Registration Statement shall become effective, in form and substance satisfactory to Parent and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement, which letter shall be brought down to the Effective Time and (ii) the letter of Arthur Andersen LLP referred to in Section 7.1(h). (b) The Company shall use its commercially reasonable best efforts to cause to be delivered to Parent (i) a copy of a letter of Ernst & Young LLP, the Company's independent auditors, dated a date within two business days before the date on which the Registration Statement shall become effective, in form and substance satisfactory to Parent and customary in scope and substance for letters delivered by independent public accountants in connection with registration 51 statements similar to the Registration Statement, which letter shall be brought down to the Effective Time and (ii) the letter of Ernst & Young LLP referred to in Section 7.1(h). SECTION 6.10 PUBLIC ANNOUNCEMENTS . Parent and the Company shall consult with each other before issuing any press release or making any public statement with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement without the prior written consent of the other party, which shall not be unreasonably withheld or delayed; PROVIDED, HOWEVER, that a party may, without the prior consent of the other party, issue such press release or make such public statement as may upon the advice of counsel be required by law or the rules and regulations of the NASDAQ if it has used all reasonable efforts to consult with the other party prior thereto. SECTION 6.11 LISTING OF PARENT SHARES . Parent shall use its commercially reasonable best efforts to have authorized for listing on the NASDAQ, upon official notice of issuance, the shares of Parent Common Stock to be issued in the Merger. SECTION 6.12 OPTIONS . As of the Effective Time, each option to acquire shares of Company Common Stock (each, a "Company Option") other than options issued pursuant to the Radius, Inc. Directors' Stock Option Plan (all of which ACCELERATE AND WILL BE EXERCISED OR WILL expire pursuant to their existing terms as of the Effective Time) shall become and represent an option to purchase (i) the number of shares of Parent Common Stock (a "Parent Option") determined by multiplying (x) the number of shares of Company Common Stock which would have been purchasable pursuant to such Company Option by (y) the Exchange Ratio (with the result rounded up to the nearest whole share) (ii) at an exercise price per share of Parent Common Stock equal to the exercise price per share of Company Common Stock subject to the Company Option divided by the Exchange Ratio (with the result rounded to the nearest whole cent); provided, however, that in the case of any Company Option to which Section 421 of the Code applies by reason of its qualification as an incentive stock option under Section 422 of the Code, the conversion formula shall be adjusted if necessary to comply with Section 424(a) of the Code. After the Effective Time, (i) each Parent Option shall be exercisable upon the same terms and conditions as were applicable to the related Company Option immediately prior to the Effective Time and (ii) Parent shall promptly file a Registration Statement on Form S-8 with respect to the shares of Parent Common Stock issuable with respect thereto and shall use its commercially reasonable best efforts to list such shares with the NASDAQ. Prior to the Effective Time, the Company shall take all necessary and appropriate action to effectuate the provisions of this Section 6.12. 52 SECTION 6.13 CONSENTS . The Company shall use its commercially reasonable best efforts to obtain all necessary consents, waivers and approvals under any of the Company's material agreements, contracts, licenses or leases in connection with the Merger, including without limitation each of the consents listed in Section 3.5 of the Company Disclosure Schedule. SECTION 6.14 INDEMNIFICATION AND INSURANCE . (a) All rights to indemnification, advancement of litigation expenses and limitation of personal liability existing in favor of the directors, officers and employees of the Company and its Subsidiaries under the provisions existing on the date hereof in the Company Charter or Company By-Laws or in the indemnification agreements previously provided by the Company to Parent (collectively "Existing Indemnification Obligations") shall, with respect to any matter existing or occurring at or prior to the Effective Time (including the transactions contemplated by this Agreement), survive the Effective Time. Parent shall cause the Existing Indemnification Obligations to be assumed (by operation of law or otherwise) by any successor to the Surviving Corporation by merger or sale of all or substantially all assets and shall guarantee the performance of the Existing Indemnification Obligation by the Surviving Corporation (or any such successor) with respect to claims thereunder related to the transactions contemplated by this Agreement. (b) For a period of five years after the Effective Time, Parent shall cause the Surviving Corporation (or any successor of the Surviving Corporation by merger or sale of all or substantially all assets) to maintain in effect the current policies of directors' and officers' and fiduciary liability insurance maintained by the Company (provided that the Surviving Corporation may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are no less advantageous to former officers and directors of the Company) only with respect to claims arising from facts or events which occurred at or before the Effective Time; PROVIDED, HOWEVER, that in no event shall the Surviving Corporation (or any such successor) be required to expend pursuant to this Section 6.14(b) more than an aggregate amount equal to 125% the current aggregate annual premiums paid by the Company for such insurance (the "Maximum Amount") (which premiums the Company represents and warrants to be $117,000 in the aggregate). If the amount of the aggregate annual premiums necessary to maintain or procure such insurance coverage exceeds the Maximum Amount, the Surviving Corporation (or any such successor) during such five-year period shall maintain or procure as much coverage as possible for aggregate annual premiums not to exceed the Maximum Amount and shall promptly send a letter to the persons listed in Section 6.14(b) of the Company Disclosure Schedule notifying them of such occurrence. SECTION 6.15 ADDITIONAL AGREEMENTS; BEST EFFORTS . Subject to the terms and conditions of this Agreement, each of the parties agrees to use its commercially 53 reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. ARTICLE VII CONDITIONS TO THE MERGER SECTION 7.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER . The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose and no similar proceeding in respect of the Proxy Statement/Prospectus shall have been initiated or threatened by the SEC; (b) SHAREHOLDER APPROVAL. The Company Voting Proposal shall have been approved and adopted by the requisite vote of the shareholders of the Company; (c) HSR ACT AND OTHER APPROVALS. The waiting period applicable to the consummation of the Merger under the HSR Act and under any other legal requirement (including without limitation any authorization, consent, order or approval, or dedication, filing or expiration of any waiting period) of any Governmental Entity shall have expired or been terminated, as the case may be, and any requirements of other jurisdictions applicable to the consummation of the Merger shall have been satisfied; (d) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by any administrative agency or commission or other Governmental Entity seeking any of the foregoing be pending; and there shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger which makes the consummation of the Merger illegal; (e) TAX OPINIONS. (i) Parent shall have received an opinion of its counsel, Skadden, Arps, Slate, Meagher & Flom LLP, in form and substance 54 reasonably satisfactory to Parent, dated as of the Effective Time, substantially to the effect that for U.S. federal income tax purposes the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code, (ii) the Company shall have received an opinion of its counsel, Fenwick & West LLP, in form and substance reasonably satisfactory to the Company, dated as of the Effective Time, substantially to the effect that for U.S. federal income tax purposes the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code, and (iii) the issuance of the opinions described in clauses (i) and (ii) of this paragraph shall be conditioned upon the receipt by counsel for Parent and the Company of representation letters from each of Parent, Merger Sub and Company, in each case, in form and substance reasonably satisfactory to both of such counsel; (f) GOVERNMENTAL ACTIONS. There shall not be pending or threatened any action or proceeding (or any investigation or other inquiry that might result in such an action or proceeding) by any Governmental Entity or administrative agency before any Governmental Entity, administrative agency or court of competent jurisdiction, nor shall there be in effect any judgment, decree or order of any Governmental Entity, administrative agency or court of competent jurisdiction, in either case, seeking to prohibit or limit Parent from exercising all material rights and privileges pertaining to its ownership of the Surviving Corporation or the ownership or operation by Parent of all or a material portion of the business or assets of Parent, or seeking to compel Parent to dispose of or hold separate all or any portion of the business or assets of Parent (including the Surviving Corporation and its subsidiaries), as a result of the Merger or the transactions contemplated by this Agreement; (g) NASDAQ LISTING. The shares of Parent Common Stock issuable in the Merger shall have been authorized for listing on the NASDAQ upon official notice of issuance; (h) OPINION OF ACCOUNTANTS. Parent shall have received (and delivered to the Company copies of) a letter from Arthur Andersen LLP, dated a date within two business days of the Proxy Statement/Prospectus and within two business days of the Closing Date, stating that the business combination to be effected by the Merger will qualify as a pooling of interests transaction under generally accepted accounting principles. The Company shall have received (and delivered to Parent copies of) a letter from Ernst & Young LLP, dated a date within two business days of the Proxy Statement/Prospectus and within two business days of the Closing Date, stating that neither the Company nor any of its Subsidiaries has taken or agreed to take any action that (without giving effect to this Agreement, the transactions contemplated hereby, or any action taken or agreed to be taken by Parent or any of its Subsidiaries) would prevent Parent from accounting for the business combination to be effected by the Merger as a pooling of interests transaction under generally accepted accounting principles; and 55 (i) STOCKHOLDER APPROVAL. The Parent Voting Proposal shall have been approved and adopted by the requisite vote of the stockholders of Parent. SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB . The obligations of Parent and Merger Sub to effect the Merger are also subject to the following conditions: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the Company contained in this Agreement shall be true and correct, in each case as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except (x) for changes contemplated by this Agreement and (y) where the failures to be true and correct (without regard to any materiality, Company Material Adverse Effect or knowledge qualifications contained therein), individually or in the aggregate, have not had, and could not reasonably be expected to have, a Company Material Adverse Effect; and Parent and Merger Sub shall have received a certificate signed on behalf of the Company by the chief executive officer and chief financial officer of the Company to such effect; (b) AGREEMENTS AND COVENANTS. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Closing Date; and Parent and Merger Sub shall have received a certificate signed by the chief executive officer and the chief financial officer of the Company to such effect; (c) CONSENTS OBTAINED. All consents, waivers, approvals, authorizations and orders required to be obtained, and all filings required to be made, by the Company for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by the Company; and (d) AFFILIATE AGREEMENTS. Parent shall have received from each person within the time frame specified in Section 6.6(a) who is identified in Section 3.28 of the Company Disclosure Schedule or in any notice delivered by the Company to Parent pursuant to Section 6.6(a) as an "affiliate" of the Company, an Affiliate Agreement, and each such Affiliate Agreement shall be in full force and effect. SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY . The obligation of the Company to effect the Merger is also subject to the following conditions: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and 56 correct, in each case as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except (x) for changes contemplated by this Agreement, and, (y) where the failures to be true and correct (without regard to any materiality, Parent Material Adverse Effect or knowledge qualifications contained therein), individually or in the aggregate, have not had, and could not reasonably be expected to have, a Parent Material Adverse Effect; and the Company shall have received a certificate signed on behalf of the Company by the chief executive officer and chief financial officer of Parent to such effect; (b) AGREEMENTS AND COVENANTS. Parent and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing Date; and the Company shall have received a certificate signed by the chief executive officer and the chief financial officer of Parent to such effect; and (c) AFFILIATE AGREEMENTS. The Company shall have received from each person within the time frame specified in Section 6.6(b) who is identified in Section 4.22 of the Parent Disclosure Schedule or in any notice delivered by Parent to the Company pursuant to Section 6.6(b) as an "affiliate" of the Company, an Affiliate Agreement, and each such Affiliate Agreement shall be in full force and effect. ARTICLE VIII TERMINATION SECTION 8.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, notwithstanding approval thereof by the shareholders of the Company: (a) by mutual written consent duly authorized by the Boards of Directors of Parent and the Company; (b) by either Parent or the Company if the Merger shall not have been consummated by June 30, 2000 (the "Outside Date") (provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); (c) by either Parent or the Company if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission shall have issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger (provided that the party seeking to terminate pursuant to this Section 8.1(c) shall 57 have complied with its obligations under Section 6.5 and used its reasonable best efforts to have any such order, decree, ruling or other action vacated or lifted); (d) by either Parent or the Company, if at the Company Shareholders Meeting (including any adjournment or postponement), the requisite vote of the shareholders of the Company in favor of the Company Voting Proposal shall not have been obtained; (e) by Parent, if the Company shall have breached or failed to perform any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would cause the conditions set forth in Sections 7.2(a) or 7.2(b) to not be satisfied and which breach shall not have been cured within 10 business days following receipt by the Company of written notice of such breach from Parent; (f) by the Company, if Parent shall have breached or failed to perform any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would cause the conditions set forth in Sections 7.3(a) or 7.3(b), to not be satisfied and which breach shall not have been cured within 10 business days following receipt by Parent of written notice of such breach from the Company; (g) by the Company at any time prior to the date of the Company Shareholders Meeting if, in response to an unsolicited Superior Proposal, and, subject to the Company's compliance with Section 6.2(c), the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to terminate this Agreement in order to comply with its fiduciary duties to the Company's shareholders under applicable law; provided that any termination by the Company pursuant to this Section 8.1(g) shall not be effective unless and until the Company shall have paid to Parent all amounts due Parent in connection with such termination pursuant to Sections 8.3(b) and (c) in accordance therewith; (h) by Parent in the event of a breach of Section 6.2 or Section 6.4(a) or (b); (i) by Parent or the Company if, at the Parent Stockholders Meeting (including any adjournment or postponement thereof), the Parent Stockholder Proposal shall not have been approved ; (j) by Parent, if for any reason other than Parent's failure to perform its obligations under this Agreement the Company fails to call and hold the Company Shareholders Meeting by the date which is one business day prior to the Outside Date; or 58 (k) by the Company, if for any reason other than the Company's failure to perform its obligations under this Agreement Parent fails to call and hold the Parent Stockholders Meeting by the date which is one business day prior to the Outside Date. SECTION 8.2 EFFECT OF TERMINATION . In the event of the termination of this Agreement pursuant to Section 8.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto or any of its affiliates, directors, officers, stockholders or shareholders except (i) that the provisions of Sections 3.27, 4.19, 8.3, this Section 8.2 and Article IX shall survive termination and (ii) nothing herein shall relieve any party from liability for any breach hereof prior to such termination. SECTION 8.3 FEES AND EXPENSES . (a) Except as set forth in this Section 8.3, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Merger is consummated; PROVIDED, HOWEVER, that Parent shall bear all fees and expenses, other than the Company's financial advisor's, accountant's and attorneys' fees and expenses, incurred in connection with preparing the printing and filing of the Proxy Statement/Prospectus (including any preliminary materials related thereto), the Registration Statement (including financial statements and exhibits) and any amendments or supplements thereto and filings under the HSR Act. (b) The Company shall reimburse Parent for all fees and expenses of Parent (or in the case of clause (i) of this Section 8.3(b), up to $750,000 of fees and expenses of Parent) actually incurred relating to the transactions contemplated by this Agreement prior to termination (including without limitation fees and expenses of Parent's counsel, accountants and financial advisors), upon the termination of this Agreement (i) by Parent or the Company pursuant to Section 8.1(d) (if prior to such termination an Acquisition Proposal shall have been publicly announced or otherwise become publicly known or any person shall have publicly announced an intention (whether or not conditional) to make an Acquisition Proposal), or (ii) by Parent pursuant to Sections 8.1(e), 8.1(h) or 8.1(j) or (iii) by the Company pursuant to Section 8.1(g). (c) The Company shall pay Parent a termination fee of $1,620,000 (and in the case of termination of this Agreement pursuant to Section 8.1(d), the Company shall also reimburse Parent for all fees and expenses of Parent actually incurred relating to the transactions contemplated by this Agreement prior to termination in excess of the amount previously reimbursed pursuant to 8.3(b)) on the date of the first to occur of the following events: 59 (i) the entry by the Company into an agreement with respect to, or the consummation of, any Acquisition Proposal within six months of the termination of this Agreement pursuant to Sections 8.1(d), 8.1(e), 8.1(h) or 8.1(j) if prior to such termination an Acquisition Proposal shall have been publicly announced or otherwise become publicly known or any person shall have publicly announced an intention (whether or not conditional) to make an Acquisition Proposal; or (ii) the termination of this Agreement by the Company pursuant to Section 8.1(g). (d) Parent shall reimburse the Company for all fees and expenses of the Company actually incurred relating to the transactions contemplated by this Agreement prior to termination (including without limitation fees and expenses of the Company's counsel, accountants and financial advisors), upon the termination of this Agreement (i) by Parent or the Company pursuant to Section 8.1(i), or (ii) by the Company pursuant to Sections 8.1(f) or 8.1(k). (e) Parent and the Company each acknowledge that the agreements contained in this Section 8.3 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, the other party would not enter into this Agreement; accordingly, if Parent or the Company fails promptly to pay the amount due pursuant to this Section 8.3, and, in order to obtain such payment, the other party commences a suit which results in a judgment against Parent or the Company, as the case may be, for the fee set forth in this Section 8.3, Parent or the Company, as the case may be, shall pay to the other party its costs and expenses (including attorneys' fees and expenses) in connection with such suit, together with interest on the amount of the fee at the prime rate of Citibank, N.A. in effect on the date such payment was required to be made. ARTICLE IX GENERAL PROVISIONS SECTION 9.1 NONSURVIVAL OF REPRESENTATIONS; WARRANTIES AND AGREEMENTS . None of the representations, warranties or agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for the agreements contained in Articles I and II, Sections 6.12, 6.14 and 6.15, this Article IX and the Affiliate Agreements. SECTION 9.2 NOTICES . All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made if and when delivered personally or by overnight courier to the parties at the following addresses or sent by electronic transmission, with confirmation 60 received, to the telecopy numbers specified below (or at such other address or telecopy number for a party as shall be specified by like notice): (a) If to Parent or Merger Sub: 290 Donald Lynch Boulevard Marlborough, Massachusetts 01752-4748 Attention: Steven Shea Telecopier No.: (508) 303-4620 Telephone No.: (508) 303-4800 With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP One Beacon Street Boston, MA 02108 Attn: David Brewster, Esq. Telecopier No.: (617) 573-4822 Telephone No.: (617) 573-4825 (b) If to the Company: 460 E. Middlefield Road Mountain View, California 94043 Attention: Mark Housley Telecopier No.: (650) 404-6205 Telephone No.: (650) 404-6301 With a copy to: Fenwick & West LLP Two Palo Alto Square Palo Alto, CA 94306 Attention: Gordon Davidson, Esq. Telecopier No.: (650) 494-1417 Telephone No.: (650) 858-7237 SECTION 9.3 CERTAIN DEFINITIONS . For purposes of this Agreement, the term: 61 (a) "affiliate" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; including, without limitation, any partnership or joint venture in which the first mentioned person (either alone, or through or together with any other subsidiary) has, directly or indirectly, an interest of 5% or more; (b) "beneficial owner" with respect to any shares of Company Common Stock means a person who shall be deemed to be the beneficial owner of such shares (i) which such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 of the Exchange Act) beneficially owns, directly or indirectly, (ii) which such person or any of its affiliates or associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding, or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares; (c) "business day" means any day other than a Saturday or Sunday or any day on which banks in The Commonwealth of Massachusetts are required or authorized to be closed; (d) "control" including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; and (e) "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act). SECTION 9.4 AMENDMENT . This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; PROVIDED, HOWEVER, that, after approval of the Company Voting Proposal by the shareholders of the Company, no amendment may be made which by law requires further approval by such shareholders without such further approval. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 9.5 EXTENSION; WAIVER . At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may to the extent legally allowed, (a) extend the time for the performance 62 of any of the obligations or other acts of any other party hereto, (b) waive any inaccuracies in the representations and warranties of any other party hereto contained herein or in any document delivered pursuant hereto or (c) waive compliance with any of the agreements or conditions of any other party hereto contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. SECTION 9.6 HEADINGS . The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.7 SEVERABILITY . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. SECTION 9.8 ENTIRE AGREEMENT, NO THIRD PARTY BENEFICIARIES . This Agreement (including the documents and instruments referred to herein, including the Confidentiality Agreement) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and (b) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder, other than the persons intended to benefit from the provisions of Section 6.14, who shall have the right to enforce such provisions directly. SECTION 9.9 ASSIGNMENT . This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Merger Sub may assign all or any of their rights hereunder to any wholly owned subsidiary thereof; PROVIDED, HOWEVER, that no such assignment pursuant to this Section 9.9 shall relieve Parent of its obligations hereunder. SECTION 9.10 INTERPRETATION . When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." 63 SECTION 9.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE . No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 9.12 GOVERNING LAW . This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to the conflict of law provisions thereof, including that the Merger shall be effected in accordance with the applicable provisions of the CGCL. Each of the parties hereto agrees that any action or proceeding brought to enforce the rights or obligations of any party hereto under this Agreement will be commenced and maintained in any court of competent jurisdiction located in the State of California. Each of the parties hereto further agrees that process may be served upon it by certified mail, return receipt requested, addressed as more generally provided in Section 9.2, and consents to the exercise of jurisdiction of a court of the State of California over it and its properties with respect to any action, suit or proceeding arising out of or in connection with this Agreement or the transactions contemplated hereby or the enforcement of any rights under this Agreement. SECTION 9.13 COUNTERPARTS . This Agreement may be executed in two or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 64 IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. MEDIA 100 INC. By: ------------------------------------------ Name: Steven D. Shea Title: Vice President of Finance DERRINGER ACQUISITION CORP. By: ------------------------------------------ Name: Steven D. Shea Title: President and Secretary DIGITAL ORIGIN, INC. By: ------------------------------------------ Name: Mark Housley Title: Chairman and Chief Executive Officer 65 TABLE OF DEFINED TERMS
Cross Reference Terms in Agreement - ----- -------------- Acquisition Proposal Section 6.2(b) Affiliate Section 9.3(a) Affiliated Group Section 3.15(a) Affiliated Return Section 3.15(a) Agreement Preamble Beneficial Owner Section 9.3(b) Business Day Section 9.3(c) Certificates Section 2.1(a) CGCL Preamble Closing Section 1.6 Closing Date Section 1.6 Code Preamble Common Shares Trust Section 2.2(d)(ii) Company Preamble Company Affiliate Agreement Section 6.6(a) Company Balance Sheet Section 3.6(b) Company By-Laws Section 3.2 Company Charter Section 3.2 Company Common Stock Section 2.1 Company Disclosure Schedule Article III Company ESPP Section 2.1(e) Company Intellectual Property Rights Section 3.17(a) Company Material Adverse Effect Section 3.1 Company Merger Documents Section 3.4 Company Option Section 6.12 Company Permits Section 3.11(b) 66 Company Plans Section 3.12(a) Company Preferred Stock Section 3.3(a) Company SEC Reports Section 3.6(a) Company Shareholders Meeting Section 3.20 Company Stock Option Plans Section 2.1(e) Company Voting Proposal Section 3.4 Company Warrants Section 2.1(b) Confidentiality Agreement Section 6.1(c) Control Section 9.3(d) DGCL Preamble Dissenting Shares Section 2.1(c) Effective Time Section 1.2 Environmental Claim Section 3.16(e) Environmental Laws Section 3.16(f) ERISA Section 3.12(a) ERISA Affiliate Section 3.12(a) Excess Shares Section 2.2(a)(ii) Exchange Act Section 3.5(b) Exchange Agent Section 2.2(a) Exchange Ratio Section 2.1(a) Existing Indemnification Obligations Section 6.14(a) GAAP Section 3.6(b) Governmental Entity Section 3.5(b) Hazardous Materials Section 3.16(g) HSR Act Section 3.5(b) Liens Section 3.3(a) Material Contract Section 3.10(b) Maximum Amount Section 6.14(b) Merger Preamble Merger Agreement Section 1.2 67 Merger Consideration Section 2.1(a) Merger Sub Preamble Merger Sub Common Shares Section 2.1(d) NASDAQ Section 2.2.(d)(ii) Other Company Options Section 2.1(e) Outside Date Section 8.1(b) Parent Preamble Parent Affiliate Agreement Section 6.6(b) Parent Affiliated Group Section 4.14(a) Parent Affiliated Return Section 4.14(a) Parent Balance Sheet Section 4.7 Parent By-Laws Section 4.2 Parent Charter Section 4.2 Parent Common Stock Section 2.1(a) Parent Disclosure Schedule Article IV Parent ERISA Affiliate Section 4.11(a) Parent Intellectual Property Rights Section 4.16(a) Parent Material Adverse Effect Section 4.1 Parent Merger Documents Section 4.4 Parent Option Section 6.12 Parent Plans Section 4.11(a) Parent Preferred Stock Section 4.3(a) Parent SEC Reports Section 4.6(a) Parent Stockholders' Meeting Section 3.20 Parent Voting Proposal Section 4.4 Person Section 9.3(e) Proxy Statement/Prospectus Section 3.20 Registration Statement Section 3.5(b) Release Section 3.16(h) Rule 145 Section 6.6(a) 68 SEC Section 3.5(b) Securities Act Section 3.5(b) Subsidiary Section 3.1 Subsidiary Documents Section 3.2 Superior Proposal Section 6.2(b) Surviving Corporation Section 1.1 Tax Returns Section 3.15(e) Tax/Taxes Section 3.15(e) Year 2000 Compliant Section 3.23(e)
69 - ------------------ COMPARISON OF FOOTERS ------------------ - -FOOTER 1- 159001.08-Boston S1A - -FOOTER 2- Footer Discontinued 70 EX-10.14 3 EXHIBIT 10.14 EXHIBIT 10.14 OEM DEVELOPMENT AND LICENSE AGREEMENT WHEREAS, Media 100 develops and markets certain software and other computer-related products and services and desires to include Supplier's software product as a component of Media 100's product or services. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree to the following terms and conditions, which set forth the rights, duties, and obligations of the parties. 1. DEFINITIONS. The following terms, when used with initial capital letters in this Agreement, shall have the following definitions, unless the context in which the term is used expressly provides otherwise. "ACCEPTANCE CRITERIA" means a set of criteria (set forth in the Specifications) that will be used to judge whether a Deliverable meets the Specifications. "AFFILIATE" means with respect to any entity, any other entity controlling, controlled by or under common control of such entity. "APPLICATIONS PROGRAMMING INTERFACE" means the specifications of a Supplier Product which define the external programming interface between that Supplier Product and other Object Code. The Applications Programming Interface includes the elements of such programming interface that are directly exposed and recommended as mandatory to implement extension to that Supplier Product. "APPLICATIONS PROGRAMMING INTERFACE ITEMS" means the following set of items implementing the Applications Programming Interface: (a) System Documentation describing the Applications Programming Interface; (b) fully functional and tested Supplier Product (Object Code and System Documentation) designed for use on, and implementing the Applications Programming Interface; and (c) a fully functional and tested validation test suite and System Documentation describing the associated test procedures. "CONFIDENTIAL INFORMATION" means any information disclosed by one party to the other pursuant to this Agreement which is in written, graphic, machine readable or other tangible form and is marked "Confidential", "Proprietary", "Source Code", or in some other manner to indicate its confidential nature. Confidential Information may also include oral or visual information disclosed by one party to the other pursuant to this Agreement, provided that such information is designated as confidential at the time of disclosure and is reduced to writing by the disclosing party within a reasonable time (not to exceed thirty (30) calendar days) after its oral or visual disclosure, and such writing is marked in a manner to indicate its confidential nature and delivered to the receiving party. 1 "BUNDLED PRODUCT" means the combination of a Restricted Streaming Product and a Supplier Product being distributed to third parties in accordance with this Agreement. "CONTRACTOR" of a company means a person or group of persons (whether incorporated or not) providing services to that company as independent contractors. "DELIVERABLES" means the Supplier Product or any portion thereof to be delivered by the Supplier identified in Exhibits A and B. "DERIVATIVE WORKS" means a revision, modification, translation, abridgment, condensation or expansion of the Supplier Product or Documentation or any form in which the Supplier Product or Documentation may be recast, transferred, or adapted, which, if prepared without the consent of Supplier, would be a copyright infringement. "DISTRIBUTOR" means any third party which acquires possession of the Supplier Product from Media 100 and is not a Reseller or End User and distributes it to a Reseller. "DOCUMENTATION" means End User Documentation and System Documentation. "END USER DOCUMENTATION" means those software user manuals, reference manuals and installation guides, or portions thereof, which are distributed in conjunction with the Supplier Product including but not limited to those set forth in Exhibit C. "End User Documentation" excludes System Documentation. "SYSTEM DOCUMENTATION" means all user manuals and other written materials, including style guides, that relate to particular Source Code or Object Code, including without limitation materials useful for understanding, designing, developing, building, implementing, maintaining and operating Source Code or Object Code (for example, logic manuals, flow charts and principles of operation) and machine-readable text or graphic files subject to display or printout. "END USER" means an entity that acquires the Supplier Product for Internal Use and is not an affiliate of Media 100's enterprise. "End User" does not include an entity that distributes, resells, sells, licenses, rents or leases the Supplier Product to other parties in the regular course of business. "ERROR" means any mistake, problem or defect that causes either an incorrect functioning of code or an incorrect or incomplete statement or graphic in Documentation, if such mistake, problem or defect (a) renders the code inoperable, (b) causes the code to fail to meet the Specifications or Acceptance Criteria, (c) causes the Documentation to be inaccurate or inadequate in any material respect, (d) causes incorrect results, or (e) causes incorrect functions to occur. "EVENT OF BANKRUPTCY" with respect to a company means (a) the commencement by the company of a voluntary case under the United States Bankruptcy Code or under any similar law, (b) the commencement against the company of an involuntary case under the United States Bankruptcy Code or under any similar law if the case is not vacated within ninety calendar days, (c) the entry of a final order by a court of competent jurisdiction finding the company to be bankrupt or insolvent, ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its general creditors or assuming custody of or appointing a receiver or other custodian for all or a substantial 2 part of its property and such order shall not be vacated or stayed upon appeal or otherwise stayed within ninety calendar days or (d) the company making an assignment for the benefit of, or entering into a composition with, its creditors, or appointing or consenting to the appointment of a receiver or other custodian for all or a substantial part of its property. "INTERNAL USE" means use for purposes that do not directly produce revenue for the user. "MAJOR AND MINOR UPDATES" means updates, if any, to the Supplier Product. Major Updates involve additions of substantial functionality while Minor Updates do not. Major Updates are customarily designated by a change in the number to the left of the decimal point of the number appearing after the product name while Minor Updates are customarily designated by a change in such number to the right of the decimal point. Major Updates exclude software releases which are reasonably designated by Supplier as new products. Where used herein "Updates" shall mean Major Updates or Minor Updates interchangeably. "MARKS" means Supplier's trademarks, service marks, logos, designations and insignias. "MILESTONE SCHEDULE" means the schedule for delivery of Deliverables and payment therefor attached to this Agreement as Exhibit B. "MILESTONE" means the milestones set forth in the Milestone Schedule. "MEDIA 100 RELATED PERSONS" means Media 100 and Media 100's subsidiaries, and their respective directors, officers, employees, agents and Contractors. "MEDIA 100" means Media 100 Inc. "MONTH(S)" and "MONTHLY" refers to a calendar month. "OBJECT CODE" means any computer programming code that loads and executes without further processing by a software compiler or linker or that results when Source Code is processed by a software compiler. "RESELLER" means any third party which is not a Distributor but acquires the Supplier Product from Media 100 or an authorized Distributor and resells, licenses, rents, or leases to End Users. "RESTRICTED STREAMING PRODUCTS" means the Media Cleaner Product of Terran Interactive, Inc. (a subsidiary of Media 100), and any product which is reasonably a derivative or extension of such product; provided each such product shall be considered a "Restricted Streaming Product" only if it can ONLY produce streaming media output; for the purposes of this provision, products designed to or capable of output to physical media (such as video tape or DVD disk) or in "mini-DV" format shall not be considered to produce only streaming media output and thus not be "Restricted Streaming Products"; however, the ability to store a streaming media output on physical media shall not disqualify a product otherwise compliant from being a "Restricted Streaming Product". 3 "SALE," "SELL" and other similar terms, when used in connection with the marketing and distribution of the Supplier Product shall mean the granting of a license or sublicense and shall not be deemed for any purpose to mean a transfer of title or other rights of ownership to the Supplier Product, other than the rights to copy and use as specifically set out in this Agreement. "SOURCE CODE" means the human-readable form of programming code and related System Documentation, including all comments and any procedural language. Source Code does not include End User Documentation. "SPECIFICATIONS" mean specifications for the Supplier Product API necessary to ensure effective integration with the Restricted Streaming Products and as set forth in Exhibit B "SUBSIDIARY" of an entity means a corporation, company or other entity (a) more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are; or (b) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but more than fifty percent (50%) of whose ownership interest (representing the right to make decisions for such corporation, company or other entity) is; in each of (a) and (b) now or hereafter, owned or controlled, directly or indirectly, by the entity in question, as the case may be, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists. "SUPPLIER PRODUCT" means the Supplier's product identified in Exhibit A that Media 100 is authorized to sublicense, market and sell under this Agreement, including each of the Deliverables, if any. "SUPPLIER RELATED PARTY" means Supplier and Supplier's subsidiaries, Affiliates, directors, officers, employees, agents and Contractors. "SUPPLIER" means the company identified as such on the signature page to this Agreement. "SUPPORT SPECIFICATIONS" means the items set forth in Exhibit C. "TERM" means the term of this Agreement, as it may be extended or earlier terminated in accordance with Section 10. 2. DELIVERY OF DELIVERABLES; ACCEPTANCE. (a) DELIVERABLES. To the extent the Supplier Product or any part thereof is an existing product, then Supplier will deliver to Media 100 such existing materials in connection with the execution of this Agreement, and each Update thereto immediately upon such materials being released by Supplier, and Media 100 will make any payment specified in respect thereto as indicated in Exhibit A. These deliverables will be in object code form only. Despite the foregoing and except as provided by separate agreement, Major 4 Updates will not be supplied by Supplier after May 31, 2003 and no Updates will be delivered after Supplier terminates its general distribution of the Supplier Product. To the extent the Supplier Product consists of Deliverables to be created under this Agreement, Supplier will deliver to Media 100 the Deliverables in accordance with due dates for each set forth on the Milestone Schedule. Upon acceptance of each Deliverable pursuant to the provisions of this Section 2, Media 100 will make the payment specified on the Exhibit B - Milestone Schedule. These deliverables will be in object code form only. Supplier agrees that it will provide the Applications Programming Interface for the Supplier Product by delivery to Media 100 of the Applications Programming Interface Items together with such Supplier Product, and thereafter promptly following any changes made thereafter to such items. (b) CREATION OF MILESTONE SCHEDULE. As of the date of execution of this Agreement, Exhibit B - Milestone Schedule and Exhibit C -- specifications of API, are not completed. The parties will use all reasonable efforts to complete Exhibits B and C and attach them hereto as promptly as possible. In general, the parties expect that an alpha release of the API will be available in February 2000 and that the commercial release version of such product will be available no later than the anniversary of this Agreement. (c) ENGINEERING SUPPORT FOR DEVELOPMENT. Supplier will make available sufficient internal engineering support from its organization to ensure that the Supplier Product is commercially viable from a technical point of view, it being understood that the foregoing does not obligate Supplier to hire personnel not then employed at the Supplier, and is only a statement of allocation of resources, not a representation or promise that the Supplier Product will in fact be commercially viable. Appropriate Media100 engineering personnel will reasonably cooperate with Supplier's personnel. (d) REVIEW. Media 100 may conduct periodic reviews, including reviews at Supplier's premises to take place at a mutually convenient time, of the Supplier Product. At Media 100's reasonable request, Supplier will provide Media 100 with written reports regarding its work on the Supplier Product and with copies of any work in progress and related materials. (e) CHANGES TO THE SPECIFICATIONS. (i) Additional Specifications for the API may be agreed upon by the parties until Media 100's final acceptance of the Supplier Product. Media 100 acknowledges that significant changes to the Specifications may result in a change in the delivery time table. (ii) If any such modification of the Specifications by Media 100 does require Supplier's expenditure of significantly more time and effort, additional fees must be agreed upon in writing by the parties prior to implementation of modifications. (f) ACCEPTANCE OF SUPPLIER PRODUCT. 5 (i) Delivery will occur when Supplier delivers a testable Deliverable to Media 100 accompanied by a written statement listing the items delivered and stating that they are ready for Media 100's acceptance testing. Delivery of software will be via electronic transmission only, unless Media 100 gives Supplier written notice that such a Deliverable is to be delivered via another medium. Media 100, with the assistance of Supplier if requested by Media 100, will examine and test each Deliverable upon delivery to determine whether the Deliverable conforms to the Acceptance Criteria for the Deliverable. Within thirty (30) calendar days or such other number of days specified in the applicable Acceptance Criteria after such delivery, Media 100 will provide Supplier with written acceptance of such Deliverable or a specific and objective statement of Errors to be corrected prior to the next Milestone. (ii) Supplier will correct the Errors in any Deliverable set forth in the statement of Errors and redeliver the Deliverable to Media 100 within thirty (30) calendar days or such other number of days specified in the applicable Acceptance Criteria after receipt of the statement of Errors, and Media 100 will within fourteen (14) calendar days after such redelivery provide Supplier with written acceptance or another statement of Errors. The procedure set forth in this clause (ii) will be repeated until Media 100 accepts the Deliverable. (iii) If Media 100 fails to give a statement of Errors within the specified time, Media 100 will be deemed to have accepted the Deliverables as of the expiration of such specified time; provided that such acceptance shall not affect the Supplier's obligation hereunder to correct any Errors after such acceptance. (g) APPLICATIONS PROGRAMMING INTERFACE; SUPPLYING SOURCE CODE. Supplier agrees that the Applications Programming Interface Items to be delivered to Media 100 are intended to be used for, among other things, extension of the user interface functionality of Supplier Products by Media 100 without the use of Source Code of the Supplier Products, and Supplier has and will in creating such Applications Programming Interface's do so taking into account the need to facilitate such use. It is the Supplier's intention that the creation of such Applications Programming Interface will give Media 100 the same capability to extend user interface functionality as the Supplier has. In the event the Applications Programming Interface, as so supplied, fails to permit a reasonably skilled programmer the ability to do so, or if the parties otherwise agree it is appropriate for Supplier to provide Media 100 access to modules of Source Code to perform development work, the Supplier shall immediately give Media 100 access to those modules of Source Code necessary for Media 100 to perform such work, but only to the extent and for the time reasonably required for Media 100 to perform such work. Any modifications to Source Code made by Media 100 (but not the project developed by Media 100 using Source Code) shall belong to Supplier, and Media 100 shall convey any ownership rights it has in the modifications to the Source Code to Supplier. 6 3. GRANT OF LICENSES. (a) LICENSE GRANT. Subject to the terms and conditions of this Agreement, Supplier grants to Media 100 a non-exclusive, worldwide, perpetual license to the Supplier Product: (i) to use, reproduce and distribute the Supplier Product and System Documentation internally within Media 100; (ii) to create or have created Derivative Works based upon or compatible with the Supplier Applications Programming Interface (whether Supplier Applications Programming Interface-compliant or not) with or without the use of code supplied by Supplier and to reproduce and distribute internally the Derivative Works in Source Code form or in Object Code form; (iii) to the extent Source Code is supplied pursuant to Section 2(g) or 3(c), to create or have created Derivative Works by modifying the Source Code of the Supplier Product and to reproduce and distribute internally the Derivative Works in Source Code form or in Object Code form; (iv) to create or have created Derivative Works by modifying the End User Documentation of the Supplier Product and to reproduce and distribute internally such Derivative Works in any form; (v) to distribute externally to End Users, either directly or through distributors, but only in bundled form with Restricted Streaming Products, copies in Object Code form only of the Supplier Product or Derivative Works and copies in any form of the End User Documentation or any Derivative Works of the End User Documentation, such distribution shall be in accordance with Media 100's standard software distribution license agreement for a particular channel of distribution; and (vi) to exercise all rights to the Supplier Product with regard to pictorial, graphic or audio/visual works, including icons, screens, music and characters, that are created as a result of execution of any code or any Derivative Work thereof in accordance with the granted license (b) PROPRIETARY NATURE OF PRODUCTS AND OWNERSHIP. No title to or ownership of software licensed under this Agreement or proprietary technology in hardware acquired under this Agreement is transferred to Media 100. Notwithstanding any provision of this Agreement to the contrary, Supplier, or the licensor through which Supplier obtained the rights to distribute the Supplier Product, owns and retains all title and ownership of all intellectual property rights in the Supplier Product, including all software, firmware, software master diskettes, copies of software, master diskettes, documentation and related materials that are acquired, produced or shipped by Supplier under this Agreement, and all modifications to and derivative works of software acquired under this Agreement that are made by Supplier or any third party (other than on behalf of Media 100). Supplier does not transfer any portion of such title and ownership, or any of the associated goodwill, to Media 100. Supplier shall own all Derivative Works of the Supplier Product produced or created by or on behalf of Media 100 provided that Supplier shall have no rights independently to market or sublicense any Derivative Works created by Media 100 without Media 100's prior written approval. Media 100 shall have rights to use such Derivative Works subject to the terms and conditions of this Agreement. (c) ACCESS TO SOURCE CODE. Supplier agrees to execute a standard software escrow agreement (the "Escrow Agreement") supplied by an escrow agent selected by Media 100 and reasonably acceptable to Supplier (the "Escrow Agent"), and in connection therewith Supplier agrees that from time to time upon request of Media 100, Supplier shall deposit 7 in escrow with the Escrow Agent the latest versions of all intellectual property, as defined in section 101 of Title 11 of the United States Code, with respect to those portions of the software and other technology incorporated in the Supplier Product and reasonably relevant to the implementation of this Agreement (the "Technology") including without limitation all Source Code, designs, patents and Documentation ("Supplier Product Materials"), to be made available to Media 100 upon the conditions set forth in this Section. Media 100 will pay the Escrow Agent's charges. Regardless of whether "Source Code Escrowed" is indicated on Exhibit A and regardless of whether this license is identified in Exhibit A as including the right to Source Code, in the event that a trustee in bankruptcy is appointed for Supplier, then unless and until such trustee has rejected this Agreement, the trustee shall, at the written request of Media 100, (i) continue to perform all of the obligations of Supplier under this Agreement, or (ii) promptly deliver to Media 100 the Technology, including all Supplier Product Materials held by the trustee, including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law, and in either case not interfere with the rights of Media 100 to use such intellectual property (including such embodiment) as provided in this Agreement or any agreement supplementary hereto, including any right to obtain such intellectual property or such embodiment from any Escrow Agent under an Escrow Agreement. Regardless of whether "Source Code Escrowed" is indicated on Exhibit A and regardless of whether this license is identified in Exhibit A as including the right to Source Code, if the trustee rejects this Agreement, and Media 100 elects under section 365(n)(1)(B) of Title 11 of the United States Code to retain its rights under this Agreement, the trustee shall promptly deliver to Media 100 all intellectual property, as defined in section 101 of Title 11 of the United States Code, with respect to the Technology, including all Supplier Product Materials held by the trustee, including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law, and not interfere with the rights of Media 100 to use such intellectual property (including such embodiment) under this Agreement or any agreement supplementary hereto, including any right to obtain such intellectual property or such embodiment from any Escrow Agent under any Escrow Agreement. 4. SUPPORT, MARKETING AND DISTRIBUTION. (a) MAINTENANCE AND SUPPORT. Supplier shall provide Media 100 with maintenance and support according to the terms and conditions specified in Exhibit D. (b) NONEXCLUSIVITY; NO MARKETING OBLIGATION. Media 100 understands that Supplier reserves the right to directly license and sell the Supplier Product and to appoint other OEM's, distributors and resellers without restriction as to number or location. Supplier understands that Media 100 has no obligation to incorporate, bundle or market the Supplier Product with or into any Media 100 products, or otherwise, unless Media 100 believes in its sole discretion that such action is desirable from the Media 100's perspective. 8 (c) USE OF AUTHORIZED OEM TITLE. During the term of this Agreement, Media 100 may refer to itself and Supplier may refer to Media 100, in connection with exercising its rights under this Agreement, as a Supplier "Authorized OEM". (d) PUBLIC ANNOUNCEMENTS AND PROMOTIONAL MATERIALS. Supplier and Media 100 shall cooperate with each other so that each party may issue a press release other than as a customer reference concerning this Agreement, provided that each party must approve such press release prior to its release. (e) SOFTWARE. When marketing products incorporating the Supplier Product, Media 100 agrees to exercise commercially reasonable efforts (and no less effort than expended with respect to its own products) to ensure that each End User receiving the products or services through Media 100 or Media 100's lines of distribution understands and agrees to be bound by a Media 100 standard Software License Agreement consistent with the line of distribution. (f) USE OF SUPPLIER MARKS AND TRADE NAMES. Media 100 is authorized to use the Supplier Marks applicable to the Supplier Product in connection with its marketing of products or services incorporating the Supplier Product. Media 100 agrees not to alter, erase or overprint any notice provided by Supplier without the prior written consent of Supplier or affix any Supplier Marks. Media 100 recognizes Supplier's ownership and title to the Trade Names and Marks. Media 100 will abide by Supplier's generally applicable and reasonable usage guidelines established by Supplier from time to time. 5. FEES AND PAYMENT. (a) ROYALTY AND LICENSE FEES. As license fees for the rights herein granted, Media 100 shall pay to Supplier royalties on Media 100 sales and related licensing or sublicensing of Bundled Product at the rates and on the terms specified in Exhibit A hereto. Media 100 is free to determine its own resale prices for the Bundled Product it is authorized to license and sell hereunder. Although Supplier may publish suggested list prices, these are suggestions only and not binding in any way. Royalties shall accrue for a particular transaction in the Media 100 fiscal quarter in which Media 100 recognizes for its financial statement purposes the revenue for the shipment by Media 100 of the relevant quantity of the Bundled Product (to a distributor or end-user). Media 100 shall pay Supplier such license fees accrued during each such fiscal quarter, within forty-five (45) days following the end of such fiscal quarter, and shall be accompanied by a report in reasonable detail showing the calculation of such fees. All payments shall be made in United States dollars. For sales for which Supplier would otherwise be entitled to a royalty on a non-dollar based amount, Media 100 will make payment to Supplier in U.S. Dollars based upon the exchange rate used in connection with preparing its internal financial statements with respect to such transaction. In no event shall Media 100 be responsible to protect the value of sums against currency fluctuation, effects of inflation, or other economic or monetary adjustment. The 9 applicable fees for the products and services provided under this Agreement do not include any sales, use or similar taxes ("Taxes") payable on the part of the acquisition of the Supplier Product from Supplier. Such Taxes, if applicable and imposed on Supplier, shall be presented in a billing statement by Supplier to Media 100, and shall be payable by the Media 100 as specified herein; provided that Media 100 shall not be liable for any taxes based upon Supplier's net income or real or personal property owned by Supplier. Any payment to Supplier shall be net of any required withholding due to taxes under applicable law. Media 100 is responsible for Taxes resulting from its sales of Bundled Products to its customers. (b) INTERNATIONAL SALES RESTRICTIONS. If any payment to Media 100 with respect to sales in any country is blocked or subject to restrictions by governmental authorities, royalties with respect to such sales may either be held in the blocking or restricting country (if permitted by local regulations) or may be removed from such country and paid to Supplier, subject to whatever restrictions, limitations and/or taxes may be imposed by the government of such country on receipts from the underlying sale. If the government of a country requires a reduction in the royalty rate set forth in this Agreement as a condition of approving the payment of royalties to Supplier, Supplier agrees to reduce such rate for that country so as to provide for the maximum royalty payment allowed by such government. When deemed reasonably necessary by Media 100, Supplier shall enter into separate agreements with affiliates of Media 100 for the purpose of facilitating the payment of royalties. (c) RECORDS EXAMINATIONS. Media 100 agrees to allow Supplier to examine its records to determine compliance or noncompliance with this Agreement. Any examination will be conducted only by an authorized representative of Supplier, and will occur during regular business hours at Media 100's offices and will not interfere unreasonably with Media 100's business activities. Examinations will be made no more frequently than annually, and Supplier will give Media 100 fifteen (15) business days or more prior written notice of the date of the examination and the name of Supplier's authorized representative who will be conducting the examination. The audit will be conducted at Supplier's expense, unless the audit reveals an underpayment for the reviewed period of more than five percent, in which case the reasonable audit cost will be borne by Media 100. . All information obtained by Supplier's authorized representative conducting the audit will be maintained confidential by the representative. The examiner will give Media 100 and Supplier an examination report containing only the information necessary to indicate compliance or non-compliance with this Agreement. Underpayments will be promptly paid. All late payments will bear interest at the rate of one percent per month until paid. 6. WARRANTIES. (a) GENERAL. Supplier represents and warrants (i) that the Supplier Product being delivered to Media 100 is identical to that generally marketed by Supplier, except to the extent specifically agreed to between the parties; and (ii) it has and will have full and sufficient authority to assign or grant the rights and/or licenses granted in the Supplier Product pursuant to this Agreement. 10 (b) NO VIRUS. Supplier has taken reasonable steps to test the Supplier Product for programming devices (e.g., viruses, key locks (including, without limitation, that control the number of users), backdoors, etc.) that would (i) disrupt the use of the Supplier Product or any system, device or software to which the Supplier Product is interfaced or other computer equipment with which such equipment communicates; (ii) destroy or damage data or make data inaccessible or delayed, except for file and purge routines necessary to the routine functioning of the Supplier Product; or (iii) permit Supplier personnel, agents or subcontractors access to any portion of the Supplier Product other than as necessary to carry out the terms of this Agreement. Supplier agrees to use programming practices and security procedures to avoid insertion of such devices and to scan for viruses before sending any media containing programming code to Customer. (c) NO EXPORT RESTRICTION. Supplier further represents and warrants that to its knowledge, except as disclosed to Media 100 the Supplier Product does not contain cryptographic code or any other code that would subject it any United States export license restrictions. THE WARRANTIES DESCRIBED IN THIS SECTION 6 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. 7. INDEMNIFICATION. (a) INDEMNIFICATION. Supplier will indemnify, defend and hold Media 100, its affiliates and, subsidiaries, and its and their respective directors, officers, employees and agents (collectively, "Media 100 Persons") harmless from any and all damages, liabilities, costs and expenses incurred by any Media 100 Person as a result of any claim, judgment or adjudication against Media 100 Person that alleges that the Supplier Product, Trade Names or the Marks infringe any trademark, copyright, patent or trade secret rights of any third party. Media 100 shall promptly notify Supplier in writing of any claim for which it seeks indemnification, provided the failure or delay in doing so shall not relieve Supplier from any obligation to indemnify any Media 100 Person except to the extent such delay or failure materially prejudices the defense of any such claim. Supplier will have control of the defense of any action and all negotiations for settlement and compromise, but shall not make any settlement binding on any Media 100 Person without Media 100's consent except if such settlement provides a complete and absolute release of such person. Media 100 shall provide Supplier with reasonable assistance and information necessary to perform the above, with Supplier to be responsible for any out-of-pocket expenses of any Media 100 Person in providing such assistance. If any Media 100 Person desires to have separate legal representation in any such action, such Media 100 Person shall be responsible for the costs and fees of its separate counsel. (b) LIMITATION ON INDEMNIFICATION. Supplier shall have no liability for infringement to the extent based on (i) modification of the Products by Media 100 or to Media 100's specifications, or (ii) the combination or use of the Supplier Product with any other computer program, equipment, product, device, item or process to the extent (A) such 11 program, equipment, product, device or process is not furnished by Supplier and (B) such infringement would have been avoided by the use of the Supplier Product alone and in its unmodified form. Moreover, Supplier shall have no liability for infringement, unless it knew or should have known of the infringement on the date of this Agreement or any significant amendment thereto and had not previously disclosed the possibility of such infringement to Media100 in writing specifying either the specific technology, algorithm, standard or similar item which is anticipated to be the source of infringement, or the party from which infringement is reasonably expected. 8. CONFIDENTIAL INFORMATION. (a) RESTRICTION ON USE. Each party and its Related Persons shall treat as confidential all Confidential Information of the other party, shall not use such Confidential Information except as contemplated under this Agreement, and each party and its Related Persons shall not disclose such Confidential Information to any third party except as may be reasonably required in connection with the manufacture, use, sale or distribution of products pursuant to this Agreement, and subject to confidentiality obligations at least as protective as those set forth in this Agreement. Without limiting the foregoing, each of the parties shall use at least the same degree of care which it uses to prevent the disclosure of confidential information of like importance to the disclosing party to prevent the disclosure of Confidential Information disclosed to it by the other party under this Agreement. (b) EXCEPTIONS. Notwithstanding the above, neither party shall have liability to the other with regard to any Confidential Information of the other which (i) was in the public domain at the time it was disclosed or enters the public domain without violation of this Agreement by the receiver; (ii)was known to the receiver, without restriction, at the time of the disclosure as shown by the files of the receiver in existence at the time of disclosure; (iii)is disclosed with the prior written approval of the discloser; (iv)was independently developed by the receiver without any use of the Confidential Information and by employees or other agents of (or Contractors hired by) the receiver who have not been exposed to the Confidential Information; (v) becomes known to the receiver, without restriction, from a third party without breach of this Agreement by the receiver and otherwise not in violation of the discloser's rights; (vi)is disclosed to third parties by the discloser, intentionally without restrictions similar to those contained in this Agreement; (vii) to the extent disclosed in accordance with the order or requirement of a court, administrative agency, or other governmental body, provided, however, that the receiver shall provide prompt notice thereof to enable the discloser to seek a protective order or otherwise prevent such disclosure; or 12 (viii) is inherently disclosed in the use, lease, sale or other distribution of, or publicly available supporting documentation for, any present or future product or service by or for the receiving party or any of its Subsidiaries as otherwise permitted in this Agreement. (c) TERMINATION OF OBLIGATIONS. The parties' obligations under this Section with respect to nontechnical sales, marketing and financial Confidential Information terminate three (3) years from the end of the Term, if not terminated earlier pursuant to Section 8(b). The parties' obligations with respect to all technical Confidential Information shall be terminated only pursuant to Section 8(b). 9. LIMITATION OF REMEDIES. (a) LIMITATIONS. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER SUPPLIER NOR MEDIA 100 WILL BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) SUSTAINED OR INCURRED IN CONNECTION WITH THIS AGREEMENT AND THE SUPPLIER PRODUCT THAT IS SUBJECT TO THIS AGREEMENT REGARDLESS OF THE FORM OF ACTION AND WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE. Supplier's liability to Media 100 under this Agreement shall not exceed the greater of amounts paid by Media 100 to Supplier under this Agreement. Media 100's liability to Supplier under this Agreement shall not exceed the amounts payable by Media 100 to Supplier under Section 5. (b) EXCEPTIONS. The limitation set forth in subsection (a) above do not apply to any payment under Section 7; to breach of Section 8; to claims by either party for personal injury or damage to real property or tangible personal property caused by other's negligence; or in the case of fraud. 10. TERM; TERMINATION. (a) TERM. This Agreement shall commence on the date it is executed by an authorized Supplier signatory and continue until terminated in accordance with its terms. (b) TERMINATION FOR CAUSE. Either party may terminate this Agreement for the substantial breach by the other party of a material term. The terminating party will first give the other party written notice of the breach and a reasonable period of at least sixty (60) days in which to cure the alleged breach. If a cure is not achieved during the cure period, then the non-breaching party may terminate this Agreement upon written notice. (c) INSOLVENCY, ASSIGNMENT, OR BANKRUPTCY. Either party may terminate this Agreement upon written notice to the other party if the other party (i) is not paying its debts as such debts generally become due, (ii) becomes insolvent, (iii) files or has filed against it a petition (or other document) under any Bankruptcy Law or similar law that is unresolved within sixty (60) days of the filing of such petition (or document), (iv) proposes any dissolution, liquidation, composition, financial reorganization or 13 recapitalization with creditors, (v) makes a general assignment or trust mortgage for the benefit of creditors, or (vi) if a receiver, trustee, custodian or similar agent is appointed or takes possession of any of its property or business. (d) TERMINATION BY MEDIA 100 FOR CONVENIENCE. Media 100 may terminate this Agreement for its convenience at any time, for any reason or for no reason, by giving Supplier written notice of termination prior to the beginning of the next Media 100 fiscal quarter. Termination will become effective upon receipt of such notice by Supplier. (e) EFFECT OF TERMINATION ON OBLIGATIONS. Termination of this Agreement will not affect any pre-termination obligations of either party under this Agreement, and any termination is without prejudice to the enforcement of any undischarged obligations existing at the time of termination. Within thirty (30) calendar days after termination of this Agreement, Media 100 shall either deliver to Supplier or destroy all copies of the Supplier Product and Documentation and any other materials provided by Supplier to Media 100 hereunder in its possession or under its control, and shall furnish to Supplier an affidavit signed by an officer of Media 100 certifying that, to the best of its knowledge, such delivery or destruction has been fully effected. Notwithstanding the foregoing, (i) all licenses to the Bundled Product granted prior to termination to End Users by or on behalf of Media 100 and in connection with products incorporating the Supplier Product shall survive any termination of the Agreement, and in particular, it is agreed that upon the termination of the Agreement for any reason, such termination shall not abridge or diminish in any way the rights of existing End Users to the licensed use and enjoyment of any product utilizing or incorporating the Supplier Product or any Derivative Work already distributed in accordance with the Agreement prior to its termination; and (ii) for a period of up to one year after the date of the termination of this Agreement Media 100 may continue, subject to payment of amounts which may be due as of the date of such termination and at any time thereafter, to sell the Bundled Product and grant End User licenses to in connection therewith, under the provisions of this Agreement solely to (A) work off existing inventory, (B) fulfill contract commitments existing at the date of termination, or (C) satisfy binding quotations in effect at the date of termination, and may thereafter retain such rights as are necessary to support users at the release level existing at the time of termination. Upon termination, Media 100's sole monetary obligation arising out of termination will be to pay Supplier the fees set forth in Exhibit A of this Agreement. 11. GENERAL PROVISIONS. (a) FORCE MAJEURE. If either party is prevented from performing any portion of this Agreement (except the payment of money) by causes beyond its control, including labor disputes, civil commotion, war, governmental regulations or controls, casualty, inability to obtain materials or services or acts of God, such defaulting party will be excused from performance for the period of the delay and for a reasonable time thereafter. (b) CHOICE OF LAW; JURISDICTION. The validity, construction and performance of this Agreement will be governed by and construed in accordance with the laws of the State of 14 California applicable to contracts executed in and performed entirely within such State, without reference to any choice of law principles of such State. With respect to any suit, action or other proceeding arising out of this Agreement, or any other transaction contemplated thereby, the parties hereto expressly waive any right they may have to a jury trial and agree that any proceeding hereunder shall be tried by a judge without a jury. Each party acknowledges that injunctive relief is an appropriate remedy for a breach of Sections 3, 8 or 11. The parties agree to non-exclusive personal jurisdiction and venue of the United States District Court for Massachusetts (and any Massachusetts State Court) and the United States District Court for the Northern District of California (and any California State Court in Santa Clara County) for that purpose. (c) SURVIVAL OF TERMS. The provisions of this Agreement that by their nature extend beyond the termination of this Agreement will survive and remain in effect until all obligations are satisfied. Confidentiality provisions of Section 8 shall remain in effect until the Confidential Information is no longer Confidential. (d) ENTIRE AGREEMENT. This Agreement, including the following Exhibits, constitutes the entire Agreement between the parties pertaining to the subject matter and supersedes all prior agreements and understandings between the parties, written or oral, with respect to such subject matter. No representations or statements of any kind made by any representative of either party which are not stated in this Agreement or other substantially contemporaneous written agreements between the parties shall be binding on such party. No course of dealing or course of performance shall be relevant to explain or supplement any term expressed in this contract. In the event of any conflict between this Agreement and any purchase order or acknowledgment, this Agreement shall take precedence over any written or typed instructions in a written or electronic purchase order or acknowledgment. References to Sections without decimals (such as "Section 2") shall include all sections numbered with decimals in such Section (i.e. Section 2.1, 2.2, etc.). The pre-printed provisions of any written or electronic purchase order or acknowledgment shall be void and of no effect. This Agreement shall be valid when signed by authorized officers of both parties. The parties agree that this Agreement, together with any appendices, addenda or exhibits attached hereto, may be amended from time to time in writing by mutual agreement of the parties. No party shall be bound by any change, alteration, amendment, modification or attempted waiver of any of the provisions of this Agreement unless in writing and signed by an authorized officer of the party against whom it is sought to be enforced. (e) ASSIGNMENT. (i) The rights and liabilities of the parties hereto will bind and inure to the benefit of their respective successors, executors and administrators, as the case may be; provided that neither party may assign or delegate its obligations under this Agreement either in whole or in part, expressly or by operation of law, without the prior written consent of the other, except that each party may assign this Agreement (A) to any Subsidiary or company of which it is a Subsidiary so long as it remains responsible for such Subsidiary's performance or (B) to a person or entity into which it has merged or which has otherwise succeeded to all or substantially all of its 15 business and assets to which this Agreement pertains, by purchase of stock, assets, merger, reorganization or otherwise, and which has assumed in writing or by operation of law its obligations under this Agreement. Any attempted assignment in violation of the provisions of this Section will be void. (ii) All rights and licenses granted to a party under this Agreement shall apply to that party's Subsidiaries so long as such Subsidiaries agree to comply fully with the obligations imposed on that party by this Agreement and so long as such Subsidiary continues to be a Subsidiary of a party. Each party shall remain fully liable for the actions and omissions of its Subsidiaries relative to rights granted under this Section 11(f). (f) NOTICE. All notices, demands, requests or other communications that may be or are required to be given, served or sent by any party pursuant to this Agreement will be in writing (and shall be deemed to have been duly given upon receipt), will reference this Agreement and shall be mailed by first class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by express courier or hand delivery or facsimile transmission, addressed to the address below the party's name on the signature page of this Agreement. Each party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice that is mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt or the affidavit of messenger or courier being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. (g) SEVERABILITY. If any term, provision, covenant or condition of this Agreement is held invalid or unenforceable for any reason, the remainder of the provisions will continue in full force and effect as if this Agreement had been executed with the invalid portion eliminated. The parties further agree to substitute for the invalid provision a valid provision that most closely approximates the intent and economic effect of the invalid provision. (h) INDEPENDENT CONTRACTORS. Each party acknowledges that the parties to this Agreement are independent contractors and that it will not, except in accordance with this Agreement, represent itself as an agent or legal representative of the other. (i) EXPORT CONTROL. Each party agrees that it will comply with the provisions of United States laws restricting export of any software, technical data or other information or materials, including without limitation the United States Export Administration Act and regulations thereunder, and will not export any software, technical data or other information or materials to any country in violation thereof. This clause shall survive termination or cancellation of this Agreement. (j) HEADINGS. The headings provided in this Agreement are for convenience only and will not be used in interpreting or construing this Agreement. 16 (j) NONSOLICITATION. During the term of this Agreement and for one year thereafter, (i) neither party shall solicit the employees or contractors of the other for employment or consulting and shall promptly advise the other if approached by same for such purposes; and (ii) Media100 agrees not to distribute the Bundled Products through any distributor of Supplier's as of the date of this Agreement without Supplier's prior written approval, which approval will not be unreasonably withheld.. (k) ATTORNEYS' FEES. In the event of any dispute in connection with this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' and experts' charges, in addition to such other relief as the court may award. Executed as of the date first above written. SUPPLIER: Media 100: DIGITAL ORIGIN, INC. MEDIA 100 INC. By By ------------------------------- ------------------------------- Name: Name: Title: Title: Address: 460 East Middlefield Road Address: 290 Donald Lynch Boulevard Mountain View CA 94043 Marlboro, MA 01752-4748 17 EXHIBIT A SUPPLIER PRODUCT, ROYALTIES 1. SUPPLIER PRODUCT: The Agreement to which this is appended applies to the following Supplier Product: a. IntroDV 1.0 For Windows, Software Only Version. The Digital Origin Software content of retail SKU 0752 (see company website for complete description). Specifically excludes all other bundled products from DO or third parties, specifically excluded hardware, cables, and other miscellaneous contained in that SKU. 2. ROYALTY/LICENSE FEES: a. DEVELOPMENT PAYMENTS Payment of $500,000 upon the earlier to occur of February 1, 2000 and Acceptance of all Deliverables of the Supplier Product (in accordance with Exhibit B). b. ONGOING ROYALTIES 1. Payment of $250,000 advance pre-paid royalty upon execution of this Agreement, considered to be the minimum royalty payment for the quarter ending February 29, 2000. 2. Royalty of 5% of Net Sales of Bundled Product each quarter. Net Sales means gross receipts from the license or sale of the Bundled Products less applicable sales and use taxes, shipping, insurance and reasonable returns. 3. Cumulative minimum payment of $250,000 per quarter for the first 14 quarters of the Agreement, such last payment being for the quarter ended May 31, 2003. "Cumulative" means that if in a particular quarter, (a) the cumulative payments under this Agreement under clause (1) and (2) in previous quarters, plus the amount to be paid based on the foregoing 5% royalty, is less than (b) $250,000 multiplied by the total number of elapsed quarters, then the payment due in such quarter is such difference, up to $250,000.) The $500,000 payment made pursuant to clause (a) shall not be considered in making the calculation of "cumulative", but shall be treated as an advance against royalties for the payments for the quarters ended August 31, 2003, and November 30, 2003 payments under clause (b), such that only to the extent the 5% royalty set for in clause (b) above exceeds such amount would Media 100 be obligated to make payments under clause (b) above for such quarters. (Note: because of the $250,000 payment on execution, no further minimum royalty payment is due for the quarter ended February 29, 2000; payment with respect to such 18 quarter shall only be made if the amount payable under the 5% royalty exceeds that amount.). C. TREATMENT OF TERMINATION 1. In the event of termination of the Agreement prior to February 28, 2001 by Media 100 for cause or convenience pursuant to Section 10, the $500,000 payment made pursuant to clause (a) above shall be promptly refunded by Supplier to Media 100 by March 15, 2001. However, payments made under clause (b) above shall not be refundable. 2. In the event of termination of the Agreement by Media 100 pursuant to Section 10 prior to the end of a quarter which quarter is after the quarter ended February 28, 2001, Media 100 shall pay to Supplier in accordance with the Agreement the payment for such quarter in accordance with the provisions of (b) above. If Media 100 terminates the Agreement in or prior to the quarter ended February 28, 2001, or if, pursuant to Section 10(e) above, Media 100 shall provide residual post-termination copies of materials in a quarter following any quarter in which the Agreement is terminated, it shall pay to Supplier solely the 5% royalty specified in clause (b)(2) above with respect to such sales, without any obligation of a minimum royalty. For avoidance of doubt, in no case will Media 100 have liability for any minimum royalties following termination of the Agreement other than as specifically stated in the first sentence of this clause (c)(2). 19 EXHIBIT B MILESTONES SCHEDULE [to be completed after execution, in accordance with Section 2(b)] DESCRIPTION OF MILESTONE DUE DATE 20 EXHIBIT C PRODUCT SPECIFICATIONS [to be completed after execution, in accordance with Section 2(b)] 21 EXHIBIT D MAINTENANCE AND SUPPORT Supplier shall not be responsible for first-level support (i.e., direct support of customer questions) of products incorporating the Supplier Product. However, during the term of this Agreement, and for a period of one (1) year thereafter but not longer than Supplier provides general support for the Supplier Product or if Supplier terminates the Agreement pursuant to Section 10(b), Supplier shall provide to Media 100 second level support services, consistent with the support obligations described below with respect to the Supplier Product including, without limitation, identification of defective Source Code and Object Code and providing corrections, Workarounds and/or patches to correct defects or errors in such Code. During the term of this Agreement and for one year thereafter, Media 100 shall provide first-level customer support of products incorporating the Supplier Product on the same basis as the Restricted Streaming Products or other comparable products that do not incorporate the Supplier Product. TECHNICAL SUPPORT. While obligated to provide second level support as provided above, in addition to the second level support services described above, (i) Supplier shall appoint a technical contact to whom Media 100 may address all technical questions relating to Supplier technologies; (ii) the parties shall determine a mutually acceptable procedure by which Media 100 shall direct its technical questions to the appropriate Supplier technical contact; and (iii) Supplier shall promptly answer all technical questions asked by Media 100 relative to the Supplier Product. TRAINING OF MEDIA 100. Supplier shall provide training of up to two members of Media 100's technical and marketing staff on the following topics: IntroDV. Training of Media 100 personnel will be provided by Supplier at Mountain View CA or other mutually agreeable location. The training duration is estimated at 2 days. Media 100 is responsible for Media 100 personnel's out of pocket expenses including travel, room and board. Supplier is responsible for the facilities, training materials and equipment. There are no tuition charges. The course will be scheduled at a mutually agreed upon time. UPGRADES, UPDATES, ERROR CORRECTIONS AND ENHANCEMENTS. Supplier will include Media 100 in its alpha programs for any Updates to the technology underlying the Supplier Product (the "Technology") released during the term of this Agreement, and will provide Media 100 with the production version of such upgrades, subject to Section 2(a) of the Agreement. Beta testing will be managed by Media 100, with support from Supplier. Media 100 may, but is not required to, incorporate any such Updates in a product. To enable Media 100 to provide standard support, while Supplier provides second level support as provided above, Supplier shall provide to Media 100, at no cost, all pertinent System Documentation for the Supplier Product and any new releases thereof which is reasonably necessary for the purpose of providing standard software support for the Supplier Product. Supplier shall also provide to Media 100, at no cost and on an as needed basis, timely qualified technical support by phone during Supplier's Business 22 Hours to answer questions from a designated Media 100 representative consistent with the following support obligations. Errors may be reported, on a 24 hours per day, 365 day per year basis, by electronic mail, voice mail, fax or telephonic recording capability. While Supplier is obligated to provide second level support as provided above, Supplier will use reasonable commercial efforts to resolve each significant Error by providing either a reasonable work around, an object code patch, or a specific action plan for how Supplier will address the problem and an estimate of how long it will take to rectify the defect. Notwithstanding the foregoing, Supplier has no obligation to perform services in connection with (i) Errors resolution from hardware or software not supplied by Supplier or (ii) which occur in the Supplier Product release which is not the then-current release. 23 EX-21.01 4 EXHIBIT 21.01 EXHIBIT 21.01 --- LIST OF SUBSIDIARIES SUBSIDIARY FRANCE - ------ Radius France S.A. Radius S.A.R.L. ASIA - ---- Nihon SuperMac K.K. SuperMac Asia Pacific UNITED KINGDOM - -------------- SuperMac Technology Europe GERMANY - ------- Radius GmbH OTHERS - ------ Radius FSC Inc. Radius (Cayman Island) Ltd. Radius Canada All subsidiaries are either inactive or in dissolution or preparation therefor, except Radius (Cayman Island) Ltd. -42- EX-23.01 5 EXHIBIT 23.01 EXHIBIT 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-37376, 33-43116, 33-47525, 33-71636, 33-77238, 33-83824, 33-59571, 333-17881, 333-04765, and 333-85213) pertaining to the 1986 Stock Option Plan, the 1988 SuperMac Technology, Inc. Stock Option Plan, the Directors' Stock Option Plan, the 1990 Employee Stock Purchase Plan, the 1999 Employee Stock Purchase Plan, Non-Plan Stock Options and the 1995 Stock Option Plan, as amended, of Digital Origin, Inc. of our report dated November 3, 1999 with respect to the consolidated financial statements and schedule of Digital Origin, Inc. included in this Annual Report (Form 10-K) for the year ended September 30, 1999. /s/ ERNST & YOUNG LLP San Jose, California December 29, 1999 -43- EX-27.01 6 EXHIBIT 27.01
5 12-MOS SEP-30-1999 SEP-30-1999 3627 0 5753 (3758) 211 5994 7586 (6860) 6895 5014 0 0 0 169417 (168336) 6895 13353 13353 4750 4750 9803 0 55 5849 0 0 0 0 0 5849 1.06 1.02
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