-----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, FX+bKPMqnYIXr1TKlnGdWIIL76dmJGcp+/YeBshOW+OcXyvSf/3NSzO3VksAkJgQ +2jDodXnXkv3XKWeP8YxRA== 0000892569-97-002280.txt : 19970815 0000892569-97-002280.hdr.sgml : 19970815 ACCESSION NUMBER: 0000892569-97-002280 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: XIRCOM INC CENTRAL INDEX KEY: 0000883905 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 954221884 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19856 FILM NUMBER: 97661257 BUSINESS ADDRESS: STREET 1: 2300 CORPORATE CENTER DR CITY: THOUSAND OAKS STATE: CA ZIP: 91320-1420 BUSINESS PHONE: 8053769300 MAIL ADDRESS: STREET 1: 2300 CORPORATE CENTER DRIVE CITY: THOUSAND OAKS STATE: CA ZIP: 91320-1420 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTER ENDED JUNE 30, 1997 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-19856 XIRCOM, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-4221884 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2300 CORPORATE CENTER DRIVE THOUSAND OAKS, CALIFORNIA 91320 (Address of principal executive offices & zip code) REGISTRANT'S TELEPHONE NUMBER: (805) 376-9300 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 [ ] There were 22,660,938 shares of the registrant's $.001 par value Common Stock outstanding as of August 6, 1997. 2 XIRCOM, INC. TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Items 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18
2 3 XIRCOM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
(Unaudited) June 30, 1997 September 30, 1996 ------------- ------------------ Current assets: Cash and cash equivalents $ 78,232 $ 21,377 Accounts receivable, net 39,642 25,006 Income tax receivable - 2,652 Inventories 22,482 13,771 Deferred income taxes 11,544 5,409 Other current assets 2,876 3,330 -------- -------- Total current assets 154,776 71,545 Equipment and improvements, net 17,798 18,136 Net assets of discontinued operations - 17,151 Other assets 390 369 -------- -------- Total assets $172,964 $107,201 ======== ======== Current liabilities: Notes payable to bank $ - $ 5,100 Accounts payable 13,619 10,260 Accrued liabilities 23,676 18,986 Current portion of long-term obligations 1,787 1,422 Accrued income taxes 2,715 1,066 -------- -------- Total current liabilities 41,797 36,834 Long-term obligations 1,494 1,860 Deferred income taxes 2,904 2,904 Shareholders' equity: Common stock 23 20 Paid-in capital 141,419 83,221 Accumulated deficit ( 14,673) ( 17,638) -------- -------- Total shareholders' equity 126,769 65,603 -------- -------- Total liabilities and shareholders' equity $172,964 $107,201 ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 4 XIRCOM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share information)
Three months ended Nine months ended June 30 June 30 1997 1996 1997 1996 --------- -------- -------- -------- Net sales $ 50,226 $ 43,919 $ 163,675 $ 117,702 Cost of sales 33,315 28,615 104,208 76,921 -------- -------- --------- --------- Gross profit 16,911 15,304 59,467 40,781 Operating expenses: Research and development 3,162 2,570 8,841 7,262 Sales and marketing 11,579 7,811 32,062 23,560 General and administrative 2,018 1,649 5,607 4,861 -------- -------- --------- --------- Total operating expenses 16,759 12,030 46,510 35,683 -------- -------- --------- --------- Operating income from continuing operations 152 3,274 12,957 5,098 Other income (expense), net 479 (455) 565 (1,086) -------- -------- --------- --------- Income from continuing operations before income taxes 631 2,819 13,522 4,012 Provision for income taxes 189 903 4,056 1,333 -------- -------- --------- --------- Income from continuing operations 442 1,916 9,466 2,679 Discontinued operations: Operating income (loss), net of related tax effects - 619 ( 226) 469 Loss on disposal, net of related tax effects (6,275) - (6,275) - -------- -------- --------- --------- Net income (loss) $ (5,833) $ 2,535 $ 2,965 $ 3,148 ======== ======== ========= ========= Weighted average shares outstanding 22,916 19,999 21,808 19,648 Net income (loss) per share: Continuing operations $ .02 $ .10 $ .43 $ .14 Discontinued operations ( .27) .03 ( .29) .02 -------- -------- --------- --------- Net income $ ( .25) $ .13 $ .14 $ .16 ======== ======== ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 5 XIRCOM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine months ended June 30 1997 1996 ---- ---- Operating activities: Income from continuing operations $ 9,466 $ 2,679 Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities: Depreciation and amortization 4,928 4,717 Changes in assets and liabilities: Accounts receivable ( 14,636) (7,488) Income tax receivable 2,652 7,926 Inventories ( 8,711) (5,698) Other current assets 413 (692) Accounts payable and accrued liabilities 8,050 3,200 Income taxes payable 3,727 1,599 -------- -------- Net cash provided by continuing operating activities 5,889 6,243 -------- -------- Income (loss) from discontinued operating activities (6,501) 469 Adjustments to reconcile income (loss) from discontinued operations to net cash used in discontinued operating activities: Depreciation and amortization 1,777 1,500 Deferred income taxes (2,329) - Change in net assets of discontinued operations 1,068 (5,317) -------- -------- Net cash used in discontinued operating activities ( 5,985) (3,348) -------- -------- Net cash provided by (used in) operating activities ( 96) 2,895 -------- -------- Investing activities: Proceeds from sale of Netaccess, Inc. 11,000 - Purchases of equipment and improvements (4,659) (7,024) Other 89 121 -------- -------- Net cash provided by (used in) continuing investing activities 6,430 (6,903) Net cash used in investing activities of discontinued operations: Purchases of equipment and improvements (501) (257) -------- -------- Net cash provided by (used in) investing activities 5,929 (7,160) -------- -------- Financing activities: Net borrowings (repayments) under line-of-credit agreement (5,100) 1,360 Proceeds from issuance of long-term debt 960 3,219 Long-term debt repayments (961) ( 536) Proceeds from issuance of capital stock 56,123 3,492 -------- -------- Net cash provided by financing activities 51,022 7,535 -------- -------- Net increase in cash 56,855 3,270 Cash and cash equivalents at beginning of period 21,377 13,043 -------- -------- Cash and cash equivalents at end of period $ 78,232 $ 16,313 ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 6 XIRCOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared by the Company without audit (except for the balance sheet information as of September 30, 1996, which was derived from audited consolidated financial statements) pursuant to Securities and Exchange Commission regulations. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position at June 30, 1997 and the consolidated results of operations for the three- and nine-month periods ended June 30, 1997 and 1996, and cash flows for the nine-month periods ended June 30, 1997 and 1996, in accordance with generally accepted accounting principles. The accompanying financial statements are condensed and do not include footnotes and certain financial presentations normally required under generally accepted accounting principles and, therefore, should be read in conjunction with the audited financial statements included in the Company's 1996 annual report on Form 10-K. The results of operations for the three- and nine-month periods ended June 30, 1997 are not necessarily indicative of the results to be expected for the entire fiscal year. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of shares of common stock and dilutive common stock equivalents (stock options) outstanding. Fully diluted amounts for each period do not materially differ from the amounts presented herein. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128") was issued in February 1997 and must be adopted by the Company on December 31, 1997. Early adoption is not permitted, however all prior year earnings per share data must be restated upon adoption to conform to the new standard. SFAS 128 simplifies the calculation of earnings per share data by replacing primary and fully diluted earnings per share with basic and diluted earnings per share, respectively. Basic earnings per share excludes dilutive securities including stock options, and is calculated using the weighted average common shares outstanding for the period. Diluted earnings per share, which is generally consistent with the fully diluted calculation under present accounting rules, reflects the dilution to earnings that would occur if securities, stock options and other dilutive securities resulted in the issuance of common stock. The Company anticipates that prior period earnings per share, when restated for SFAS 128, will remain unchanged or will be slightly higher. If the Company had been permitted to adopt SFAS 128 in the third quarter of 1997, there would have been no change in the amount reported as earnings from continuing operations per common share. The Company therefore does not expect the impact of SFAS 128 on fully diluted earnings per share to be material on future calculations. 6 7 XIRCOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" were issued in June 1997. In accordance with the provisions of these statements, the presentation and disclosures required will be adopted by the Company in fiscal year 1999. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consisted of the following (in thousands):
June 30 September 30 1997 1996 ---- ---- Finished goods $10,509 $ 5,723 Subassemblies 2,108 1,348 Work-in-process 2,106 543 Component parts 7,759 6,157 ------- ------- $22,482 $13,771 ======= =======
REVENUE RECOGNITION The Company recognizes revenue from product sales when shipped. The Company generally provides a lifetime limited warranty against defects in the hardware component and a two-year limited warranty on the software component of its network adapters and modem products. In addition, the Company provides telephone support to purchasers of its products as needed to assist them in installation or use of the products. The Company makes provisions for these costs in the period of sale. The Company also has policies and/or contractual agreements which permit distributors and dealers to return products under certain circumstances. The Company makes a provision for the estimated amount of product returns that may occur under these programs and contracts in the period of sale. CASH AND CASH EQUIVALENTS All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents and are carried at cost plus accrued interest. DISCONTINUED OPERATIONS On June 30, 1997, the Company completed the sale of Netaccess, Inc. ("Netaccess"), its remote access subsidiary, which resulted in a loss of $6.3 million or $0.27 per share. The accompanying financial statements have been prepared to reflect the historical financial position and results of operations of Netaccess as discontinued operations. 7 8 XIRCOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 Operating income (loss) from discontinued operations is summarized as follows (in thousands):
Three months Nine months ended ended June 30 June 30 1997 1996 1997 1996 ------ ------ ------ ------ Net sales $ 3,120 $8,304 $ 13,185 $17,544 ======= ====== ========== ======= Operating income (loss) before income taxes $ - $ 909 $ ( 323) $ 713 Loss on disposal before income taxes (8,604) - (8,604) - Income tax provision (benefit) (2,329) 290 (2,426) 244 -------- ------ --------- ------- Net income (loss) $(6,275) $ 619 $ ( 6,501) $ 469 ======== ====== ========= =======
The net assets of Netaccess, comprised principally of accounts receivable, inventory, fixed assets, goodwill and other intangibles, offset by trade accounts payable and other liabilities, have been classified as Net assets of discontinued operations in the accompanying Condensed Consolidated Balance Sheet. SUPPLEMENTAL CASH FLOW DISCLOSURES Supplemental cash flow disclosures are as follows: Cash paid for interest $ 399 $ 390 Cash paid for income taxes $ 82 $ 20 Tax benefit related to employee stock options $2,078 $1,050
8 9 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the trend analysis and other forward-looking statements contained herein, as a result of the risk factors set forth below and elsewhere in this report. RESULTS OF OPERATIONS The following table sets forth the statements of operations as a percentage of net sales:
Three months Nine months ended ended June 30 June 30 1997 1996 1997 1996 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 66.3% 65.2% 63.7% 65.4% ------- ------- ------- ------- Gross profit 33.7% 34.8% 36.3% 34.6% Operating expenses: Research and development 6.3% 5.8% 5.4% 6.2% Sales and marketing 23.1% 17.8% 19.6% 20.0% General and administrative 4.0% 3.7% 3.4% 4.1% ------- ------- ------- ------- 33.4% 27.3% 28.4% 30.3% ------- ------- ------- ------- Operating income from continuing operations 0.3% 7.5% 7.9% 4.3% Other income (expense), net 1.0% ( 1.1%) 0.4% ( 0.9%) ------- ------- ------- ------- Income from continuing operations before income taxes 1.3% 6.4% 8.3% 3.4% Provision for income taxes 0.4% 2.0% 2.5% 1.1% ------- ------- ------- ------- Income from continuing operations 0.9% 4.4% 5.8% 2.3% Discontinued operations: Operating income (loss), net of income taxes - 1.4% (0.2%) 0.4% Loss on disposal, net of income taxes (12.5%) - (3.8%) - ------- ------- ------- ------- Net income (loss) (11.6%) 5.8% 1.8% 2.7% ======= ======= ======= =======
NET SALES Net sales of LAN adapters, modems and multifunction LAN and modem cards ("Combo cards") (collectively "client products") for the three- and nine-month periods ended June 30, 1997 increased 14% and 39%, respectively, from the corresponding prior-year periods primarily due to growth in overall market demand for these products. The growth in market demand may be indicative of several factors: an increased growth 9 10 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS rate in shipments of portable PCs, which in turn require network connections; a more competitive pricing strategy adopted by the Company; continuing increased market acceptance of the Company's Combo cards and Fast Ethernet cards; and increased sales of the Company's modem-only PC Card products. The lower growth rate of net sales in the three-month period compared to the nine-month period was due to a decrease in shipments to distributors in the June 1997 quarter in order to reduce the level of inventories carried in the distribution channel. Unit shipments of client products for the three- and nine-month periods ended June 30, 1997 increased 56% and 77%, respectively, from the corresponding prior year periods, but average selling prices declined due to increased competition in the PC Card LAN adapter market, price reductions on the Combo card and modem products, and a higher mix of LAN-only products which have lower average selling prices than Combo card and modem products. INTERNATIONAL SALES. Total international sales (shipments to customers located outside the U.S.) were 49% of total net sales for each of the three- and nine-month periods ended June 30, 1997, compared to 50% and 45% from the comparable prior year periods. PC Card sales in Europe and Asia-Pacific grew at a faster rate than in the U.S. during most of 1997 primarily because of greater market growth in Asia and shorter delays between initial shipment of new products in the U.S. and the shipment of internationally approved versions of such products. GROSS PROFIT Gross profit margins for the three- and nine-month periods ended June 30, 1997 were 33.7% and 36.3%, respectively, compared to 34.8% and 34.6%, respectively, for the comparable prior-year periods. The decrease in gross profit as a percentage of net sales was primarily attributable to the increased portion of sales represented by PC Card products, which have lower gross profit margins than the Company's parallel port products, and by selling price reductions on Combo card and modem products. These negative margin impacts were partially offset by increased shipments and the resulting decrease in fixed costs as a percentage of total cost of sales, a change in the discount structure on products sold into the distribution channel beginning in the September 1996 quarter, and the favorable impact of cost reduction efforts including the successful transition of all the Company's PC Card production to its own manufacturing facility in Penang, Malaysia. Start-up expenses related to the Malaysian manufacturing facility had a negative impact on gross margins in the December 1995 and March 1996 quarters. OPERATING EXPENSES Total operating expenses for the three- and nine-month periods ended June 30, 1997 increased by 39% and 30%, respectively, compared to the corresponding prior-year 10 11 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS periods primarily due to the continued expansion of product lines and international operations and an increase in certain sales and marketing programs. Total operating expenses as a percentage of sales for the three-month period ended June 30, 1997 increased compared to the prior year period primarily due to a decrease in shipments to the channel during the quarter without a corresponding decrease in expenses. Total operating expenses decreased as a percentage of sales for the nine-month period ended June 30, 1997 primarily due to increased sales in the first two quarters of fiscal 1997 and more focused product development activities. Total operating expenses are not expected to increase materially for the remainder of fiscal 1997 but are expected to increase in fiscal 1998, and may fluctuate as a percentage of net sales. Research and development expenses for the three- and nine-month periods ended June 30, 1997 increased by 23% and 22%, respectively, compared to the corresponding prior-year periods. Increased expenses for both periods are due to additional staffing to support expanded product lines, offset partially by reduced expenses of the Netwave product line, which was sold in August 1996. As a percentage of sales, research and development expenses decreased for the nine-month period of 1997 compared to the same period of 1996 due to increased sales and more focused product development efforts. Research and development expenses are expected to continue to increase due to planned expenditures on product enhancements and new product introductions, but may vary as a percentage of sales. Sales and marketing expenses for the three- and nine-month periods ended June 30, 1997 increased by 48% and 36%, respectively, compared to the corresponding prior-year periods. The increases are related to additional headcount, marketing activities to support the increased sales levels and expanding markets, and increased distributor-related sales and marketing expenses. As discussed in "Gross profit" above, the Company changed its discount structure on products sold into the distribution channel beginning in the September 1996 quarter and, as a result, improved its gross profit margins. However, the additional gross profit dollars were applied to product and marketing programs, which increased the amount of sales and marketing expenses. As a percentage of sales, sales and marketing expenses decreased slightly for the nine months ended June 30, 1997 as compared to the similar period in 1996 primarily due to the consolidation of certain sales operations and reduced overall promotional spending resulting from a more focused product line. Sales and marketing expenses are expected to decrease slightly through the remainder of fiscal 1997 as further consolidation of functions is pursued. General and administrative expenses for the three- and nine-month periods ended June 30, 1997 increased by 22% and 15%, respectively, compared to the corresponding prior-year periods. The increases were due to the need to support growth in the organization. As a percentage of sales, these expenses decreased for the nine-month period of fiscal 1997 primarily due to increased sales. General and administrative expenses are not expected to increase for the remainder of fiscal 1997 and will vary as a percentage of sales. 11 12 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER INCOME (EXPENSE), NET Net other income or expense includes interest income from the investment of available cash, early payment discounts earned by the Company offset by early payment discounts taken by customers, foreign currency transaction gains and losses, and interest expense on notes payable and capital leases. Net other income for the fiscal 1997 periods compared to net other expense for the fiscal 1996 periods is due primarily to lower interest expense and higher interest income as a result of increased cash balances and reduced borrowings under the Company's credit facilities. INCOME TAXES The Company's effective tax rate for the nine months ended June 30, 1997 was 30.0%. The difference between the effective tax rate in the current year and the 35% federal statutory tax rate is due primarily to benefits from the tax holiday status of the Company's operations in Malaysia. The Company's effective tax rate for the nine months ended June 30, 1996 was 33% as a result of an expected 32% tax rate for profitable operations in the second and third quarters of fiscal 1996 and the 23.6% tax benefit related to a pre-tax loss recorded in the first quarter of fiscal 1996. DISCONTINUED OPERATIONS The financial results of Netaccess, which includes remote access server products sold to original equipment manufacturers ("OEMs") and through two-tier distribution channels, have been reported as discontinued operations in the Condensed Consolidated Statements of Operations for all periods. On June 30, 1997, the Company completed the sale of Netaccess resulting in a loss of $6.3 million or $0.27 per share. Operating loss from discontinued operations, net of income tax benefit, was $226,000 for the nine months ended June 30, 1997, compared with a profit of $469,000 in the comparable prior year period. Additional information with respect to discontinued operations is included in the Notes to Condensed Consolidated Financial Statements. RISK FACTORS The market for portable PC LAN adapters has grown rapidly since the Personal Computer Memory Card International Association (PCMCIA) introduced a standard form factor for PC Card (originally "PCMCIA") LAN adapters in 1993. Companies with greater name recognition in the PC, desktop LAN adapter and PC Card modem industries and with greater financial resources now have a significant presence in the PC Card adapter market. As a result, the Company's net sales and gross profit margins have been and could continue to be adversely impacted by several competitive factors. Such competitive factors include increased price competition, new product introductions by competitors, promotional efforts by competitors, any reduction in the Company's percentage market share of the PC Card adapter markets, and changes in the level of inventories in the Company's distribution channels. Although competition is expected to remain intense, the Company believes its share of the PC Card LAN 12 13 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS adapter market stabilized in 1996 and the first nine months of fiscal 1997. The Company believes such stabilization was achieved primarily due to a more competitive pricing strategy for PC Card products adopted during fiscal 1995, the success of its combination Ethernet LAN and Modem PC Card, and the introduction of several new PC Card products in late 1996 and 1997. Such new products include the Company's Fast Ethernet PC Card which began shipping in June 1996, its CardBus Ethernet adapter which began shipping in October 1996, its fourth-generation Combo cards which began shipping in September 1996, and its Fast Ethernet+Modem 56 Combo cards which began shipping in June 1997. The Company believes that the market for PC Card LAN adapters, modems and Combo cards will continue to be price competitive for the long-term and thus could continue to result in lower gross profit margins than the Company has earned from such products in the past. In addition, the Company's manufacturing facility is operating at a greater efficiency level than in the first nine months of fiscal 1996. This manufacturing facility began volume production in early fiscal 1996 and is now producing all of the Company's PC Card products. While the in-house manufacturing facility is expected to continue to have a positive impact on cost reduction efforts, the proportion of revenues derived from the Combo and modem-only PC Cards, which have lower gross profit margins compared to LAN PC Cards, have negatively impacted overall gross margins and may continue to offset any improvements from manufacturing and design efficiencies if such revenue mix changes continue. In addition, there can be no assurances that cost reductions achieved through increased manufacturing efficiencies will keep pace with competitors' cost reductions or will be sufficient in the event of anticipated competitive price reductions to allow price reductions required to maintain or increase market share without adversely affecting gross profit margins. The Company generally ships products within one to six weeks after receipt of orders and therefore its sales backlog is typically minimal. Accordingly, the Company's expectations of future net sales are based largely on its own estimate of future demand and not on firm customer orders. If net sales do not meet expectations, the Company may not be able to reduce expenses commensurately in the near-term, and profitability would be adversely affected. The Company's net sales may be affected by its distributors' decisions as to the quantity of the Company's products to be maintained in their inventories. As of June 30, 1997, the Company believes its distributors had what the Company considers to be normal levels of inventory overall. However, there can be no assurance that distributors will not choose to reduce inventory levels nonetheless, which would adversely affect net sales. There can be no assurances that new products the Company may introduce will achieve market acceptance or sell through to end users in sufficient quantities to make them viable for the long-term. In addition, the Company may have difficulty in establishing its presence in markets in which it does not have significant brand recognition. 13 14 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's modem-only PC Card products generally have lower gross profit margins than PC Card LAN adapters, however, increased sales volume from modems would have a positive impact on coverage of fixed manufacturing costs, which in time could partially offset the generally lower margins on modem products. Because all PC Card products are being manufactured at the Company's own facilities, interruptions in supply of products could occur if the Company is unable to accurately forecast or react to changes in product demand, which in turn could adversely affect future sales. Interruptions could also occur due to political or economic changes in Malaysia. In summary, gross profit margins are impacted by a number of factors. Such factors include the rate of sales growth, competitive pricing pressures, the mix of product sales, and component and manufacturing costs. In addition, new products often have lower margins until market acceptance and increased volumes permit component cost reductions and manufacturing efficiencies. Frequent product transitions also increase the risk of inventory obsolescence and interruptions of sales. The Company's corporate headquarters, research and development facilities and other critical business operations are located near major earthquake faults. Operating results could be materially adversely affected in the event of a major earthquake. A number of additional factors could have an impact on the Company's future operating results. The industry in which the Company operates is characterized by rapid technological change and short product life cycles. While the Company has historically been successful in developing leading technology for its products, ongoing investment in research and development will be required to maintain the Company's technological position and the Company could be required to increase the rate of such investments depending on competitive factors. Many of the Company's competitors have greater financial and technical resources than the Company. It is also possible that networking capability could be included in the PC itself or in extension modules to PCs, which could cause a reduction in the demand for add-on networking devices. The Company's results are also dependent on continued growth in the underlying market for portable networking products as well as the Company's ability to retain its market share. The Company is aware that competitors have duplicated certain functionality of the Company's products. There can be no assurance that the Company's patents, copyrights, trademarks and other efforts to protect its intellectual property will prevent duplication of the Company's technology or that they will provide a competitive advantage. The Company is also aware that there can be no assurance that a patent issued to the Company would be upheld as valid if litigation over a patent were initiated. The Company believes that, due to the rapid pace of technological change in the LAN communications industry, the Company's success is likely to depend more upon continued innovation, technical expertise, marketing skills and customer support and service than legal protection of the Company's proprietary rights. 14 15 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With the proliferation of new products and rapidly changing technology in the PC Card market, there is a significant volume of patents or similar intellectual property rights held by third parties. Given the nature of the Company's products and development efforts, there are risks that claims associated with such patents or intellectual property rights could be asserted by third parties. These risks may include the following: the cost of licensing a given technology if the Company believes it may be prudent to secure such rights; the claimant may not offer such a license on terms acceptable to the Company; the cost of litigation or settlement of such claims could be substantial regardless of the merits of the allegations; the Company may not prevail in the event of litigation; if the Company did not prevail in litigation, it could be required to pay significant damages, and/or to cease sales and production of infringing products, and only make future sales of a noninfringing design. The Company currently includes software licensed from third parties in certain of its Ethernet+Modem, modem-only and Token Ring products, which, in the aggregate, accounted for 60% of revenues in the third quarter of fiscal 1997. The Company's operating results could be adversely affected by a number of factors relating to this third-party software. Such factors include failure by a licensor to promote or support the software, delays in shipment of the Company's products as a result of delays in the introduction of licensed software or errors in the licensed software, excess customer support costs or product returns experienced by the Company due to errors in licensed software, or termination of the Company's relationship with such licensors. Because of frequent technology changes and rapid industry growth, the cost and availability of components used to manufacture the Company's products may fluctuate. Some components, including custom chipsets, are available from only one supplier. Any interruptions in these supply sources or limitations on availability could impact the Company's ability to deliver its products and in turn adversely affect future earnings. The Company is also subject to additional risk factors as identified in its Annual Report to Shareholders and filing on Form 10-K for the year ended September 30, 1996. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997 the Company had $78.2 million in cash and cash equivalents. The Company's continuing operating activities provided cash of approximately $5.9 million in the nine-month period ended June 30, 1997, primarily as a result of income from operations, income tax refunds received and an increase in accounts payable, offset partially by increases in accounts receivable and inventories. Accounts receivable increased due to higher quarterly revenue and fewer early payment discounts offered in the June 1997 quarter compared to the September 1996 quarter. Inventories and accounts payable increased primarily due to an increase in the volume of business. The Company had capital expenditures related to continuing operations of $4.7 million in the first nine months of fiscal 1997, primarily for manufacturing equipment at its Malaysian manufacturing facility. The Company has no material fixed commitments and does not expect an increase in the rate of capital expenditures during the 15 16 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS remainder of fiscal 1997 except that it has signed a letter of intent to purchase its manufacturing facilities in Penang, Malaysia for approximately $5.6 million. The Company is currently evaluating its options for funding the purchase price. The Company has a credit facility with a bank that permits borrowings up to $25.0 million under base rate advances at the prime rate or under London Interbank Offered Rate ("LIBOR") advances at the related LIBOR rate plus 1-1/4%. As of June 30, 1997, there were no borrowings outstanding under this agreement. The agreement expires in December 1998. The Company also has a credit facility in Malaysia totaling $10.8 million with interest ranging from a fixed rate of approximately 7.0% to a variable rate of 1/2% to 1-1/2% over the bank's reference rate. As of June 30, 1997, there were no demand notes and $3.3 million in term loans outstanding under this facility This facility expires in December 1998. At June 30, 1997 the Company had approximately $26.8 million in borrowings available under its credit facilities. On February 28, 1997 Intel Corporation ("Intel") completed the purchase of a 12.5 percent interest in the Company's common stock (2,516,405 newly issued shares) and acquired a warrant to purchase an additional 7.5 percent of the Company's common stock (1,509,903 newly issued shares). The value of the initial Intel equity investment was approximately $52 million. The Company intends to use the proceeds from the equity investment for working capital purposes. The Company believes that cash on hand, borrowings available under its existing facilities or from other financing sources and cash provided by operations will be sufficient to support its working capital and capital expenditure requirements for at least the next twelve months. However, there can be no assurances that future cash requirements to fund operations will not require the Company to seek additional capital sooner than the twelve months, or that such additional capital will be available when required on terms acceptable to the Company. 16 17 XIRCOM, INC. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER ITEMS In July 1997, Marc M. Devis was appointed Senior Vice President, Worldwide Sales, Robert W. Bass was appointed Senior Vice President, Worldwide Operations, and Renee Bader was appointed Vice President, Worldwide Marketing for the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.32 Asset Purchase Agreement by and among BTINH Operating Company, Inc. as Buyer, Brooktrout Technology, Inc. as Parent, Netaccess, Inc. as Seller and Xircom, Inc. as Seller's Sole Stockholder, dated June 30, 1997 27 Financial Data Schedule (b) Reports on Form 8-K A Report on Form 8-K was filed by the Company on April 23, 1997 pursuant to Item 5 of Form 8-K ("Other Events"). The report related to a press release for the Company's second quarter 1997 earnings. A copy of the press release was filed as an exhibit to such report. A Report on Form 8-K was filed by the Company on July 3, 1997 pursuant to Item 5 of Form 8-K ("Other Events"). The report related to a press release related to the completion of the divestiture of the assets of Netaccess, Inc., the Company's remote access subsidiary. A copy of the press release was filed as an exhibit to such report. 17 18 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. XIRCOM, INC. ------------ (Registrant) Date: August 12, 1997 /s/ Dirk I. Gates ---------------- ----------------- Dirk I. Gates Chairman of the Board, President and Chief Executive Officer Date: August 12, 1997 /s/ Steven F. DeGennaro --------------- ----------------------- Steven F. DeGennaro Vice President, Finance and Chief Financial Officer 18 EX-10.32 2 ASSET PURCHASE AGREEMENT 1 Exhibit 10.32 ASSET PURCHASE AGREEMENT by and among BTINH OPERATING COMPANY, INC. as Buyer BROOKTROUT TECHNOLOGY, INC. as Parent NETACCESS, INC. as Seller and XIRCOM, INC. as Seller's Sole Stockholder June 30, l997 2 ASSET PURCHASE AGREEMENT INDEX
Page SECTION 1. PURCHASE AND SALE OF ASSETS 1 1.1 Sale of Assets 1 1.2 Assumption of Specified Liabilities, Assumed Contracts and Warranty Liabilities 3 1.3 Purchase Price and Payment 5 1.4 Time and Place of Closing 7 1.5 Delivery of Agreement of Assumption of Assumed Liabilities 7 1.6 Transfer of Subject Assets 7 1.7 Delivery of Records and Contracts 7 1.8 Further Assurances 8 1.9 Allocation of Purchase Price 8 1.10 Sales and Transfer Taxes 8 1.11 Accounts Receivable 8 1.12 Procedures for Assets not Transferable 8 1.13 Employees, Wages and Benefits 9 SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDER 10 2.1 Making of Representations and Warranties 10 2.2 Organization and Qualifications of Seller 10 2.3 Subsidiaries 11 2.4 Capital Stock of Seller; Beneficial Ownership 11 2.5 Authority of Seller and the Stockholder 11 2.6 Real and Personal Property 13 2.7 Financial Statements 15 2.8 Taxes 16 2.9 Collectibility of Accounts Receivable 16 2.10 Inventories 16 2.11 Absence of Certain Changes 17 2.12 Ordinary Course 18 2.13 Banking Relations 18 2.14 Intellectual Property 19 2.15 Contracts 20 2.16 Litigation 22 2.17 Compliance with Laws 22 2.18 Insurance 22 2.19 Warranty or Other Claims 22 2.20 Powers of Attorney 23 2.21 Finder's Fee 23 2.22 Permits; Burdensome Agreements 23 2.23 [INTENTIONALLY OMITTED] 23 2.24 Transactions with Interested Persons 23 2.25 Employee Benefit Programs 23
i 3 2.26 Environmental Matters 25 2.27 Directors and Officers 26 2.28 Disclosure 26 2.29 Backlog 26 2.30 Employees; Labor Matters 27 2.31 Customers, Distributors and Suppliers 27 2.32 Purchase Commitments 28 2.33 Required Consents 28 SECTION 3. COVENANTS OF SELLER AND THE STOCKHOLDER 28 3.1 Making of Covenants and Agreements 28 3.2 Notice of Default 28 3.3 Consummation of Agreement 28 3.4 Cooperation of Seller 28 3.5 Non-competition 29 3.6 No Solicitation of Employees 31 3.7 Confidentiality 31 3.8 Tax Returns 31 3.9 Bank Accounts 31 SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER 32 4.1 Making of Representations and Warranties 32 4.2 Organization of Buyer 32 4.3 Authority of Buyer 32 4.4 Litigation 33 4.5 Finder's Fee 33 SECTION 5. CONDITIONS 33 5.1 Conditions to the Obligations of Buyer 33 5.2 Conditions to Obligations of Seller 35 SECTION 6. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING 36 6.1 Survival of Warranties 36 6.2 Collection of Assets 36 6.3 Payment of Obligations 36 SECTION 7. INDEMNIFICATION 37 7.1 Indemnification by Seller and Stockholder 37 7.2 Limitations on Indemnification by Seller and Stockholder 38 7.3 Indemnification by Buyer and Parent 38 7.4 Limitation on Indemnification by Buyer and Parent 39 7.5 Notice; Defense of Claims 39 SECTION 8. MISCELLANEOUS 40 8.1 Bulk Sales Law 40 8.2 Fees and Expenses 40 8.3 Governing Law 40 8.4 Notices 40
ii 4 8.5 Entire Agreement 41 8.6 Assignability; Binding Effect 42 8.7 Captions and Gender 42 8.8 Execution in Counterparts 42 8.9 Amendments 42 8.10 Publicity and Disclosures 42 8.11 Consent to Jurisdiction 42
List of Exhibits and Schedules Schedule 1.2(a) Specified Liabilities Schedule 1.2(b) Assumed Contracts Schedule 2.5(a) Defaults Schedule 2.6(b) Leased Real Property Schedule 2.6(c) Machinery, Equipment and Other Tangible Personal Property Schedule 2.7 Financial Statements Schedule 2.8 Income Tax Returns Schedule 2.9 Accounts or Loans Receivable from Affiliated Persons Schedule 2.10 Inventory Schedule 2.11 Absence of Certain Changes Schedule 2.13 Banking Relations Schedule 2.14 Intellectual Property Schedule 2.14(e) Confidentiality Agreements Schedule 2.15 Contracts Schedule 2.16 Litigation Schedule 2.17 Compliance with Laws Schedule 2.18 Insurance Schedule 2.19 Warranty or Other Claims and Warranty Terms Schedule 2.22 Permits; Burdensome Agreements Schedule 2.24 Transactions with Interested Persons Schedule 2.25 Employee Benefit Programs Schedule 2.26 Environmental Matters Schedule 2.27 Directors and Officers Schedule 2.29 Backlog Schedule 2.30 Labor Matters Schedule 2.31(a) Customers and Distributors Schedule 2.31(b) Suppliers Schedule 2.32 Purchase Commitments Schedule 5.1(q) Licenses Exhibit 1.3 Form of Closing Statement of Assets and Liabilities Exhibit 1.5 Agreement of Assumption of Assumed Liabilities Exhibit 1.6(a) Agreement of Transfer of Subject Assets Exhibit 1.6(b) Agreement of Assignment and Assumption of Trademarks Exhibit 1.9 Estimated Allocation of Purchase Price Exhibit 5.1(f) Opinion of Counsel for Seller Exhibit 5.1(j) Transition Services Agreement Exhibit 5.1(k) FIRPTA Withholding Certificate Exhibit 5.2(d) Opinion of Counsel for Buyer iii 5 ASSET PURCHASE AGREEMENT AGREEMENT entered into as of June 30, l997 by and among BTINH OPERATING COMPANY, INC., a Delaware corporation ("Buyer"), BROOKTROUT TECHNOLOGY, INC., a Massachusetts corporation ("Parent"), NETACCESS, INC., a Delaware corporation ("Seller"), and XIRCOM, INC., a California corporation and the sole stockholder of Seller (the "Stockholder"). W I T N E S S E T H WHEREAS, subject to the terms and conditions hereof, Seller desires to sell substantially all of its assets; and WHEREAS, subject to the terms and conditions hereof, Buyer desires to purchase said assets of Seller for the consideration specified herein and the assumption of certain trade liabilities as specified herein; NOW, THEREFORE, in order to consummate said purchase and sale and in consideration of the mutual agreements set forth herein, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF ASSETS. 1.1 Sale of Assets. (a) Subject to the provisions of this Agreement, Seller agrees to sell and Buyer agrees to purchase, at the Closing (as defined in Section 1.4 hereof), all of the properties, assets and business of Seller of every kind and description, tangible and intangible, real, personal or mixed, and wherever located, including, without limitation, the following: (i) all inventory, work-in-progress, finished goods and raw materials (collectively, the "Inventory"); (ii) all machinery, equipment and leasehold and personal property; (iii) all goodwill and intellectual property rights, including trade secrets, proprietary information, designs, styles, technologies, inventions, know-how, formulae, processes, procedures, research records, test information, software and software documentation, market surveys, marketing know-how and manufacturing, research and technical information, trade names, copyrights and copyright registrations, service marks and trademarks (including applications and registrations therefor) 6 specifically listed on Schedule 2.14 attached hereto, which such trademarks are all the trademarks needed in connection with Seller's business, patents and patent applications (including, without limitation, the trade names, copyrights and copyright registrations, and patents and patent applications described in Schedule 2.14 attached hereto), and all licenses to or from third parties with respect to the foregoing or rights related thereto, in each case which is used or held for use in the Seller's business; (iv) all accounts receivable of the Seller's business (the "Receivables"); (v) all of Seller's rights and interests in and to all orders, commitments, contracts and agreements it has received or is a party to including, without limitation, the backlog of orders for the sale or lease of products or services for which no revenues have been recognized by Seller and any and all rights under any proprietary rights agreements and non-disclosure agreements; (vi) all of Seller's right, title and interest in and to all franchises, licenses, permits, certifications, approvals and authorizations relating to the business of the Seller; (vii) all cash, cash equivalents, investments and prepaid expenses; and (viii) all other assets and properties of every nature whatsoever tangible and intangible, and wherever located, used or held for use in connection with the Seller's business, including, without limitation, all assets shown or reflected in the Base Balance Sheet (as defined in Section 2.7 hereof) of Seller, and all of Seller's goodwill and the exclusive right to use the name of Seller as all or part of a trade or corporate name. (b) Notwithstanding the foregoing, there shall be excluded from such purchase and sale the following property and assets: (i) Assets and property disposed of since the date of the Base Balance Sheet in the ordinary course of business and such other assets as have been or are disposed of as expressly permitted by the terms of this Agreement; and (ii) Seller's corporate franchise, stock record books, corporate record books containing minutes of meetings of directors and stockholders and such other records as have to do exclusively with Seller's organization or stock capitalization (collectively, the "Corporate Records"); provided, however, that Seller shall provide Buyer prior to the Closing with copies of each of the foregoing, certified by Seller to be true, correct and complete copies. 7 The assets, property and business of Seller to be sold to and purchased by Buyer under this Agreement are hereinafter sometimes referred to as the "Subject Assets," and the assets, property and business of the Seller which are excluded from the Subject Assets under this Section 1.1(b) are hereinafter sometimes referred to as the "Excluded Assets." 1.2 Assumption of Specified Liabilities, Assumed Contracts and Warranty Liabilities. Upon the sale and purchase of the Subject Assets, Buyer shall assume and agree to pay or discharge when due in accordance with their respective terms only those trade liabilities of Seller incurred in the ordinary course of business as described on Schedule 1.2(a) which are outstanding at the time of the Closing and all trade liabilities of the type set forth on Schedule 1.2(a) incurred by Seller since the date of the Base Balance Sheet in the ordinary course of business and consistent with the terms of this Agreement which are outstanding at the time of the Closing (the "Specified Liabilities"). Buyer shall also assume in accordance with their terms (a) all performance obligations arising from and after the Closing Date under those leases and other contracts set forth on Schedule 1.2(b) (the "Assumed Contracts") and (b) product warranty liabilities other than any warranty liabilities arising in connection with Shiva Corporation or any of its affiliates, whether related to the agreement between Shiva Corporation and Seller, dated September 1, 1995 or otherwise with respect to sales of products on or prior to the Closing Date (the "Shiva Warranty Liability") arising from Seller's sales of products in the ordinary course of business (the "Warranty Liabilities"). Except for the Specified Liabilities, the Assumed Contracts and the Warranty Liabilities, Buyer shall not assume or be bound by any obligations or liabilities of Seller or any affiliate of Seller of any kind or nature, known, unknown, accrued, absolute, contingent or otherwise, whether now existing or hereafter arising whatsoever. In connection therewith and notwithstanding the foregoing, it is specifically agreed that Buyer shall not assume and shall not pay any other liabilities of the Seller, including, without limitation, the following: (i) Liabilities incurred by Seller in connection with or relating to this Agreement and the transactions provided for herein, including, without limitation, counsel and accountant's fees (except that Buyer agrees to pay one-half (1/2) of the audit fees reasonably incurred in connection with Seller's obligation to provide the audited financial statements pursuant to Section 2.7(a)(i), which such one-half of audit fees is estimated to be not in excess of $25,000), any broker's commissions or finder's fees and expenses pertaining to the performance by Seller and its affiliates of its or their obligations hereunder; (ii) Taxes (as defined in Section 2.8 hereof) of Seller (whether relating to periods before or after the transactions contemplated in this Agreement or incurred by Seller in connection with this Agreement, including any increase in taxes as a result of the applicability of Section 280G of the Code, and the transactions provided for herein), including any liability for Taxes arising out of the inclusion of Seller in any group filing consolidated, combined or unitary tax returns or arising out of any transferee liability; 8 (iii) Liabilities relating to all debt and other amounts owed to related parties or affiliates of the Seller; (iv) Liabilities related to any accrued bonuses or compensation due to Seller's employees or other amounts due to Seller's employees whether as a consequence of the transaction contemplated hereby or by virtue of any agreements between Seller or Stockholder and one or more of Seller's employees relating to a change in control of Seller or Stockholder, including, without limitation, those Change in Control Agreements between Stockholder and each of William Rosenberger, Eric Mikisch, Michael Shaeffer, Charlie Snell, and Richard Sterry; (v) Liabilities of Seller with respect to any options, warrants, agreements or convertible or other rights to acquire any shares of its capital stock of any class; and (vi) Liabilities in connection with or relating to all actions, suits, claims, proceedings, demands, assessments and judgments, costs, losses, liabilities, damages, deficiencies and expenses (whether or not arising out of third-party claims), including, without limitation, interest, penalties, reasonable attorneys' and accountants' fees and all amounts paid in investigation, defense or settlement of any of the foregoing. In furtherance of the foregoing, Seller shall be responsible for and pay any and all losses, damages, obligations, liens, assessments, judgments, fines, disposal and other costs and expenses, liabilities and claims, including, without limitation, interest, penalties and reasonable fees of counsel, engineers and experts, as the same are incurred, of every kind or nature whatsoever (all the foregoing being a "Claim" or the "Claims"), made by or owed to any person, other than Parent or Buyer, if any, to the extent any of the foregoing relates to the operations and assets of the Seller's business and arises in connection with or on the basis of events, acts, omissions, conditions or any other state of facts occurring or existing prior to or on the Closing (including, in each case, without limitation, any Claim relating to or associated with product liability matters, tax matters, pension and benefits matters, any failure to comply with applicable laws and/or permitting or licensing requirements, personal injury and property damage matters and environmental and worker health and safety matters). Buyer shall be responsible for and pay any and all Claims to the extent they relate to (x) the Assumed Liabilities or (y) the operation by Buyer of the Subject Assets after the Closing and arise in connection with or on the basis of events, acts, omissions, conditions or any other state of facts occurring or existing after the Closing (including, in each case, without limitation, any Claim relating to or associated with product liability matters, warranty claims, tax matters, pension and benefit matters, any failure to comply with applicable laws and/or permitting or licensing requirements, personal injury and property damage matters and environmental and worker health and safety matters). Any Claim, other than for the payment of the Assumed Liabilities, relating to operations and assets of the Seller's business and arising in connection with or on the basis of events, acts, omissions, conditions or any other state of facts 9 (collectively, "Facts") occurring or existing both before and after the Closing will be apportioned between Seller and Buyer according to their relative degrees of causation. Pursuant to the foregoing, Seller agrees with Buyer that Seller shall be solely responsible for any and all claims for injury (including death) or claims for damage, direct or consequential, resulting from or connected with products shipped or sold by Seller or services of the Seller's business provided on or prior to the Closing, and Buyer shall have no liability for such claims. Buyer agrees with Seller that Buyer shall be solely responsible for any and all warranty claims or claims for injury (including death) or claims for damage, direct or consequential, resulting from or connected with products shipped or sold or services provided by Buyer after the Closing. The liabilities which are not assumed by Buyer under this Agreement are hereinafter sometimes referred to as the "Excluded Liabilities." The Specified Liabilities, Assumed Contracts and Warranty Liabilities are collectively sometimes referred to as the "Assumed Liabilities." The assumption of said liabilities by any party hereunder shall not enlarge any rights of third parties under contracts or arrangements with Buyer or Seller and nothing herein shall prevent any party from contesting in good faith with any third party any of said liabilities. 1.3 Purchase Price and Payment. In consideration of the sale by Seller to Buyer of the Subject Assets, subject to the assumption by Buyer of the Liabilities and the satisfaction of all of the conditions contained herein, Buyer agrees that at the Closing it will (a) deliver to Seller Ten Million Eight Hundred Seventy-One Thousand Dollars ($10,871,000) (the "Estimated Purchase Price") by bank cashiers check in Boston Clearing House funds or by wire transfer of immediately available funds. The Estimated Purchase Price shall be subject to adjustment as provided below. The Estimated Purchase Price as so adjusted is herein referred to as the "Purchase Price". (a) Purchase Price Adjustment. (i) Within sixty (60) days of the Closing and determined as of the Closing, Seller shall at its expense cause an audit for the purpose of preparing a statement of Subject Assets acquired and Assumed Liabilities (the "Closing Statement of Assets and Liabilities") in the form attached hereto as Exhibit 1.3. Within five (5) days following completion of such audit, Seller shall prepare and deliver the Closing Statement of Assets and Liabilities to Buyer. The Closing Statement of Assets and Liabilities shall be accompanied by a check or wire transfer of an amount equal to the "Net Worth Difference" (as defined below), if any, together with interest as described in Section 1.3(a)(iv). It is understood by the parties hereto that any such payment may not represent payment in full of the final Purchase Price, which such final Purchase Price shall be determined as provided in this Section 1.3. Said Statement shall (x) be complete and correct in all material respects, (y) represent a fair statement of the 10 Subject Assets and Assumed Liabilities in all material respects and (z) be prepared on the same basis, and in accordance with generally accepted accounting principles using the same methods and procedures applied on a basis consistent with the methods and procedures used to prepare the Base Balance Sheet. In addition, in preparing the Closing Statement of Assets and Liabilities, reserve levels, including reserves and allowances for accounts receivables, inventories, warranty claims, and other items, shall be determined on a basis consistent with that used to determine such reserves in the Base Balance Sheet, adjusted only for changes in circumstances, such as known bad debts, increases in dollar amount or quantities, or identified potential liabilities. Notwithstanding the foregoing, the parties hereto agree as follows: (i) the "Accrued warranty reserve" on the Closing Statement of Assets and Liabilities shall remain at $219,630 and not be reduced; (ii) the "Obsolescense reserve" on the Closing Statement of Assets and Liabilities shall be the sum of $591,992 from the Base Balance Sheet plus $439,000 that was recorded during the quarter ended June 30, 1997; (iii) the inventory accounts on the Closing Statement of Assets and Liabilities shall not be adjusted upward by $165,000 which Seller and Stockholder have indicated they believe is an amount by which such accounts in the aggregate were understated on the Base Balance Sheet on account of overhead; and (iv) the fixed asset depreciation accounts on the Closing Statement of Assets and Liabilities shall not be adjusted downward by $35,000 which amount Seller and Stockholder have indicated they believe is an amount by which such accounts in the aggregate were overstated on the Base Balance Sheet. Buyer's accountants will be provided reasonable and timely access to the audit working papers of Seller's accountants documenting the procedures they performed in forming their opinion on the Closing Statement of Assets and Liabilities. (ii) If the amount of total Subject Assets less Assumed Liabilities ("Net Worth") as shown on the Closing Statement of Assets and Liabilities is less than $8,110,000 (such difference, the "Net Worth Difference") then the Purchase Price shall be equal to the Estimated Purchase Price decreased by the Net Worth Difference. (iii) If Buyer disagrees with the Closing Statement of Assets and Liabilities, Buyer shall, within forty-five (45) days after receipt thereof, furnish to Seller a written statement of such disagreement, together with an explanation of the reasons therefor. The parties hereto shall first use commercially reasonable efforts to resolve such disagreement among themselves. If the parties are unable to resolve the dispute within ten (10) business days after delivery of such notification, the dispute shall be submitted to accountants other than Ernst & Young LLP or Deloitte & Touche LLP jointly selected by Buyer and Seller (the "Accountants"). The Accountants shall be instructed to apply the same methods, policies and procedures as were applied in preparing the Base Balance Sheet. The determination of the Accountants as to the resolution of any dispute shall be binding and conclusive upon all parties hereto. All determinations pursuant to this Section 1.3(b)(iii) shall be in writing and shall be delivered to Buyer and Seller. Any adjustment to the Estimated Purchase Price made 11 pursuant to this Section 1.3(b) may be entered in and enforced by any court having jurisdiction thereover. The fees and expenses of the Accountants in connection with the resolution of disputes pursuant to this Section 1.3(b)(iii) shall be borne equally by the Buyer and Seller. (iv) If, pursuant to Section 1.3(b)(ii), the Purchase Price is less than the Estimated Purchase Price, the difference (less any adjustment amount previously paid pursuant to Section 1.3(a)(i)), together with interest thereon at the base lending rate as announced by BankBoston at its headquarters and in effect from time to time plus one percent (1%), calculated daily, from the Closing to the payment of such difference, shall be paid by Seller to Buyer. Any cash amount due to Buyer shall be paid or delivered within five (5) business days after the later of (i) delivery of the Closing Statement of Assets and Liabilities and (ii) the earlier of (A) the resolution of any dispute by Buyer and Seller following notification of their disagreement or (B) a determination by the Accountants pursuant to Section 1.3(b)(iii) above. Any such cash amount shall be paid by wire transfer of immediately available funds to an account designated by Buyer. (c) Notwithstanding anything contained herein to the contrary, in no event shall the Purchase Price be increased above the Estimated Purchase Price. (d) The parties hereto acknowledge and agree that the adjustment to the Estimated Purchase Price provided for in this Section 1.3 shall not be limited in any way by the limitations on indemnification in Section 7; provided that no claim for indemnification shall result in a duplication of any adjustment under this Section 1.3. 1.4 Time and Place of Closing. The closing of the purchase and sale provided for in this Agreement (herein called the "Closing") shall be held at the offices of Goodwin, Procter & Hoar LLP at 53 State Street, Boston, MA, at the close of business on the date hereof. 1.5 Delivery of Agreement of Assumption of Assumed Liabilities. At the Closing, Buyer shall deliver or cause to be delivered to Seller, an Agreement for Assumption of the Assumed Liabilities by Buyer in the form of Exhibit 1.5 hereto. 1.6 Transfer of Subject Assets. At the Closing, Seller shall deliver or cause to be delivered to Buyer good and sufficient instruments of transfer transferring to Buyer title to all the Subject Assets. Such instruments of transfer (a) shall be in the form attached hereto as Exhibit 1.6 and (b) shall effectively vest in Buyer good and marketable title to all the Subject Assets free and clear of all liens, restrictions and encumbrances not shown or reflected on the Base Balance Sheet. 12 1.7 Delivery of Records and Contracts. At the Closing, Seller shall deliver or cause to be delivered to Buyer all of Seller's leases, contracts, commitments, agreements (including without limitation non-competition agreements) and rights, with such assignments thereof and consents to assignments as are necessary to assure Buyer of the full benefit of the same. Seller shall also deliver to Buyer at the Closing all of Seller's business records, state tax returns, books and other data relating to its assets, business and operations (except corporate records and other property of Seller excluded under Subsection 1.1(b) as to which only copies need be delivered in accordance with such Section), and Seller shall take all requisite steps to put Buyer in actual possession and operating control of the assets and business of Seller. Notwithstanding the foregoing, (i) Seller need not deliver those records not located at Seller's offices for which physical delivery may not be practicable provided that Seller and Stockholder provide Buyer with such reasonable access to such records as Buyer may deem necessary from time to time; and (ii) Seller and its counsel may retain copies of such records as Seller deems necessary in its reasonable good faith judgment for the purposes of satisfying its financial, tax, and legal reporting requirements, provided that, at or prior to Closing, but in no event shall Seller, Stockholder or its counsel retain copies of materials which constitute technology which is part of the Subject Assets. 1.8 Further Assurances. Seller from time to time after the Closing at the request of Buyer and without further consideration shall execute and deliver further instruments of transfer and assignment and take such other action as Buyer may reasonably require to more effectively transfer and assign to, and vest in, Buyer each of the Subject Assets. Seller shall cooperate with Buyer to permit Buyer to enjoy Seller's rating and benefits under the workman's compensation laws and unemployment compensation laws of applicable jurisdictions, to the extent permitted by such laws. Nothing herein shall be deemed a waiver by Buyer of its right to receive at the Closing an effective assignment of each of the leases, contracts, commitments or rights of Seller as otherwise set forth in this Agreement. 1.9 Allocation of Purchase Price. Attached hereto as Exhibit 1.9 is an estimate prepared by Buyer of the allocation of the purchase price (and all other capitalized costs) reasonably among the Subject Assets. Within ninety (90) days of the Closing, Buyer shall, after consultation with Stockholder, allocate the purchase price (and all other capitalized costs) reasonably among the Subject Assets on a basis substantially consistent with the estimate provided as Exhibit 1.9 attached hereto. Such allocation shall be made in accordance with the provisions of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be binding upon Buyer and Seller for all purposes (including financial accounting purposes, financial and regulatory reporting purposes and tax purposes). Buyer and Seller also each agree to file IRS Form 8594 consistent with the foregoing and in accordance with Section 1060 of the Code. 1.10 Sales and Transfer Taxes. All sales and transfer taxes, fees, duties and other similar expenses under applicable law incurred in connection with this Agreement or the transactions contemplated thereby will be borne and paid by Seller, and Seller shall promptly 13 reimburse Buyer for the payment of any such tax, fee or duty which it is required to make under applicable law. 1.11 Accounts Receivable. Seller and Stockholder shall use commercially reasonable efforts to assist Buyer in collecting the Receivables following the Closing. Any and all amounts received by Seller and Stockholder in respect of any Receivables shall be promptly remitted to Buyer. 1.12 Procedures for Assets not Transferable. If any of the contracts or agreements or any other property or rights included in the Subject Assets is not assignable or transferable either by virtue of the provisions thereof or under applicable law without the consent of some party or parties and any such consent is not obtained prior to the Closing, this Agreement and the related instruments of transfer shall not constitute an assignment or transfer thereof and, unless otherwise agreed between Buyer and Seller with respect to such contract, Buyer shall not assume Seller's obligations with respect thereto as provided herein, but Seller shall use all commercially reasonable efforts to obtain any such consent as soon as possible after the Closing or otherwise obtain for Buyer the practical benefit of such property or rights and Buyer shall use all commercially reasonable efforts to assist in that endeavor. In the event that any purchase order included in the Subject Assets is not assigned by Seller by reason of the foregoing provisions of this Section 1.12, Buyer agrees to purchase from Seller at the contract price all property thereunder which Seller is obligated to purchase and Seller agrees to sell the same to Buyer at such price. In the event that any sales order included in the Subject Assets is not assigned by Seller by reason of the foregoing provisions of this Section 1.12, Buyer agrees to sell to Seller any products required to complete such contracts at the same price provided for therein and otherwise to complete such contracts on behalf of Seller and Seller agrees to purchase the same from Buyer at such price. If Seller fails to comply with the provisions of this Section 1.12, Buyer may on its own behalf undertake to complete such contracts and collect amounts due thereunder in the name of Seller. 1.13 Employees, Wages and Benefits. (a) Seller shall terminate all employees of the Seller's business and Seller shall be responsible for making all severance payments to such terminated employees in respect of such terminations. Buyer shall not assume or have any obligations or liabilities with respect to any employees of Seller or such terminations. Buyer intends to hire all or substantially all such terminated employees immediately as at-will employees, provided that each such employee agrees, as a condition of employment, after the Closing at substantially the same salary as previously provided by Seller, to execute Buyer's standard form of Proprietary Information and Inventions Agreement and such other agreements as Buyer deems reasonably necessary to conduct its business. Nothing in this Agreement shall be construed as a commitment or obligation of Buyer to accept for employment, or otherwise continue the employment of, any of Seller's employees. 14 (b) Seller shall pay all wages, salaries, commissions and the cost of all fringe benefits provided to each employee of the Seller's business which shall have become due for work performed as of and through the Closing, and Seller shall collect and pay all taxes in respect of such wages, salaries, commissions and benefits. (c) Seller acknowledges and agrees that Buyer is not, except as provided below, assuming and shall not have any obligations or liabilities under any benefit plan maintained by, or for the benefit of employees of, the Seller's business, including without limitation obligations for severance. (d) Effective as of the Closing, Buyer shall establish a defined contribution 401(k) profit sharing plan (the "Buyer's Plan") to provide benefits to those Employees employed by it immediately following the Closing (the "Transferred Employees") who were, as of immediately prior to the Closing, entitled to coverage under the Seller's 401(k) Profit Plan ("Seller's Plan"). The Buyer's Plan shall credit all Transferred Employees with the actual vesting service under Seller's Plan. In consideration of the transfer of assets described below, the Buyer's Plan shall assume and discharge all obligations and liabilities of Seller's Plan for all benefits held under the Seller's Plan for the Transferred Employees. (e) As soon as practicable after the Closing, (i) Seller, at its expense, shall cause the trustee or other funding medium of Seller's Plan to transfer to the trustee or other fiduciary of the Buyer's Plan the portion of Seller's Plan assets allocated to the accounts of the Transferred Employees, together with the earnings accrued under Seller's Plan for the period from the Closing to the date of actual transfer of assets and (ii) Seller shall provide Buyer with such pertinent data or information and in such form or format as Buyer may reasonably require to determine the Transferred Employees' service, compensation and account balances under Seller's Plan as of the Closing. (f) Seller and Buyer shall take such actions as may be required by Section 414(l) of the Code in connection with the spinoff and transfer of assets from Seller's Plan to Buyer's Plan. All costs associated with such spinoff and transfer shall be borne by the Seller. (g) The Transferred Employees will become covered under the welfare benefit plans maintained by Buyer upon commencement of employment with Buyer. (h) Seller shall take such actions as may be necessary to permit each Transferred Employee to continue to be eligible to submit for reimbursement under Seller's health care and dependent care flexible spending accounts maintained in accordance with Sections 105, 129 and 125 of the Code expenses incurred after the Closing and prior to the end of the current coverage periods. 15 SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDER. 2.1 Making of Representations and Warranties. As a material inducement to Buyer to enter into this Agreement and consummate the transactions contemplated hereby, Seller and the Stockholder jointly and severally hereby make to Buyer the representations and warranties contained in this Section 2. 2.2 Organization and Qualifications of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the Delaware with full corporate power and authority to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is currently conducted or proposed to be conducted. The copies of Seller's Articles of Incorporation as amended to date, certified by the Delaware Secretary of State, and of Seller's by-laws, as amended to date, certified by Seller's Clerk or Secretary, and heretofore delivered to Buyer's counsel, are complete and correct, and no amendments thereto are pending. Seller is not in violation of any term of its Articles of Incorporation or by-laws. Seller is duly qualified to do business as a foreign corporation in New Hampshire, California, Maryland and Pennsylvania, and it is not required to be licensed or qualified to conduct its business or own its property in any other jurisdiction. 2.3 Subsidiaries. Seller has no subsidiaries and does not own any securities issued by any other business organization or governmental authority, except U.S. Government securities, bank certificates of deposit and money market accounts acquired as short-term investments in the ordinary course of its business. Seller does not own or have any direct or indirect interest in or control over any corporation, partnership, joint venture or entity of any kind. 2.4 Capital Stock of Seller; Beneficial Ownership. (a) The authorized capital stock of Seller consists of 1,000 shares of Common Stock, $1.00 par value, of which 100 shares are duly and validly issued, outstanding, fully paid and non-assessable and of which 900 shares are authorized but unissued. There are no outstanding options, warrants, rights, commitments, preemptive rights or agreements of any kind for the issuance or sale of, or outstanding securities convertible into, any additional shares of capital stock of any class of Seller. None of Seller's capital stock has been issued in violation of any federal or state law. There are no voting agreements, trusts, proxies or other agreements, instruments or undertakings with respect to the voting of Seller's capital stock to which Seller or the Stockholder is a party. (b) The Stockholder owns beneficially and of record 100 shares of Common Stock of Seller, which constitutes all of Seller's outstanding capital stock. 16 2.5 Authority of Seller and the Stockholder. (a) Seller has full right, authority and power to enter into this Agreement and each agreement, document and instrument to be executed and delivered by Seller pursuant to this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance by Seller of this Agreement and each such other agreement, document and instrument have been duly authorized by all necessary action of Seller and its Stockholder and no other action on the part of Seller or its Stockholder is required in connection therewith. This Agreement and each agreement, document and instrument executed and delivered by Seller pursuant to this Agreement constitutes, or when executed and delivered will constitute, valid and binding obligations of Seller enforceable in accordance with their terms. The execution, delivery and performance by Seller of this Agreement and each such agreement, document and instrument: (i) does not and will not violate any provision of the Articles of Incorporation or by-laws of Seller; (ii) does not and will not violate any laws of the United States, or any state or other jurisdiction applicable to Seller or require Seller to obtain any approval, consent or waiver of, or make any filing with, any person or entity (governmental or otherwise) that has not been obtained or made; and (iii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under, give rise to a right of termination of, or permit any third party to exercise any additional rights under, any indenture or loan or credit agreement or any other agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which Seller is a party or by which the property of Seller is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the Subject Assets, except as specifically identified on Schedule 2.5(a). (b) The Stockholder has full right, authority, power and capacity to enter into this Agreement and each agreement, document and instrument to be executed and delivered by or on behalf of him or her pursuant to this Agreement and to carry out the transactions contemplated hereby and thereby. This Agreement and each agreement, document and instrument executed and delivered by the Stockholder pursuant to this Agreement constitutes, or when executed and delivered will constitute, valid and binding obligations of the Stockholder enforceable in accordance with 17 their respective terms. The execution, delivery and performance by the Stockholder of this Agreement and each such agreement, document and instrument: (i) does not and will not violate any laws of the United States, or any state or other jurisdiction applicable to the Stockholder or require the Stockholder to obtain any approval, consent or waiver of, or make any filing with, any person or entity (governmental or otherwise) that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under, or give rise to a right of termination of, any indenture or loan or credit agreement or any other agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which the Stockholder is a party or by which the property of the Stockholder is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the Subject Assets. 2.6 Real and Personal Property. (a) Owned Real Property. Seller does not own any real property ("Owned Real Property"). (b) Leased Real Property. All of the real property leased by Seller as tenant or lessee is identified on Schedule 2.6(b) (collectively referred to herein as the "Leased Real Property"). Seller hereby makes the following representations and warranties with respect to the Leased Real Property: (i) Leases. The copies of the leases of the Leased Real Property, together with any amendments thereto, (collectively, the "Leases") delivered by Seller to Buyer and the information with respect to each of the Leases set forth in Schedule 2.6(b) is complete, accurate, true and correct. With respect to each of the Leases, except as set forth on Schedule 2.6(b): (A) each of the Leases is in full force and effect and has not been modified, amended, or altered, in writing or otherwise; (B) all obligations of the landlord or lessor under the Leases which have accrued have been performed in all material respects, and to the best of the knowledge of Seller, no landlord or lessor is in default in any material respect under any Lease; (C) all obligations of the tenant or lessee under the Leases which have accrued have been performed in all material respects, and Seller is 18 not in default under any Lease, and no circumstance presently exists which, with notice or the passage of time, or both, would give rise to a default by Seller; and (D) Seller has obtained or will obtain prior to the Closing the consent of each landlord or lessor under any Leases whose consent is required to the transfer of the Leased Real Property to Buyer, and such transfer will not give any landlord or lessor under any Lease any remedy, including, without limitation, any right to declare a default under any Lease. (ii) Title and Description. Seller holds a good, clear, marketable, valid and enforceable leasehold interest in the Leased Real Property pursuant to the Leases, subject only to the right of reversion of the landlord or lessor under the Leases, free and clear of all other prior or subordinate interests, including, without limitation, mortgages, deeds of trust, ground leases, leases, subleases, assessments, tenancies, claims, covenants, conditions, restrictions, easements, judgments or other encumbrances or matters affecting title, and free of encroachments onto or off of the Leased Real Property, except for (x) easements, covenants, restrictions and similar encumbrances that do not and could not interfere with the use of the Leased Real Property as currently used and improved, and (y) minor encroachments that do not and are not likely to affect materially the value or use of the Leased Real Property as currently used and improved and that could be removed without material cost ((x) and (y) are collectively referred to as "Permitted Encumbrances"), and except for matters set forth on Schedule 2.6(b). (iii) Condition. Except as set forth on Schedule 2.6(b), there are, to Seller's knowledge, no material defects in the physical condition of any improvements constituting a part of the Leased Real Property, including, without limitation, structural elements, mechanical systems, roofs or parking and loading areas, and all of such improvements are in good operating condition and repair, have been well maintained and are free from infestation by rodents or insects. Except as set forth on Schedule 2.6(b), to Seller's knowledge none of the Leased Real Property is subject to special flood or mudslide hazards or within the 100 year flood plain. To Seller's knowledge all water, sewer, gas, electric, telephone, drainage and other utilities required by law or necessary for the current or planned operation of the Leased Real Property have been installed and connected pursuant to valid permits, and are sufficient to service the Leased Real Property. (iv) Compliance with Law; Government Approvals. Seller has received no notice from any governmental authority of any violation of any law, ordinance, regulation, license, permit or authorization issued with respect to any of the Leased Real Property that has not been corrected heretofore, and no such violation by Seller or, to its knowledge, by any landlord of Seller now exists which could have an 19 adverse effect on the operation or value of any of the Leased Real Property. All improvements constituting a part of the Leased Real Property are in compliance in all respects with all applicable laws, ordinances, regulations, licenses, permits and authorizations, and there are presently in effect all licenses, permits and authorizations required by law, ordinance, or regulation. There is at least the minimum access required by applicable subdivision or similar law to the Leased Real Property. Seller has received no notice of any pending or threatened real estate tax deficiency or reassessment or condemnation of all or any portion of any of the Leased Real Property. (c) Personal Property. A complete list of Seller's machinery, equipment and other tangible personal property is contained in Schedule 2.6(c). Except as specifically disclosed in said Schedule or in the Base Balance Sheet (as hereinafter defined), Seller has good and marketable title to all of its personal property. None of such personal property or assets is subject to any mortgage, pledge, lien, conditional sale agreement, security agreement, encumbrance or other charge except as specifically disclosed in said Schedule or in the Base Balance Sheet or immaterial liens imposed by law, such as mechanics, materialmen's, warehousemen's and carriers' liens, which secure obligations incurred in the ordinary course of business and which are not yet past due (such liens, "Permitted Liens"). Except as set forth on Schedule 2.6(c), the Base Balance Sheet reflects all personal property of Seller, and the Subject Assets are sufficient for Buyer to continue the business of Seller as conducted by Seller. Except as otherwise specified in Schedule 2.6(c), and except for deficiencies which do not materially adversely impair the value of any of the Subject Assets, all leasehold improvements, furnishings, machinery and equipment of Seller are in good repair, have been well maintained, and substantially comply with all applicable laws, ordinances and regulations, and such machinery and equipment is in good working order. Seller does not know of any pending or threatened change of any such laws, ordinances or regulations which could adversely affect Seller or its business. 2.7 Financial Statements. (a) Seller has delivered to Buyer the following financial statements, copies of which are attached hereto as Schedule 2.7: (i) Balance sheets of Seller at September 30, 1994 and 1996 and statements of income, retained earnings and cash flows for the years ended September 30, 1994 and 1996, with appropriate footnotes, audited by Arthur Andersen LLP and Ernst & Young LLP, respectively, and unaudited balance sheet, statement of income, retained earnings and cash flows for the year ended September 30, 1995, certified by the Stockholder's Chief Financial Officer. (ii) Unaudited balance sheet of Seller as of March 31, 1997 (third column) (herein the "Balance Sheet") and statements of income, retained earnings and 20 cash flows for the six-month period then ended, with appropriate footnotes, certified by Stockholder's chief financial officer. (iii) Unaudited balance sheet of Seller as of March 31, 1997 labeled "Base Balance Sheet" (first column) together with the "Base Balance Sheet Detail" (such balance sheet with such detail, the "Base Balance Sheet"). Said financial statements have been prepared in accordance with generally accepted accounting principles applied consistently during the periods covered thereby, are complete and correct in all material respects, and present fairly in all material respects the financial condition of Seller at the dates of said statements and the results of its operations and its cash flows for the periods covered thereby. (b) As of the date of the Base Balance Sheet, Seller had no liabilities of any nature, whether accrued, absolute, contingent or otherwise (including without limitation liabilities as guarantor or otherwise with respect to obligations of others, or liabilities for taxes due or then accrued or to become due or contingent liabilities relating to activities of Seller or the conduct of its business prior to the date of the Base Balance Sheet), except liabilities stated or adequately reserved against on the Base Balance Sheet, disclosed in the notes thereto, or reflected in Schedules furnished to Buyer hereunder as of the date hereof. (c) As of the date hereof, Seller had and will have no liabilities of any nature, whether accrued, absolute, contingent or otherwise (including without limitation liabilities as guarantor or otherwise with respect to obligations or others, or liabilities for taxes due or then accrued or to become due or contingent liabilities relating to activities of Seller or the conduct of its business prior to the date hereof), except liabilities (i) stated or adequately reserved against on the Base Balance Sheet or the notes thereto, (ii) reflected in Schedules furnished to Buyer hereunder on the date hereof, or (iii) incurred in the ordinary course of business of Seller consistent with the terms of this Agreement. 2.8 Taxes. (a) Seller has (i) timely and accurately filed within the time period for filing or any extension granted with respect thereto all federal, state, local and other returns, estimates and reports ("Returns") relating to any and all taxes or other governmental charges, obligations or fees and any related interest or penalties ("Tax" or "Taxes") it is required to file and has paid all Taxes shown due thereon or has provided adequate reserves therefor on its books and records, and (ii) withheld with respect to Seller's employees all federal and state income Taxes, FICA, FUTA and other Taxes required to be withheld and paid such withheld amounts to the appropriate governmental body within the time period required by law. All state Returns filed with respect to Seller for the taxable period ended on September 30, 1995 are set forth on and attached to Schedule 2.8 hereto. 21 (b) Neither the Internal Revenue Service nor any other governmental authority is now asserting or, to the knowledge of Seller or the Stockholder, threatening to assert against Seller any deficiency or claim for additional Taxes for which the Buyer might become liable. There are no security interests on any of the Subject Assets that arose in connection with any failure (or alleged failure) to pay any Taxes. 2.9 Collectibility of Accounts Receivable. All of the accounts receivable of Seller (less the reserve for bad debts) are or will be at the Closing valid and enforceable claims, fully collectible (to the knowledge of Seller and Stockholder) and subject to no set off or counterclaim and do not relate to sales pursuant to which the Seller is potentially obligated, following the Closing, to (a) accept the return of products sold, (b) provide any additional services or (c) grant any payment terms not in the ordinary course of business. Seller has no accounts or loans receivable from any person, firm or corporation which is affiliated with Seller or from any director, officer or employee of Seller, except as disclosed on Schedule 2.9, and all accounts and loans receivable from any such person, firm or corporation shall be paid in cash prior to the Closing. 2.10 Inventories. Except as disclosed in Schedule 2.10, all items in the inventories of Seller are of a quality and quantity saleable in the ordinary course of its business. The valuations of inventory on the Base Balance Sheet are consistent with the inventory costs used to generate the cost of goods sold used during the fiscal year ended September 30, 1996. Except as disclosed in Schedule 2.10, said inventories reflect write-downs to realizable values in the case of items which are below standard quality or have become obsolete or unsalable (except at prices less than cost) through regular distribution channels in the ordinary course of the business of Seller. No such write-downs since September 30, 1995 have had a material adverse affect on the financial condition or results of operations of Seller. The values of the inventories stated in the Base Balance Sheet and any subsequent financial statements of Seller reflect the normal inventory valuation policies of Seller and were determined at the lower of cost or market in accordance with generally accepted accounting principles, practices and methods consistently applied. Purchase commitments for raw materials and parts are not in excess of normal requirements and none are at prices in excess of current market prices. All inventory items are located on the Leased Real Property and no inventory is currently located at customers or vendors on assignment, on consignment or on an evaluation basis. Since the date of the Base Balance Sheet, no inventory items have been sold or disposed of except through sales in the ordinary course of business and without unusual price discounts or other price discounting inconsistent with Seller's prior past practices and all sales commitments made for Seller's products are at prices not less than inventory values plus selling expenses. 2.11 Absence of Certain Changes. Except as disclosed in Schedule 2.11, since the date of the Base Balance Sheet there has not been: (a) Any change in the financial condition, properties, assets, liabilities, business or operations of Seller which change by itself or in conjunction with all other such 22 changes, whether or not arising in the ordinary course of business, has been materially adverse with respect to Seller; (b) Any contingent liability incurred by Seller as guarantor or otherwise with respect to the obligations of others or any cancellation of any material debt or claim owing to, or waiver of any material right of, Seller; (c) Any mortgage, encumbrance or lien, other than Permitted Liens (as defined in Section 2.6(c)), placed on any of the properties of Seller which remains in existence on the date hereof or will remain on the Closing Date; (d) Any obligation or liability of any nature incurred by Seller, whether accrued, absolute, contingent or otherwise (including without limitation liabilities for Taxes due or to become due or contingent or potential liabilities relating to products or services provided by Seller or the conduct of Seller's business since the date of the Base Balance Sheet), other than obligations and liabilities incurred in the ordinary course of business consistent with the terms of this Agreement; (e) Any purchase, sale or other disposition, or any agreement or other arrangement for the purchase, sale or other disposition, of any of the properties or assets of Seller other than in the ordinary course of business; (f) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the value of the Subject Assets; (g) Any declaration, setting aside or payment of any dividend by Seller, or the making of any other distribution in respect of the capital stock of Seller, or any direct or indirect redemption, purchase or other acquisition by Seller of its own capital stock; (h) Any labor trouble or claim of unfair labor practices involving Seller; any change in the compensation payable or to become payable by Seller to any of its officers, employees, agents or independent contractors other than normal merit increases in accordance with its usual practices, or any bonus payment or arrangement made to or with any of such officers, employees, agents or independent contractors; (i) Any change in the personnel constituting the officers or management of Seller; (j) Any payment or discharge of a material lien or liability of Seller which was not shown on the Base Balance Sheet or incurred in the ordinary course of business thereafter; 23 (k) Any obligation or liability incurred by Seller to any of its officers, directors, stockholders or employees, or any loans or advances made by Seller to any of its officers, directors, stockholders or employees, except normal compensation and expense allowances; (l) Any change in accounting methods or practices, credit practices or collection policies used by Seller; (m) Any other transaction entered into by Seller other than transactions in the ordinary course of business; or (n) Any agreement or understanding whether in writing or otherwise, for Seller to take any of the actions specified in paragraphs (a) through (m) above. 2.12 Ordinary Course. Since the date of the Base Balance Sheet, Seller has conducted its business only in the ordinary course and consistently with its prior practices. 2.13 Banking Relations. All of the arrangements which Seller has with any banking institution are completely and accurately described in Schedule 2.13, indicating with respect to each of such arrangements the type of arrangement maintained (such as checking account, borrowing arrangements, safe deposit box, etc.) and the person or persons authorized in respect thereof. 2.14 Intellectual Property. (a) Except as described in Schedule 2.14, Seller has exclusive ownership of, or exclusive license to use, all patent, copyright, trade secret, trademark, or other proprietary rights (collectively, "Intellectual Property") used or to be used in the business of Seller as presently conducted or contemplated. Seller's rights in all of such Intellectual Property are freely transferable. There are no claims or demands of any other person pertaining to any of such Intellectual Property and no proceedings have been instituted, or are pending or threatened, which challenge the rights of Seller in respect thereof. Seller has the right to use, free and clear of claims or rights of other persons, all customer lists, designs, manufacturing or other processes, computer software, systems, data compilations, research results and other information required for or incident to its products or its business as presently conducted or contemplated; provided that Stockholder and Seller do not represent that their use does not infringe upon Intellectual Property rights of others except as provided in Section 2.14(f). (b) All patents, patent applications, trademarks, trademark applications and registrations and registered copyrights which are owned by or licensed to Seller or used or to be used by Seller in its business as presently conducted or contemplated, and all other items of Intellectual Property which are material to the business or operations of Seller, are listed in Schedule 2.14. All of such patents, patent applications, trademark registrations, trademark 24 applications and registered copyrights have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the United States Register of Copyrights, or the corresponding offices of other jurisdictions as identified on said Schedule, and have been properly maintained and renewed in accordance with all applicable provisions of law and administrative regulations of the United States and each such jurisdiction. (c) All licenses or other agreements under which Seller is granted rights in Intellectual Property are listed in Schedule 2.14, other than nonexclusive licenses to Seller of generally available commercial software. All said licenses or other agreements are in full force and effect, there is no material default by any party thereto, and, except as set forth on Schedule 2.14, all of Seller's rights thereunder are freely assignable. To the knowledge of Seller, the licensors under said licenses and other agreements have and had all requisite power and authority to grant the rights purported to be conferred thereby. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to Buyer. (d) All licenses or other agreements under which Seller has granted rights to others in Intellectual Property owned or licensed by Seller are listed in Schedule 2.14. All of said licenses or other agreements are in full force and effect, there is no material default by any party thereto, and, except as set forth on Schedule 2.14, all of Seller's rights thereunder are freely assignable. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to Buyer. (e) Seller has employed sound business practice to establish and preserve its ownership of all Intellectual Property rights with respect to its products, services and technology. Except as noted on Schedule 2.14(e), Seller has required all professional and technical employees, and other employees having access to valuable non-public information of Seller, to execute agreements under which such employees are required to convey to Seller ownership of all inventions and developments conceived or created by them in the course of their employment and to maintain the confidentiality of all such information of Seller. Seller has not made any such information available to any person other than employees of Seller except pursuant to written agreements requiring the recipients to maintain the confidentiality of such information and appropriately restricting the use thereof, which written agreements are listed on Schedule 2.14(e). Seller has no knowledge of any infringement by others of any of its Intellectual Property rights. (f) To Seller's knowledge, the present and contemplated business, activities and products of Seller do not infringe any Intellectual Property of any other person. No proceeding charging Seller with infringement of any adversely held Intellectual Property has been filed or is threatened to be filed. To Seller's knowledge, there exists no unexpired patent or patent application which includes claims that would be infringed by or otherwise adversely affect the products, activities or business of Seller. Seller is not making unauthorized use of any confidential information or trade secrets of any person, including without limitation any 25 former employer of any past or present employee of Seller. Except as set forth in Schedule 2.14, neither Seller nor, to the knowledge of Seller, any of its employees have any agreements or arrangements with any persons other than Seller related to confidential information or trade secrets of such persons or restricting any such employee's ability to engage in business activities of any nature. The activities of Seller's employees on behalf of Seller do not violate any such agreements or arrangements known to Seller which any such employees have with other persons. 2.15 Contracts. Except for contracts, commitments, plans, agreements and licenses described in Schedule 2.15 (true and complete copies of which have been delivered to Buyer or its counsel), Seller is not a party to or subject to: (a) any plan or contract providing for bonuses, pensions, options, stock purchases, deferred compensation, retirement payments, profit sharing, collective bargaining or the like, or any contract or agreement with any labor union; (b) any employment contract or contract for services; (c) any contract or agreement for the purchase of any commodity, material or equipment except purchase orders (i) listed on Schedule 2.32, or (ii) in the ordinary course for less than $2,500 each, such orders for less than $2,500 each not exceeding $50,000 in the aggregate, of which no more than $70,000 represents contracts to purchase non-inventory items; (d) any other contracts or agreements creating any obligations of Seller of $10,000 or more with respect to any such contract or agreement not specifically disclosed elsewhere under this Agreement; (e) any contract or agreement providing for the purchase of all or substantially all of its requirements of a particular product from a supplier; (f) any contract or agreement involving more than $10,000 which by its terms does not terminate or is not terminable without penalty by Seller or any successor or assign within one year after the date hereof; (g) any contract or agreement for the sale or lease of its products not made in the ordinary course of business; (h) any contract which, as a result of the execution, delivery and performance of this Agreement and each agreement, document and instrument executed and delivered by Seller pursuant to this Agreement will give rise to or permit any third party to exercise additional rights under any contract or agreement to which Seller is a party and which is included in or related to the Subject Assets or the Liabilities, including, without limitation, 26 any contract which provides for the transfer of any intellectual property, such as source code or other information, upon a change in control of the Seller; (i) any contract with any sales agent or distributor of products of Seller; (j) any contract containing covenants limiting the freedom of Seller to compete in any line of business or with any person or entity; (k) any contract or agreement for the purchase of any fixed asset for a price in excess of $5,000 whether or not such purchase is in the ordinary course of business; (l) any license agreement (as licensor or licensee); (m) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for the borrowing of money; or (n) any contract or agreement with any officer, employee, director or stockholder of Seller or with any persons or organizations controlled by or affiliated with any of them. Seller is not in default under any such contracts, commitments, plans, agreements or licenses described in said Schedule and has no knowledge of conditions or facts which with notice or passage of time, or both, would constitute a default. 2.16 Litigation. Schedule 2.16 hereto lists all currently pending litigation and governmental or administrative proceedings or investigations to which Seller is a party. Except for matters described in Schedule 2.16, there is no litigation or governmental or administrative proceeding or investigation pending or, to the knowledge of Seller, threatened against Seller or any affiliate of Seller which is reasonably likely to have a material adverse effect on Seller's properties, assets, prospects, financial condition or business or which would prevent or hinder the consummation of the transactions contemplated by this Agreement. With respect to each matter set forth therein, Schedule 2.16 sets forth a description of the matter, the forum (if any) in which it is being conducted, the parties thereto and the type and amount of relief sought. 2.17 Compliance with Laws. Except as set forth in Schedule 2.17 Seller is in compliance in all material respects with all applicable statutes, ordinances, orders, judgments, decrees and rules and regulations promulgated by any federal, state, municipal or other governmental authority which apply to the Seller or to the conduct of its business, and Seller has not received notice of a violation or alleged violation of any such statute, ordinance, order, rule or regulation. 27 2.18 Insurance. The physical properties and assets of Seller are insured to the extent disclosed in Schedule 2.18 and all insurance policies and arrangements of Seller are disclosed in said Schedule. Said insurance policies and arrangements are in full force and effect, all premiums with respect thereto are currently paid, and Seller is in compliance in all material respects with the terms thereof. Said insurance is adequate and customary for the business engaged in by Seller and is sufficient for compliance by Seller with all requirements of law and all agreements and leases to which Seller is a party. 2.19 Warranty or Other Claims. There are no existing or threatened product liability, warranty or other similar claims, or any facts upon which a material claim of such nature could be based, against Seller for products shipped or services provided prior to Closing which are defective or fail to meet any product or service warranties except as disclosed in Schedule 2.19. The total amount of warranty claims (including costs of correction at normal internal rates of charge) arising on or after the Closing Date with respect to products shipped by Seller before the Closing Date will not exceed $220,000. No claim has been asserted against Seller for renegotiation or price redetermination of any business transaction, and there are no facts upon which any such claim could be based. Seller's standard warranty terms are as set forth on Schedule 2.19. Other than as set forth on Schedule 2.19, no warranty terms have been granted which provide any greater rights than Seller's standard warranty terms. 2.20 Powers of Attorney. Seller has not granted powers of attorney which are presently outstanding except limited powers of attorney granted to financial institutions in the ordinary course of business pursuant to financial accounts. 2.21 Finder's Fee. Neither Seller nor the Stockholder has incurred or become liable for any broker's commission or finder's fee relating to or in connection with the transactions contemplated by this Agreement other than to Broadview Associates by Seller. 2.22 Permits; Burdensome Agreements. Schedule 2.22 lists all permits, registrations, licenses, franchises, certifications and other approvals (collectively, the "Approvals") required from foreign, federal, state or local authorities, including all international product approvals, in order for Seller to conduct its business and for its products to be used, including the applicable authority granting such Approval and the scope or subject matter of such Approval. Seller has obtained all such Approvals, which are valid and in full force and effect, and is operating in compliance therewith. Such Approvals include, but are not limited to, those required under federal, state or local statutes, ordinances, orders, requirements, rules, regulations, or laws pertaining to environmental protection, public health and safety, worker health and safety, buildings, highways or zoning. Except as disclosed in Schedule 2.22, all such Approvals will be available and assigned to Buyer and remain in full force and effect upon Buyer's purchase of the Subject Assets, and no further Approvals will be required in order for Buyer to conduct the business currently conducted by Seller subsequent to the Closing. Except as disclosed in Schedule 2.22 or in any other Schedule hereto, Seller is not subject to or bound by any agreement, arrangement, judgment, decree or order which may 28 materially and adversely affect its business or prospects, its condition, financial or otherwise, or any of its assets or properties. 2.23 [INTENTIONALLY OMITTED] 2.24 Transactions with Interested Persons. Except as set forth in Schedule 2.24 hereto, neither Seller, nor any stockholder, officer, supervisory employee or director of Seller or, to the knowledge of Seller, any of their respective spouses or family members owns directly or indirectly on an individual or joint basis any material interest in, or serves as an officer or director or in another similar capacity of, any competitor or supplier of Seller, or any organization which has a material contract or arrangement with Seller. 2.25 Employee Benefit Programs. (a) Seller's Plan (as defined in Section 1.13(e)) has received a favorable determination or approval letter from the Internal Revenue Service ("IRS") regarding its qualification under section 401(a) of the Code and it has, in fact, been continuously qualified under such section of the Code since the effective date of Seller's Plan. No event or omission has occurred which would cause Seller's Plan to lose its qualification under Section 401(a) of the Code. (b) Seller does not know, and has no reason to know, of any failure of any party to comply with any laws applicable to Seller's Plan. With respect to any Employee Program ever maintained by Seller, there has occurred no "prohibited transaction," as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Section 4975 of the Code, or breach of any duty under ERISA or other applicable law (including, without limitation, any health care continuation requirements or any other tax law requirements, or conditions to favorable tax treatment, applicable to such plan), which could result, directly or indirectly, in any taxes, penalties or other liability to Buyer. No litigation, arbitration, or governmental administrative proceeding (or investigation) or other proceeding (other than those relating to routine claims for benefits) is pending or threatened with respect to any such Employee Program. (c) Neither Seller nor any Affiliate (as defined below) (i) has ever maintained any Employee Program which has been subject to Title IV of ERISA (including, but not limited to, any Multiemployer Plan (as defined below)) or (ii) has ever provided health care or any other non-pension benefits to any employees after their employment is terminated (other than as required by part 6 of subtitle B of title I of ERISA) or has ever promised to provide such post-termination benefits. (d) With respect to Seller's Plan, complete and correct copies of the following documents have previously been delivered to Buyer: (i) all documents embodying or governing such plan, and any funding medium for the plan (including, without limitation, 29 trust agreements) as they may have been amended; (ii) the most recent IRS determination or approval letter with respect to such plan under Code Section 401, and any applications for determination or approval subsequently filed with the IRS; (iii) the three most recently filed IRS Forms 5500, with all applicable schedules and accountants' opinions attached thereto; and (iv) the summary plan description for such plan (or other descriptions of such Employee Program provided to employees) and all modifications thereto; (e) For purposes of this section: (i) "Employee Program" means (A) all employee benefit plans within the meaning of ERISA Section 3(3), including, but not limited to, multiple employer welfare arrangements (within the meaning of ERISA Section 3(4)), plans to which more than one unaffiliated employer contributes and employee benefit plans (such as foreign or excess benefit plans) which are not subject to ERISA; and (B) all stock or cash option plans, restricted stock plans, bonus or incentive award plans, severance pay policies or agreements, deferred compensation agreements, supplemental income arrangements, vacation plans, and all other employee benefit plans, agreements, and arrangements not described in (A) above. In the case of an Employee Program funded through an organization described in Code Section 501(c)(9), each reference to such Employee Program shall include a reference to such organization. (ii) An entity "maintains" an Employee Program if such entity sponsors, contributes to, or provides (or has promised to provide) benefits under such Employee Program, or has any obligation (by agreement or under applicable law) to contribute to or provide benefits under such Employee Program, or if such Employee Program provides benefits to or otherwise covers employees of such entity, or their spouses, dependents, or beneficiaries. (iii) An entity is an "Affiliate" of Seller if it would have ever been considered a single employer with Seller under ERISA Section 4001(b) or part of the same "controlled group" as Seller for purposes of ERISA Section 302(d)(8)(C). (iv) "Multiemployer Plan" means a (pension or non-pension) employee benefit plan to which more than one employer contributes and which is maintained pursuant to one or more collective bargaining agreements. 30 2.26 Environmental Matters. (a) Except as set forth in Schedule 2.26, or as otherwise permitted by law (i) Seller has never generated, transported, used, stored, treated, disposed of, or managed any Hazardous Waste (as defined below); (ii) no Hazardous Material (as defined below) has ever been or is threatened to be spilled, released, or disposed of by Seller or, to Seller's knowledge, by any other party, at any site presently or formerly owned, operated, leased, or used by Seller, or has ever been located in the soil or groundwater at any such site; (iii) no Hazardous Material has ever been transported by Seller or, to Seller's knowledge, by any other party, from any site presently or formerly owned, operated, leased, or used by Seller for treatment, storage, or disposal at any other place; (iv) Seller does not presently own, operate, lease, or use, nor has it previously owned, operated, leased, or used any site on which to Seller's knowledge underground storage tanks are or were located; and (v) to Seller's knowledge, no lien has ever been imposed by any governmental agency on any property, facility, machinery, or equipment owned, operated, leased, or used by Seller in connection with the presence of any Hazardous Material. (b) Except as set forth in Schedule 2.26, (i) Seller has never violated, any Environmental Law (as defined below); (ii) Seller operates its business in compliance with all applicable Environmental Laws; (iii) Seller has never entered into or been subject to any judgment, consent decree, compliance order, or administrative order with respect to any environmental or health and safety matter or received any request for information, notice, demand letter, administrative inquiry, or formal or informal complaint or claim with respect to any environmental or health and safety matter or the enforcement of any Environmental Law; and (iv) Seller has no knowledge or reason to know that any of the items enumerated in clause (iii) of this subsection will be forthcoming. (c) Except as set forth in Schedule 2.26 hereto, to Seller's knowledge, no site owned, operated, leased, or used by Seller contains any asbestos or asbestos-containing material, any polychlorinated biphenyls (PCBs) or equipment containing PCBs, or any urea formaldehyde foam insulation. (d) Seller has provided or made available to Buyer or its counsel copies of all documents, records, and information maintained by Seller for regulatory purposes concerning any environmental or health and safety matter relevant to Seller, whether generated by Seller or others, including, without limitation, environmental audits, environmental risk assessments, site assessments, documentation regarding off-site disposal of Hazardous Materials, spill control plans, and reports, correspondence, permits, licenses, approvals, consents, and other authorizations related to environmental or health and safety matters issued by any governmental agency. (e) For purposes of this Section 2.26, (i) "Hazardous Material" shall mean and include any hazardous waste, hazardous material, hazardous substance, petroleum product, 31 oil, toxic substance, pollutant, contaminant, or other substance which may pose a threat to the environment or to human health or safety, as defined or regulated under any Environmental Law; (ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or regulated under any Environmental Law; (iii) "Environmental Law" shall mean any environmental or health and safety-related law, regulation, rule, ordinance, or by-law at the foreign, federal, state, or local level, whether existing as of the date hereof, previously enforced, or subsequently enacted; and (iv) "Seller" shall mean and include Seller and all affiliated persons for whose conduct Seller is or may be held responsible under any Environmental Law. 2.27 Directors and Officers. Schedule 2.27 contains a true and complete list of all current directors and officers of Seller. In addition, Schedule 2.27 contains a list of all managers, employees and consultants of Seller, identified as full-time, part-time or temporary employees, and their compensation. In each case such Schedule includes the current job title and aggregate annual compensation of each such individual. 2.28 Disclosure. The representations, warranties and statements contained in this Agreement and in the certificates, exhibits and schedules delivered by Seller pursuant to this Agreement to Buyer do not contain any untrue statement of a material fact, and, when taken together, do not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or statements not misleading in light of the circumstances under which they were made. There are no facts which presently or may in the future have a material adverse affect on the business, properties, prospects, operations or condition of Seller which have not been specifically disclosed herein, in the Seller's Confidential Information Memorandum distributed by Broadview Associates or in a Schedule furnished herewith, other than general economic conditions affecting Seller's industry. 2.29 Backlog. As of June 27, 1997, Seller has a backlog of firm orders for the sale or lease of products or services, for which revenues have not been recognized by Seller, as set forth in Schedule 2.29 and, unless otherwise set forth on such Schedule, all such orders have been made in the ordinary course of business. Stockholder and Seller covenant to provide an update to such Schedule 2.29 as of the Closing not later than two (2) business days following the Closing, which such updated schedule shall become the final Schedule 2.29. 2.30 Employees; Labor Matters. Seller generally enjoys good employer-employee relationships. Seller is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it to the date hereof or amounts required to be reimbursed to such employees. Upon termination of the employment of any of said employees, neither Seller nor Buyer will by reason of the acquisition transaction or anything done prior to the Closing be liable to any of said employees for so-called "severance pay" or any other payments, except as set forth in Schedule 2.30. Seller does not have any policy, practice, plan or program of paying severance pay or any form of severance compensation in connection with the termination of employment, except as 32 set forth in said Schedule. Seller is in compliance with all applicable laws and regulations respecting labor, employment, fair employment practices, work place safety and health, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices, nor are there any strikes, slowdowns, stoppages of work, or any other concerted interference with normal operations existing, pending or threatened against or involving Seller. No question concerning representation exists respecting any group of employees of Seller. There are no grievances, complaints or charges that have been filed against Seller under any dispute resolution procedure (including, but not limited to, any proceedings under any dispute resolution procedure under any collective bargaining agreement) that might have an adverse effect on Seller or the conduct of its business and no arbitration or similar proceeding is pending and no claim therefor has been asserted. No collective bargaining agreement is in effect or is currently being or is about to be negotiated by Seller. Seller has received no information to indicate that any of its employment policies or practices is currently being audited or investigated by any federal, state or local government agency. Seller is, and at all times since November 6, 1986 has been, in compliance with the requirements of the Immigration Reform Control Act of 1986. 2.31 Customers, Distributors and Suppliers. Schedule 2.31(a) sets forth any customer, representative or distributor (whether pursuant to a commission, royalty or other arrangement) for the six (6) months ended as of the date of the Base Balance Sheet (collectively, the "Customers and Distributors"). Schedule 2.31(b) is a true and complete list of the suppliers of Seller to whom, during either the fiscal year ended September 30, l996 or the six (6) months ended as of the date of the Base Balance Sheet, Seller made payments aggregating $10,000 or more showing, with respect to each, the name, address and dollar volume involved (the "Suppliers"). The relationships of Seller with its Customers, Distributors and Suppliers are good commercial working relationships. Except as set forth on Schedule 2.31(b), no Customer, Distributor or Supplier of Seller has canceled, materially modified, or otherwise terminated its relationship with Seller, or has during said period decreased materially its usage or purchase of the services or products of Seller or its services, supplies or materials furnished to Seller, nor does any Customer, Distributor or Supplier have, to the knowledge of Seller, any plan or intention to do any of the foregoing. 2.32 Purchase Commitments. Schedule 2.32 sets forth as of June 27, 1997 all commitments in excess of $2,500 for the purchase or lease by Seller of raw materials, parts, equipment, components, products or services, and such commitments are not in excess of Seller's normal requirements in the ordinary course of business or at prices in excess of current market prices. Stockholder and Seller covenant to provide an update to such Schedule 2.32 as of the Closing not later than two (2) business days following the Closing, which such updated schedule shall become the final Schedule 2.32. 2.33 Required Consents. Seller has obtained all required or necessary authorizations, consents or permits of others required to permit the consummation by Seller of the transactions contemplated by this Agreement. 33 SECTION 3. COVENANTS OF SELLER AND THE STOCKHOLDER. 3.1 Making of Covenants and Agreements. Seller and the Stockholder hereby make their respective covenants and agreements set forth in this Section 3 and Stockholder agrees to cause Seller to comply with such covenants and agreements. 3.2 Notice of Default. Promptly upon the occurrence of, or promptly upon Seller or the Stockholder becoming aware of the impending or threatened occurrence of, any event which would cause or constitute a breach or default, or would have caused or constituted a breach or default had such event occurred or been known to Seller or the Stockholder prior to the date hereof, of any of the representations, warranties or covenants of Seller or the Stockholder contained in or referred to in this Agreement or in any Schedule or Exhibit referred to in this Agreement, Seller shall give detailed written notice thereof to Buyer and shall use all commercially reasonable efforts to prevent or promptly remedy the same. 3.3 Consummation of Agreement. Seller and the Stockholder shall use all commercially reasonable efforts to perform and fulfill all conditions and obligations on their parts to be performed and fulfilled under this Agreement, to the end that the transactions contemplated by this Agreement shall be fully carried out. To this end, Seller will promptly in connection with or following the Closing take all appropriate actions to: (a) Change Seller's name to a corporate name to another title which does not include the words or use the names "Netaccess," "Net Access," "Primary Rate," "PRI" or any similar name and further agree, from and after the Closing not to use any such names or words; and (b) Transfer the Subject Assets, including all Intellectual Property, to Buyer. 3.4 Cooperation of Seller. Seller and Stockholder shall cooperate with all reasonable requests of Buyer and Buyer's counsel in connection with the consummation of the transactions contemplated hereby, including (i) filing any UCC termination statements necessary to transfer the Subject Assets free of all liens; and (ii) providing all necessary audited financial statements and consents of the auditors preparing such audited financial statements, and access to all other financial information required for Buyer (i) to comply with its reporting obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or (ii) to comply with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), in connection with any registration statement thereunder and shall use its best efforts to cause their counsel and auditors cooperate with all such requests of Buyer and Buyer's counsel. The expense of all reasonable necessary consents of Seller's auditors required for Buyer to comply with its reporting obligations under the Exchange Act, including, without limitation, any auditor's consent necessary in connection with the filing of a 34 Form 8-K in connection with the transaction contemplated hereby, shall be borne by the Seller. Notwithstanding anything contained in this Agreement to the contrary, this covenant shall survive the Closing or other termination of this Agreement. 3.5 Non-competition. As a material inducement to Buyer to enter into this Agreement and consummate the transactions contemplated hereby, each of Seller and Stockholder agrees, on behalf of themselves and on behalf of their affiliates, that, for four (4) years after the Closing (the "Non-Compete Period"), it will not, whether as the result of an Acquisition (as defined below) or otherwise, without the prior written consent of Buyer, directly or indirectly, engage or participate in, be employed by or assist in any manner or in any capacity, or have any interest in or make any loan to any person, firm, corporation or business which engages in any activity anywhere in the world which is competitive with the business and operations of Buyer or any of Buyer's subsidiaries so long as Buyer or any of Buyer's subsidiaries (or its or their successor, if any) shall engage in such activity. Notwithstanding the foregoing: (A) During the first two years of the Non-Compete Period, Seller, Stockholder and their affiliates (each, an "Acquiring Person") shall not be prohibited from engaging in an Acquisition of a Competing Business other than a Material Competing Business (a "Permitted Acquisition"), provided that, in the event of such a Permitted Acquisition, the Acquiring Person shall, within the first sixty (60) days following the closing of the Permitted Acquisition (or such shorter period as Buyer, in its sole discretion determines), negotiate in good faith with Buyer to sell the portion of the acquired business that constitutes a Competing Business to Buyer on commercially reasonable terms. In the event that the Acquiring Person and Buyer are unable to reach a definitive agreement regarding the sale of the Competing Business within such time, or in the event that Buyer indicates in writing prior to the expiration of such sixty (60) day period that it is not interested in purchasing such Competing Business, the Acquiring Person shall sell, liquidate or discontinue the operations of the Competing Business within a period of time to be agreed upon by the parties hereto by separate agreement on or before Closing. In the event of any such Permitted Acquisition, until such time as the Acquiring Person completes the sale of or liquidates or discontinues such portion of the acquired business that constitutes a Competing Business to Buyer or any other third party, neither the Acquiring Person nor any affiliate thereof shall contribute any additional capital or funds (other than to satisfy necessary and reasonable working capital requirements) to the Competing Business or transfer technology thereto. (B) During the third and fourth years of the Non-Compete Period, the Acquiring Persons shall not be prohibited from engaging in a Permitted Acquisition, provided that, in the event of such a Permitted Acquisition, the Acquiring Person shall, within the first sixty (60) days following the closing of the Permitted Acquisition (or 35 such shorter period as Buyer, in its sole discretion determines), negotiate in good faith with Buyer to sell the portion of the acquired business that constitutes a Competing Business to Buyer on commercially reasonable terms. In the event that the Acquiring Person and Buyer are unable to reach a definitive agreement regarding the sale of the Competing Business within such time, or in the event that Buyer indicates in writing prior to the expiration of such sixty (60) day period that it is not interested in purchasing such Competing Business, the Acquiring Person shall use commercially reasonable efforts to sell the Competing Business to a third party on commercially reasonable terms within a period of time to be agreed to by the parties hereto by separate agreement on or before Closing. In the event that the Acquiring Person is not able to sell the Competing Business during such period, the Acquiring Person shall be permitted to retain the Competing Business. In the event of any such Permitted Acquisition, until such time as (a) the Acquiring Person completes the sale of such portion of the acquired business that constitutes a Competing Business or (b) the expiration of both the initial sixty (60) day period and the additional period of time to be agreed upon by the parties hereto by separate agreement on or before Closing, neither the Acquiring Person nor any affiliate thereof shall contribute any additional capital or funds (other than to satisfy necessary and reasonable working capital requirements) to the Competing Business or transfer technology thereto. For the purposes of this Section 3.5, an "Acquisition" shall be defined as acquiring by merger, purchase of assets or otherwise, any business, entity or operation which may include a segment, division, business unit, or other operational component or product line; a "Competing Business" shall be defined as directly or indirectly designing, manufacturing or selling (i) T1&E1 Primary Rate ISDN, (ii) multiport Basic Rate ISDN and (iii) multiport modem wide area network access hardware and related software products used in servers or multi-user systems used in remote access and computer telephony applications; a "Material Competing Business" shall be defined as any business, entity or operation which may include a segment, division, business unit, or other operational component or product line which derives annual revenues from a Competing Business that exceed the lesser of (a) twenty percent (20%) of the overall revenues of the business or (b) Four Million Dollars ($4,000,000). Seller agrees to enforce, and to cause any other existing or future subsidiaries or affiliates of Seller or Stockholder to enforce the agreements with their respective employees who are retained by Seller, Stockholder or any other existing or future subsidiaries or affiliates of Seller or Stockholder, as applicable, following the Closing which agreements prohibit such employees from competing (as described above) with or disclosing confidential information of Buyer or any of its subsidiaries or affiliates. 3.6 No Solicitation of Employees. Neither Seller, the Stockholder, nor any of their representatives or affiliates will at any time during the two (2) year period after the Closing, 36 directly or indirectly, employ any person who, at any time up to the Closing, was an employee of Seller or Buyer, or solicit, encourage, assist, initiate discussion or engage in negotiation with any such person regarding employment, provided that the restriction contained in this Section 3.6 will not apply against Stockholder commencing on the 31st day following the Closing Date with respect to the hire of any employee of Seller not hired as an employee by Buyer as of or within 30 days from the Closing Date; provided, however, that neither Seller, Stockholder nor any of their representatives or affiliates shall have during such 30-day period disclosed the existence of or the substance of this Section 3.6 to any such employee. 3.7 Confidentiality. Seller and the Stockholder agree that, after the Closing has been consummated, Seller, its officers, directors, agents and representatives, and the Stockholder will hold in strict confidence, and will not use, distribute or make available to others, any confidential or proprietary data or information of Seller that is used in connection with or related to the Seller's business, the Subject Assets or the Assumed Liabilities. For this purpose, the following shall be deemed not to constitute confidential or proprietary data or information (a) information which is generally known to the public or in the trade, or becomes so generally known without breach of this Agreement by Seller or Stockholder; (b) information disclosed to Seller or Stockholder without restriction by a third party who is not in breach of any obligation of confidentiality in making such disclosure; or (c) information which is required to be disclosed by law or legal process, provided that Seller or Stockholder shall notify Buyer prior to making such disclosure and shall permit Buyer to intervene in any relevant proceeding to protect its interests. 3.8 Tax Returns. Seller, in accordance with applicable law, shall (i) promptly prepare and file on or before the due date or any extension thereof all federal, state and local tax returns required to be filed by it with respect to taxable periods of Seller that include any period ending on or before the Closing and (ii) pay all Taxes of Seller attributable to periods ending on or before the Closing. Seller shall provide Buyer with (i) its state tax returns for the 1996 fiscal year when filed with respect to those states in which it files a separate return and (ii) state tax returns in which it files on a consolidated basis with portions unrelated to Seller redacted. 3.9 Bank Accounts. Immediately following the Closing, Seller and Stockholder agree to take any and all actions required to direct Seller's bank to sweep the funds related to Seller's business received in Seller's or Stockholder's bank or similar accounts and lockbox, if any, to an account designated by Buyer and not to revoke such instructions without the prior written consent of Buyer. 37 SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER. 4.1 Making of Representations and Warranties. As a material inducement to Seller and the Stockholder to enter into this Agreement and consummate the transactions contemplated hereby, Buyer hereby makes the representations and warranties to Seller and the Stockholder contained in this Section 4. 4.2 Organization of Buyer. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full corporate power to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is conducted by it. 4.3 Authority of Buyer. Buyer has full right, authority and power to enter into this Agreement and each agreement, document and instrument to be executed and delivered by Buyer pursuant to this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance by Buyer of this Agreement and each such other agreement, document and instrument have been duly authorized by all necessary corporate action of Buyer and no other action on the part of Buyer is required in connection therewith. This Agreement and each other agreement, document and instrument executed and delivered by Buyer pursuant to this Agreement constitute, or when executed and delivered will constitute, valid and binding obligations of Buyer enforceable in accordance with their terms. The execution, delivery and performance by Buyer of this Agreement and each such agreement, document and instrument: (i) does not and will not violate any provision of the Certificate of Incorporation or by-laws of Buyer; (ii) does not and will not violate any laws of the United States or of any state or any other jurisdiction applicable to Buyer or require Buyer to obtain any approval, consent or waiver of, or make any filing with, any person or entity (governmental or otherwise) which has not been obtained or made; and (iii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under, or give rise to a right of termination of any indenture, loan or credit agreement, or any other agreement, mortgage, lease, permit, order, judgment or decree to which Buyer is a party and which is material to the business and financial condition of Buyer and its parent and affiliated organizations on a consolidated basis. 38 4.4 Litigation. There is no litigation or governmental or administrative proceeding or investigation pending or, to its knowledge, threatened against Buyer which would prevent or hinder the consummation of the transactions contemplated by this Agreement. 4.5 Finder's Fee. Buyer has not incurred or become liable for any broker's commission or finder's fee relating to or in connection with the transactions contemplated by this Agreement. SECTION 5. CONDITIONS. 5.1 Conditions to the Obligations of Buyer. The obligation of Buyer to consummate this Agreement and the transactions contemplated hereby are subject to the fulfillment, prior to or at the Closing, of the following conditions precedent: (a) Representations; Warranties; Covenants. Each of the representations and warranties of Seller and Stockholder contained in Section 2 shall be true and correct as though made on and as of the Closing; and Seller shall, on or before the Closing, have performed all of its obligations hereunder which by the terms hereof are to be performed on or before the Closing. (b) No Material Change. There shall have been no material adverse change in the financial condition, prospects, properties, assets, liabilities, business or operations of Seller since the date hereof, whether or not in the ordinary course of business. (c) Certificate from Officers. Seller shall have delivered to Buyer a certificate of Seller's and Stockholder's President and Chief Financial Officer dated as of the Closing to the effect that the statements set forth in paragraph (a) and (b) above in this Section 5.1 are true and correct. (d) Approval of Buyer's Counsel. All actions, proceedings, instruments and documents required to carry out this Agreement and the transactions contemplated hereby and all related legal matters contemplated by this Agreement shall have been approved by Goodwin, Procter & Hoar LLP as counsel for Buyer, and such counsel shall have received on behalf of Buyer such other certificates, opinions, and documents in form satisfactory to such counsel, as Buyer may reasonably require from Seller and the Stockholder to evidence compliance with the terms and conditions hereof as of the Closing and the correctness as of the Closing of the representations and warranties of the Stockholder and Seller and the fulfillment of their respective covenants. (e) Opinion of Counsel. On the date of the Closing, Buyer shall have received from Wilson, Sonsini, Goodrich & Rosati, counsel for Seller, an opinion as of said date, in form attached hereto as Exhibit 5.1(e). 39 (f) Audited Financials. On or prior to the Closing, Buyer shall have received audited financial statements for the fiscal year ended September 30, 1996 together with originally executed reports of the auditors who have prepared such audited financial statements and all necessary consents required for Buyer to comply with its reporting obligations under the Securities Exchange Act of 1934, as amended. (g) No Litigation. There shall have been no determination by Buyer, acting in good faith, that the consummation of the transactions contemplated by this Agreement has become inadvisable or impracticable by reason of the institution or threat by any person or any federal, state or other governmental authority of litigation, proceedings or other action against Buyer, Seller or Stockholder or any material adverse change in the laws or regulations applicable to Seller. (h) Consents and Assignments. Seller (and, to the extent applicable, Stockholder) shall have made all filings with and notifications of governmental authorities, regulatory agencies and other entities required to be made by Seller (and, to the extent applicable, Stockholder) in connection with the execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the continued operation of the business of Seller by Buyer subsequent to the Closing; and Seller and Buyer shall have received all authorizations, waivers, consents and permits, in form and substance reasonably satisfactory to Buyer, from all third parties, including, without limitation, applicable governmental authorities, regulatory agencies, lessors, lenders and contract parties, required to permit the continuation of the business of Seller and the consummation of the transactions contemplated by this Agreement, and in connection with the transfer of Subject Assets or Seller's contracts, permits, leases, licenses and franchises, to avoid a breach, default, termination, acceleration or modification of any indenture, loan or credit agreement or any other agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award as a result of, or in connection with, the execution and performance of this Agreement. (i) Hart-Scott-Rodino. All required Hart-Scott-Rodino filings under the HSR Act shall have been completed and all applicable time limitations under such Act shall have expired without a request for further information by the relevant federal authorities under such Act, or in the event of such a request for further information, the expiration of all applicable time limitations under the Act shall have occurred without the objection of such federal authorities. (j) Transition Services Agreement. Seller, Stockholder and Buyer shall have executed and delivered a Transition Services Agreement in substantially the form of Exhibit 5.1(j) attached hereto. 40 (k) FIRPTA Withholding. At or prior to the Closing, Buyer shall have received from Stockholder a "transferor's certificate of non-foreign status" as provided in the Treasury Regulations under Section 1445 of the Code substantially in the form attached hereto as Exhibit 5.1(k). (l) Business Relations. Buyer shall be reasonably satisfied based on personal interviews with Seller's Customers, Distributors and Suppliers that such Customers, Distributors and Suppliers intend to continue their current level of business with Seller after the Closing. (m) Employee Programs. Seller shall have taken all steps reasonably necessary under the relevant documents and applicable law for Buyer to succeed to the position of Seller with respect to each Employee Program identified on Schedule 2.25. (n) No Liens. Prior to or at the Closing, the Subject Assets shall be free and clear of all liens, encumbrances and charges. (o) No Intercompany Debt. Prior to or at the Closing, all accounts receivable or accounts payable owed to or by Seller from or to any related party or affiliate of Seller or Stockholder shall be paid in full. (p) Assignment of Certain Rights of Stockholder. Stockholder shall have assigned to Buyer all rights including under any proprietary information or nondisclosure agreements as are necessary to conduct Seller's business. (q) Licenses. Seller and Stockholder have assisted Buyer in obtaining the third-party licenses set forth on Schedule 5.1(q) attached hereto and Stockholder represents that it has made all lump sum payments required thereunder. 5.2 Conditions to Obligations of Seller. Seller's obligation to consummate this Agreement and the transactions contemplated hereby is subject to the fulfillment, prior to or at the Closing, of the following conditions precedent: (a) Representations; Warranties; Covenants. Buyer shall, on or before the Closing, have performed all of its obligations hereunder which by the terms hereof are to be performed on or before the Closing; and Buyer shall have delivered to Seller a certificate of the President or any Vice President of Buyer dated on the Closing to such effect. (b) Approval of Seller's Counsel. All actions, proceedings, instruments and documents required to carry out this Agreement and the transactions contemplated hereby and all related legal matters contemplated by this agreement shall have been approved by Wilson, Sonsini, Goodrich & Rosati, as counsel for Seller, and such counsel shall have received on behalf of Seller and the Stockholder such other certificates, opinions and documents in form 41 satisfactory to counsel for Seller as Seller may reasonably require from Buyer to evidence compliance with the terms and conditions hereof as of the Closing and the correctness as of the Closing of the representations and warranties of Buyer and the fulfillment of its covenants. (c) No Litigation. There shall have been no determination by Seller, acting in good faith, that the consummation of the transactions contemplated by this Agreement has become inadvisable or impracticable by reason of the institution or threat by any person or any federal, state or other governmental authority of material litigation, proceedings or other action against Buyer, Seller or the Stockholder or any material adverse change in the laws or regulations applicable to Buyer. (d) Opinion of Counsel. On the Closing Date, Seller shall have received from Goodwin, Procter & Hoar LLP, counsel for Buyer, an opinion as of said date, in form attached hereto as Exhibit 5.2(d). (e) Hart-Scott-Rodino. All required Hart-Scott-Rodino filings under the HSR Act shall have been completed and all applicable time limitations under such Act shall have expired without a request for further information by the relevant federal authorities under such Act, or in the event of such a request for further information, the expiration of all applicable time limitations under the Act without the objection of such federal authorities. SECTION 6. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING. 6.1 Survival of Warranties. Each of the representations, warranties, agreements, covenants and obligations herein or in any schedule, exhibit, certificate or financial statement delivered by any party to the other party incident to the transactions contemplated hereby are material, shall be deemed to have been relied upon by the other party and shall survive the Closing regardless of any investigation and shall not merge in the performance of any obligation by either party hereto. 6.2 Collection of Assets. Subsequent to the Closing, Buyer shall have the right and authority to collect all receivables and other items transferred and assigned to it by Seller hereunder and to endorse with the name of Seller any checks received on account of such receivables or other items, and Seller agrees that it will promptly transfer or deliver to Buyer from time to time, any cash or other property that Seller may receive with respect to any claims, contracts, licenses, leases, commitments, sales orders, purchase orders, receivables of any character or any other items included in the Subject Assets. 6.3 Payment of Obligations. Seller shall pay all of the Excluded Liabilities in the ordinary course of business as they become due. 42 SECTION 7. INDEMNIFICATION. 7.1 Indemnification by Seller and Stockholder. Seller and Stockholder jointly and severally agree subsequent to the Closing to indemnify and hold Buyer and its respective subsidiaries and affiliates and persons serving as officers, directors, partners or employees thereof (individually a "Buyer Indemnified Party" and collectively the "Buyer Indemnified Parties") harmless from and against any damages, liabilities, diminution in value, losses, taxes, fines, penalties, costs, and expenses (including, without limitation, reasonable fees of counsel) of any kind or nature whatsoever (whether or not arising out of third-party claims and including all amounts paid in investigation, defense or settlement of the foregoing) which may be sustained or suffered by any of them arising out of or based upon any of the following matters: (a) fraud, intentional misrepresentation or a deliberate or wilful breach by Seller or the Stockholder of any of their representations, warranties or covenants under this Agreement or in any certificate, schedule or exhibit delivered pursuant hereto; (b) any other breach of any representation or warranty of Seller or the Stockholder under this Agreement or in any certificate, schedule or exhibit delivered pursuant hereto, or by reason of any claim, action or proceeding asserted or instituted growing out of any matter or thing constituting a breach of such representations or warranties; (c) any other breach of any covenant of Seller or Stockholder under this Agreement or in any certificate, schedule or exhibit delivered pursuant hereto, or by any reason or any claim, action or proceeding asserted or instituted growing out of any matter or thing constituting a breach of such covenant; (d) the Shiva Warranty Liability or any other claims made by Shiva Corporation with respect to the matters or events occurring or facts or circumstances existing with respect to sales of products or services by Seller to or Seller's relationship or activities with Shiva Corporation on or prior to the Closing; (e) all claims asserted under the Bulk Sales Act; (f) any failure by Seller or the Stockholder to perform and discharge any of the Excluded Liabilities as set forth in this Agreement; (g) any liability of Seller or the Stockholder for Taxes (as defined in Section 2.8); (h) any liability of the Buyer arising out of intercompany accounts or balances of, between or among the Seller and its affiliates or related parties existing as of the date of the Closing; and 43 (i) any liability related to claims of patent infringement made or threatened against Seller or Stockholder by Omni Dimensional Networks or Business Software Alliance. 7.2 Limitations on Indemnification by Seller and Stockholder. Notwithstanding the foregoing, the right of Buyer Indemnified Parties to indemnification under Section 7.1 shall be subject to the following provisions: (a) No indemnification shall be payable pursuant to Subsection 7.1(b) above to any Buyer Indemnified Party, unless the total of all claims for indemnification pursuant to Section 7.1 shall exceed $100,000 in the aggregate, whereupon the amount of such claims in excess of $100,000 shall be recoverable in accordance with the terms hereof; (b) No indemnification shall be payable to a Buyer Indemnified Party with respect to claims asserted pursuant to Subsection 7.1(b) (exclusive of claims for indemnification for Taxes or a breach of any representation, warranty or covenant with respect to Taxes or tax related matters or any breach relating to or involving fraud or intentional misrepresentation) after October 31, 1998 (the "Indemnification Cut-Off Date"); and (c) No indemnification shall be payable pursuant to Subsection 7.1(b) above to a Buyer Indemnified Party (exclusive of claims for indemnification for Taxes or a breach of any representation, warranty or covenant with respect to Taxes or the related matters or any breach relating to or involving fraud or intentional misrepresentation) to the extent that the aggregate amount payable exceeds Four Million Five Hundred Thousand Dollars ($4,500,000). 7.3 Indemnification by Buyer and Parent . Buyer and Parent jointly and severally agree to indemnify and hold Seller and its representatives, affiliates and persons serving as officers, directors or employees thereof and the Stockholder (individually a "Seller Indemnified Party" and collectively the "Seller Indemnified Parties") harmless from and against any damages, liabilities, losses and expenses (including, without limitation, reasonable fees of counsel) of any kind or nature whatsoever (whether or not arising out of third-party claims and including all amounts paid in investigation, defense or settlement of the foregoing) which may be sustained or suffered by any of them arising out of or based upon any of the following matters: (a) a breach of any representation, warranty or covenant made by Buyer in this Agreement or in any certificate delivered by Buyer hereunder, or by reason of any claim, action or proceeding asserted or instituted growing out of any matter or thing constituting such a breach; and (b) any failure by Buyer to perform and discharge any of the Liabilities as set forth in this Agreement. 44 7.4 Limitation on Indemnification by Buyer and Parent. Notwithstanding the foregoing, the right of Seller Indemnified Parties to indemnification under Section 7.3 shall be subject to the following provisions: (a) No indemnification pursuant to Section 7.3(a) shall be payable to Seller or the Stockholder, unless the total of all claims for indemnification pursuant to Section 7.3(a) shall exceed $100,000 in the aggregate, whereupon the amount of such claims in excess of $100,000 shall be recoverable in accordance with the terms hereof; (b) No indemnification shall be payable to Seller or the Stockholder with respect to claims asserted pursuant to Section 7.3(a) above after the Indemnification Cut-Off Date; and (c) No indemnification shall be payable pursuant to Subsection 7.3(a) above to a Seller Indemnified Party (exclusive of claims for indemnification for Taxes or a breach of any representation, warranty or covenant with respect to Taxes or the related matters or any breach relating to or involving fraud or intentional misrepresentation) to the extent that the aggregate amount payable exceeds Four Million Five Hundred Thousand Dollars ($4,500,000). 7.5 Notice; Defense of Claims. An indemnified party may make claims for indemnification hereunder by giving written notice thereof to the indemnifying party within the period in which indemnification claims can be made hereunder. If indemnification is sought for a claim or liability asserted by a third party, the indemnified party shall also give written notice thereof to the indemnifying party promptly after it receives notice of the claim or liability being asserted, but the failure to do so shall not relieve the indemnifying party from any liability except to the extent that it is prejudiced by the failure or delay in giving such notice. Such notice shall summarize the bases for the claim for indemnification and any claim or liability being asserted by a third party. Within 20 days after receiving such notice the indemnifying party shall give written notice to the indemnified party stating whether it disputes the claim for indemnification and whether it will defend against any third party claim or liability at its own cost and expense. If the indemnifying party fails to give notice that it disputes an indemnification claim within 20 days after receipt of notice thereof, it shall be deemed to have accepted and agreed to the claim, which shall become immediately due and payable. The indemnifying party shall be entitled to direct the defense against a third party claim or liability with counsel selected by it (subject to the consent of the indemnified party, which consent shall not be unreasonably withheld) as long as the indemnifying party is conducting a good faith and diligent defense. The indemnified party shall at all times have the right to fully participate in the defense of a third party claim or liability at its own expense directly or through counsel; provided, however, that if the named parties to the action or proceeding include both the indemnifying party and the indemnified party and the indemnified party is advised that representation of both parties by the same counsel would be inappropriate 45 under applicable standards of professional conduct, the indemnified party may engage separate counsel, whose reasonable fees and expenses shall be borne by the indemnifying party. If no such notice of intent to dispute and defend a third party claim or liability is given by the indemnifying party, or if such good faith and diligent defense is not being or ceases to be conducted by the indemnifying party, the indemnified party shall have the right, at the expense of the indemnifying party, to undertake the defense of such claim or liability (with counsel selected by the indemnified party), and to compromise or settle it, exercising reasonable business judgment. If the third party claim or liability is one that by its nature cannot be defended solely by the indemnifying party, then the indemnified party shall make available such information and assistance as the indemnifying party may reasonably request and shall cooperate with the indemnifying party in such defense, at the expense of the indemnifying party. SECTION 8. MISCELLANEOUS. 8.1 Bulk Sales Law. Buyer waives compliance by Seller with the provisions of any applicable bulk sales, fraudulent conveyance or other law for the protection of creditors in connection with the transfer of the Subject Assets under this Agreement. 8.2 Fees and Expenses. (a) Each of the parties will bear its own expenses in connection with the negotiation and the consummation of the transactions contemplated by this Agreement, and no expenses of Seller relating in any way to the purchase and sale of the Subject Assets hereunder and the transactions contemplated hereby, including without limitation legal, accounting or other professional expenses of Seller or the Stockholder, shall be charged to or paid by Buyer or included in any of the Liabilities. (b) Seller will pay all costs incurred, whether at or subsequent to the Closing, in connection with the transfer of the Subject Assets to Buyer as contemplated by this Agreement, including without limitation, all sales, use, excise, real property and other transfer taxes and charges applicable to such transfer; all recording charges and fees applicable to the recordation of deeds and mortgages and other instruments of transfer; and all costs of obtaining or transferring permits, registrations, applications and other tangible and intangible properties. Buyer will pay all premiums, charges and costs of obtaining and providing surveys, appraisals, UCC and title searches and title insurance for the benefit of Buyer with respect to the Subject Assets. 8.3 Governing Law. This Agreement shall be construed under and governed by the internal laws of the Commonwealth of Massachusetts without regard to its conflict of laws provisions. 46 8.4 Notices. Any notice, request, demand or other communication required or permitted hereunder shall be in writing and shall be deemed to have been given if delivered or sent by facsimile transmission, upon receipt with confirmation of transmission, or if sent by registered or certified mail or by a nationally recognized commercial courier, upon the sooner of the date on which receipt is acknowledged or the expiration of three days after deposit in United States post office facilities properly addressed with postage prepaid. All notices to a party will be sent to the addresses set forth below or to such other address or person as such party may designate by notice to each other party hereunder: TO BUYER: Netaccess Acquisition Corp. c/o Brooktrout Technology, Inc. 410 First Avenue Needham, MA 02192 Attention: Eric Giler, President With a copy to: Goodwin, Procter & Hoar LLP Exchange Place Boston, MA 02109 Attention: H. David Henken, Esq. Thomas P. Storer, P.C. TO SELLER: Netaccess, Inc. c/o Xircom, Inc. 2300 Corporate Center Drive Thousand Oaks, California 91320-1420 Attention: General Counsel With a copy to: Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Attention: Larry W. Sonsini, Esq. Howard S. Zeprun, Esq. TO THE STOCKHOLDER: Xircom, Inc. 2300 Corporate Center Drive Thousand Oaks, California 91320-1420 Attention: General Counsel With a copy to: Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Attention: Larry W. Sonsini, Esq. Howard S. Zeprun, Esq. 47 Any notice given hereunder may be given on behalf of any party by his counsel or other authorized representatives. 8.5 Entire Agreement. This Agreement, including the Schedules and Exhibits referred to herein and the other writings specifically identified herein or contemplated hereby, is complete, reflects the entire agreement of the parties with respect to its subject matter, and supersedes all previous written or oral negotiations, commitments and writings. No promises, representations, understandings, warranties and agreements have been made by any of the parties hereto except as referred to herein or in such Schedules and Exhibits or in such other writings; and all inducements to the making of this Agreement relied upon by either party hereto have been expressed herein or in such Schedules or Exhibits or in such other writings. 8.6 Assignability; Binding Effect. After the Closing, Buyer's rights and obligations hereunder shall be freely assignable, provided that Buyer's obligations under Section 7 shall be assignable only (a) to any direct or indirect subsidiary of Brooktrout Technology, Inc.; (b) to a person who acquires all or substantially all of Buyer's assets by merger, purchase or otherwise or (c) otherwise with the consent of Stockholder, which consent shall not be unreasonably withheld. This Agreement may not be assigned by Seller without the prior written consent of Buyer. This Agreement shall be binding upon and enforceable by, and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns. 8.7 Captions and Gender. The captions in this Agreement are for convenience only and shall not affect the construction or interpretation of any term or provision hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, as the context may require. 8.8 Execution in Counterparts. For the convenience of the parties and to facilitate execution, this Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. 8.9 Amendments. This Agreement may not be amended or modified, nor may compliance with any condition or covenant set forth herein be waived, except by a writing duly and validly executed by each party hereto, or in the case of a waiver, the party waiving compliance. 8.10 Publicity and Disclosures. No press releases or public disclosure, either written or oral, of the transactions contemplated by this Agreement, shall be made by a party to this Agreement without the prior knowledge and consent of Buyer and Seller. 8.11 Consent to Jurisdiction. Solely for the purpose of allowing a party to enforce its indemnification and other rights hereunder, each of the parties hereby consents to personal jurisdiction, service of process and venue in the federal or state courts of Massachusetts, or in 48 the court in which any claim for which indemnification may be sought hereunder is brought against an indemnified party. [THIS SPACE INTENTIONALLY LEFT BLANK] 49 IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed as of the date set forth above by their duly authorized representatives. BUYER: BTINH OPERATING COMPANY, INC. By: Title: PARENT: BROOKTROUT TECHNOLOGY, INC. By: Title: SELLER: NETACCESS, INC. By: Title: STOCKHOLDER: XIRCOM, INC. By: Title: EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XIRCOM, INC'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS SEP-30-1997 OCT-01-1996 JUN-30-1997 78,232 0 43,066 3,424 22,482 154,776 35,874 18,076 172,964 41,797 0 0 0 23 126,746 172,964 163,675 163,675 104,208 104,208 46,510 0 0 13,522 4,056 9,466 (6,501) 0 0 2,965 .14 .14
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