-----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, BLzJ+TNiXAk9aKZbvTVZJ6uohzZoi1s4s4Z0dH1ORGGvqMla6ERva5MZDoroUkI6 4GeykxnyO/MK4Q0US5sukg== 0000892569-00-000259.txt : 20000229 0000892569-00-000259.hdr.sgml : 20000229 ACCESSION NUMBER: 0000892569-00-000259 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000222 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAIRGAIN TECHNOLOGIES INC /CA/ CENTRAL INDEX KEY: 0000910032 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 330282809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-14699 FILM NUMBER: 555859 BUSINESS ADDRESS: STREET 1: 14402 FRANKLIN AVE CITY: TUSTIN STATE: CA ZIP: 92780 BUSINESS PHONE: 7148329922 MAIL ADDRESS: STREET 1: 14402 FRANKLIN AVE CITY: TUSTIN STATE: CA ZIP: 92780 8-K 1 FORM 8-K DATED FEBRUARY 22, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) February 22, 2000 ----------------------- PAIRGAIN TECHNOLOGIES, INC. (Exact name of registrant as specified in charter) Delaware 0-22202 33-0282809 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 14402 Franklin Avenue, Tustin, CA 92780-7013 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 832-9922 Not Applicable (Former name or former address, if changed since last report.) 2 ITEM 5. OTHER EVENTS On February 23, 2000, PairGain Technologies, Inc., a Delaware corporation ("PairGain"), and ADC Telecommunications, Inc., a Minnesota corporation ("ADC"), announced that they had executed an Agreement and Plan of Merger, dated as of February 22, 2000 (the "Merger Agreement"), by and among PairGain, ADC and Roman Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of ADC ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will merge with and into PairGain and PairGain will survive the merger as a wholly-owned subsidiary of ADC. As a result of the merger, each share of PairGain's common stock issued and outstanding immediately prior to the effective time of the merger (other than any shares owned by ADC or its subsidiaries) will be automatically converted into the right to receive 0.43 shares of ADC common stock. The merger is expected to be treated as a reorganization for federal income tax purposes and to be accounted for as a pooling of interests. The consummation of the transaction is subject to a number of conditions, including approval of the Merger Agreement by PairGain's stockholders and receipt of applicable regulatory approvals. Copies of the Merger Agreement and the press release are attached hereto as Exhibits 2.1 and 99.1, respectively. In connection with the execution of the Merger Agreement, PairGain and ADC entered into a Stock Option Agreement (the "Option Agreement"), pursuant to which PairGain granted ADC an option to acquire shares of PairGain common stock representing up to 19.9% of PairGain's issued and outstanding shares under certain circumstances described in the Option Agreement. Certain stockholders of PairGain entered into a Voting Agreement (the "Voting Agreement") with ADC, pursuant to which such stockholders agreed to vote their shares of PairGain common stock in favor of the approval of the Merger Agreement. Copies of the Option Agreement and the Voting Agreement are attached hereto as Exhibits 99.2 and 99.3, respectively. On February 20, 2000, the Company's Board of Directors adopted a resolution to rescind the Company's plan to repurchase shares of outstanding common stock that had been announced on October 14, 1998. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits Exhibit No. Exhibit - ----------- ------- 2.1 Agreement and Plan of Merger, dated as of February 22, 2000, among ADC Telecommunications, Inc., Roman Acquisition Corp. and PairGain Technologies, Inc. 99.1 Joint Press Release of PairGain Technologies, Inc. and ADC Telecommunications, Inc., dated February 23, 2000. 99.2 Stock Option Agreement, dated as of February 22, 2000, between PairGain Technologies, Inc. and ADC Telecommunications, Inc. 99.3 Voting Agreement, dated as of February 22, 2000, among ADC Telecommunications, Inc. and the stockholders of PairGain Technologies, Inc. identified therein. Page 2 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, PairGain has duly caused this report to be signed on our behalf by the undersigned hereunto duly authorized. Date: February 28, 2000 PAIRGAIN TECHNOLOGIES, INC. /s/ ROBERT R. PRICE -------------------------------------------- Robert R. Price Senior Vice President, Chief Financial Officer Page 3 4 INDEX TO EXHIBITS Exhibit No. Exhibit - ----------- ------- 2.1 Agreement and Plan of Merger, dated as of February 22, 2000, among ADC Telecommunications, Inc., Roman Acquisition Corp. and PairGain Technologies, Inc. 99.1 Joint Press Release of PairGain Technologies, Inc. and ADC Telecommunications, Inc., dated February 23, 2000. 99.2 Stock Option Agreement, dated as of February 22, 2000, between PairGain Technologies, Inc. and ADC Telecommunications, Inc. 99.3 Voting Agreement, dated as of February 22, 2000, among ADC Telecommunications, Inc. and the stockholders of PairGain Technologies, Inc. identified therein. EX-2.1 2 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER BY AND AMONG ADC TELECOMMUNICATIONS, INC., ROMAN ACQUISITION CORP. AND PAIRGAIN TECHNOLOGIES, INC. ----------------- February 22, 2000 ----------------- 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER..........................................................2 1.1. The Merger..........................................................2 1.2. Effect of Merger....................................................2 1.3. Effective Time......................................................2 1.4. Certificate of Incorporation; Bylaws................................2 1.5. Directors and Officers..............................................3 1.6. Taking of Necessary Action; Further Action..........................3 1.7. The Closing.........................................................3 ARTICLE II CONVERSION OF SECURITIES............................................3 2.1. Conversion of Securities............................................3 2.2. Stock Options.......................................................5 2.3. Employee Stock Purchase Plan........................................6 2.4. Exchange of Certificates............................................6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................8 3.1. Organization and Qualification......................................8 3.2. Capital Stock of Subsidiaries.......................................9 3.3. Capitalization......................................................9 3.4. Authority Relative to this Agreement...............................10 3.5. No Conflict; Required Filings and Consents.........................11 3.6. SEC Filings; Financial Statements..................................12 3.7. Absence of Changes or Events.......................................13 3.8. Absence of Certain Developments....................................13 3.9. Litigation.........................................................13 3.10. Title to Properties................................................13 3.11. Certain Contracts..................................................14 3.12. Compliance with Law................................................14 3.13. Intellectual Property Rights; Year 2000............................15 3.14. Taxes..............................................................17 3.15. Employees..........................................................18 3.16. Employee Benefit Plans.............................................19 3.17. Environmental Matters..............................................21 3.18. Insurance..........................................................22 3.19. Foreign Corrupt Practices Act......................................22 3.20. Export Control Laws................................................22 3.21. Finders or Brokers.................................................22 3.22. Board Recommendation...............................................23 3.23. Vote Required......................................................23 3.24. Opinion of Financial Advisor.......................................23 3.25. Tax Matters........................................................23 3.26. State Takeover Statutes; Rights Agreement..........................23 3.27. Registration Statement; Proxy Statement/Prospectus.................24 3.28. First Quarter Performance..........................................24
i 3 TABLE OF CONTENTS (Continued)
PAGE ---- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT............24 4.1. Organization and Qualification.....................................24 4.2. Capitalization.....................................................25 4.3. Authority Relative to this Agreement...............................26 4.4. No Conflicts; Required Filings and Consents........................26 4.5. SEC Filings; Financial Statements..................................27 4.6. Absence of Changes or Events.......................................28 4.7. Litigation.........................................................28 4.8. Compliance with Law................................................28 4.9. Finders or Brokers.................................................28 4.10. Tax Matters........................................................28 4.11. Registration Statement; Proxy Statement/Prospectus.................29 ARTICLE V COVENANTS AND AGREEMENTS...........................................29 5.1. Conduct of Business of the Company Pending the Merger..............29 5.2 Preparation of Registration Statement; Proxy Statement/Prospectus; Blue Sky Laws........................32 5.3 Meeting of Stockholders............................................33 5.4. Additional Agreements, Cooperation.................................33 5.5. Publicity..........................................................33 5.6. No Solicitation....................................................34 5.7. Access to Information..............................................35 5.8. Notification of Certain Matters....................................36 5.9. Resignation of Officers and Directors..............................36 5.10. Indemnification....................................................36 5.11. Stockholder Litigation.............................................37 5.12. Employee Benefit Plans.............................................37 5.13. Determination of Optionholders.....................................38 5.14. Preparation of Tax Returns.........................................38 5.15. Pooling Affiliates.................................................39 5.16. Pooling Actions....................................................39 5.17 Tax-Free Reorganization............................................39 5.18. SEC Filings; Compliance............................................39 5.19. Listing of Additional Shares.......................................39 5.20. Rights Agreement...................................................40 5.21. Stock Repurchase Plan..............................................40 ARTICLE VI CONDITIONS TO CLOSING..............................................40 6.1. Conditions to Each Party's Obligation to Effect the Merger.........40 6.2. Conditions to Obligations of Parent................................40 6.3. Conditions to Obligations of the Company...........................42 ARTICLE VII TERMINATION........................................................43 7.1. Termination........................................................43 7.2. Effect of Termination..............................................45 7.3. Fees and Expenses..................................................45 ARTICLE VIII MISCELLANEOUS......................................................47 8.1. Nonsurvival of Representations and Warranties......................47 8.2. Waiver.............................................................47 8.3. Notices............................................................47 8.4. Counterparts.......................................................48 8.5. Interpretation.....................................................48 8.6. Amendment..........................................................49 8.7. No Third Party Beneficiaries.......................................49 8.8. Governing Law......................................................49 8.9. Entire Agreement...................................................49 8.10. Validity...........................................................49
ii 4 EXHIBITS EXHIBITS - -------- A Stock Option Agreement B Voting Agreement C Certificate of Merger D Form of Company Affiliate Letter E Form of Parent Affiliate Letter iii 5 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated February 22, 2000, is made and entered into by and among ADC Telecommunications, Inc., a Minnesota corporation ("Parent"), Roman Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Parent ("Merger Sub"), and PairGain Technologies, Inc., a Delaware corporation (the "Company"). Merger Sub and the Company are sometimes collectively referred to as the "Constituent Corporations." WITNESSETH: WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have determined that it is advisable and in the best interests of the respective corporations and their stockholders that Merger Sub be merged with and into the Company in accordance with the General Corporation Law of the State of Delaware (the "DGCL") and the terms of this Agreement, pursuant to which the Company will be the surviving corporation and will be a wholly owned subsidiary of Parent (the "Merger"); and WHEREAS, for financial reporting purposes the parties intend that the Merger shall be accounted for as a "pooling of interests." The Company has provided to Parent an opinion letter from its independent accountants, Deloitte & Touche LLP, addressed to the Company, stating that, based on its familiarity with the Company, the Company will qualify as a party to a pooling-of-interests transaction under Opinion 16 of the Accounting Principles Board and applicable rules and regulations of the Securities and Exchange Commission (collectively, "Opinion 16"). Parent has provided to the Company an opinion letter from its independent accountants, Arthur Andersen LLP, addressed to Parent, stating that, as of the date of such letter, based on its familiarity with Parent, Parent will qualify as a party to a pooling-of-interests transaction under Opinion 16; and WHEREAS, for United States federal income tax purposes, the parties intend that the Merger shall qualify as a "reorganization" under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement constitute a "plan of reorganization" within the meaning of the Code; and WHEREAS, Parent, Merger Sub and the Company desire to make certain representations, warranties, covenants, and agreements in connection with, and establish various conditions precedent to, the Merger; and WHEREAS, as a condition to, and immediately after the execution of, this Agreement, Parent and the Company are concurrently entering into a Stock Option Agreement (the "Company Option Agreement"), in substantially the form attached hereto as Exhibit A, pursuant to which the Company will grant Parent an option exercisable upon the occurrence of certain events; and 1 6 WHEREAS, as an inducement to Parent to enter into this Agreement, certain principal stockholders of the Company are concurrently herewith entering into a Voting Agreement (the "Voting Agreement") in substantially the form attached hereto as Exhibit B, whereby each such stockholder agrees to vote in favor of the Merger and all other transactions contemplated by this Agreement. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements set forth in this Agreement and in the Certificate of Merger (as defined in Section 1.3 hereof), the parties hereto, intending to be legally bound, agree as follows: ARTICLE I THE MERGER 1.1. The Merger. At the Effective Time (as defined in Section 1.3 hereof), subject to the terms and conditions of this Agreement and the Certificate of Merger (as defined in Section 1.3 hereof), Merger Sub shall be merged with and into the Company, the separate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation. The Company, in its capacity as the corporation surviving the Merger, is hereinafter sometimes referred to as the "Surviving Corporation." 1.2. Effect of Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the DGCL. Without limiting the generality of the foregoing, the Surviving Corporation shall succeed to and possess all the properties, rights, privileges, immunities, powers, franchises and purposes, and be subject to all the duties, liabilities, debts, obligations, restrictions and disabilities, of the Constituent Corporations, all without further act or deed. 1.3. Effective Time. Subject to the terms and conditions of this Agreement, the parties hereto will cause a copy of the Certificate of Merger, attached hereto as Exhibit C (the "Certificate of Merger") to be executed, delivered and filed with the Secretary of State of the State of Delaware in accordance with the applicable provisions of the DGCL at the time of the Closing (as defined in Section 1.7 hereof). The Merger shall become effective upon filing of the Certificate of Merger with the Secretary of State of the State of Delaware, at such later time as may be agreed to by the parties and set forth in the Certificate of Merger. The time of effectiveness is herein referred to as the "Effective Time." The day on which the Effective Time shall occur is herein referred to as the "Effective Date." 1.4. Certificate of Incorporation; Bylaws. From and after the Effective Time and until further amended in accordance with applicable law, the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation, as amended as set forth in an exhibit to the Certificate of Merger. From and after the Effective Time and until further amended in accordance with law, the Bylaws of Merger Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation. 2 7 1.5. Directors and Officers. From and after the Effective Time, the directors of the Surviving Corporation shall be the persons who were the directors of Merger Sub immediately prior to the Effective Time, and the officers of the Surviving Corporation shall be the persons who were the officers of Merger Sub immediately prior to the Effective Time. Said directors and officers of the Surviving Corporation shall hold office for the term specified in, and subject to the provisions contained in, the Certificate of Incorporation and Bylaws of the Surviving Corporation and applicable law. If, at or after the Effective Time, a vacancy shall exist on the Board of Directors or in any of the offices of the Surviving Corporation, such vacancy shall be filled in the manner provided in the Certificate of Incorporation and Bylaws of the Surviving Corporation. 1.6. Taking of Necessary Action; Further Action. Parent, Merger Sub and the Company, respectively, shall each use its or their best efforts to take all such action as may be necessary or appropriate to effectuate the Merger under the DGCL at the time specified in Section 1.3 hereof. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all properties, rights, privileges, immunities, powers and franchises of either of the Constituent Corporations, the officers of the Surviving Corporation are fully authorized in the name of each Constituent Corporation or otherwise to take, and shall take, all such lawful and necessary action. 1.7. The Closing. The closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth Street, Minneapolis, Minnesota, within three business days after the date on which the last of the conditions set forth in Article VI shall have been satisfied or waived, or at such other place and on such other date as is mutually agreeable to Parent and the Company (the "Closing Date"). The Closing will be effective as of the Effective Time. ARTICLE II CONVERSION OF SECURITIES 2.1. Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company, the holder of any shares of Company Common Stock (defined below) or the holder of any options, warrants or other rights to acquire or receive shares of Company Common Stock, the following shall occur: (a) Conversion of Company Common Stock. At the Effective Time, each share of common stock, par value $.0005 per share, of the Company (the "Company Common Stock") issued and outstanding immediately prior to the Effective Time (other than any shares of Company Common Stock to be canceled pursuant to Section 2.1(b)) will be canceled and extinguished and be converted automatically into the right to receive 0.43 shares (the "Exchange Ratio") of common stock, par value $.20 per share, of the Parent (the "Parent Common Stock"). All references in this Agreement to Parent Common Stock to be issued pursuant to the Merger shall be deemed to include the corresponding rights to purchase shares of Parent Common Stock pursuant to the Parent SRP Plan (defined in Section 4.2 hereof), except where the context otherwise requires. 3 8 (b) Cancellation of Company Common Stock Owned by Parent or Company. At the Effective Time, all shares of Company Common Stock that are owned by Company as treasury stock and each share of Company Common Stock owned by Parent or any direct or indirect wholly owned subsidiary of Parent or of Company immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof. (c) Company Stock Option Plans. At the Effective Time, the Company's 1990 Stock Plan, 1993 Stock Option/Stock Issuance Plan, as amended, the Company's 1996 Non-Employee Directors Stock Option Plan and the Avidia Stock Option and Incentive Award Plan (collectively, the "Company Stock Option Plans") and all options to purchase Company Common Stock then outstanding under the Company Stock Option Plans shall be assumed by Parent in accordance with Section 2.2 hereof. (d) Capital Stock of Merger Sub. At the Effective Time, each share of common stock, $0.01 par value, of Merger Sub ("Merger Sub Common Stock") issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock, $0.01 par value, of the Surviving Corporation, and the Surviving Corporation shall be a wholly owned subsidiary of Parent. Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted in the event of (i) any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Company Common Stock), reorganization, recapitalization or other like change with respect to Parent Common Stock or Company Common Stock occurring after the date hereof and prior to the Effective Time or (ii) any increase in the number of shares of Company Common Stock on a fully diluted, as-converted basis relative to such number of shares as derived from Section 3.3 hereof (other than increases resulting from transactions permitted in Section 5.1(b)(ii) or (iii) hereof), so as to provide holders of Company Common Stock and Parent the same economic effect as contemplated by this Agreement prior to such stock split, reverse split, stock dividend, reorganization, recapitalization, like change or increase. (f) Fractional Shares. No fraction of a share of Parent Common Stock will be issued, but in lieu thereof each holder of shares of Company Common Stock who would otherwise be entitled to a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock to be received by such holder) shall receive from Parent an amount of cash (rounded to the nearest whole cent) equal to the product of (i) such fraction, multiplied by (ii) the closing price for a share of Parent Common Stock on the Nasdaq National Market on the last full trading day prior to the Effective Time. 4 9 2.2. Stock Options. (a) At the Effective Time, each outstanding option to purchase shares of Company Common Stock under the Company Stock Option Plans (each, a "Company Option"), whether vested or unvested, shall be assumed by Parent and converted into an option (each, a "Parent Option") to acquire, on substantially the same terms and conditions, including but not limited to any performance criteria set forth in the applicable stock option agreements, as were applicable under such Company Option, the number of whole shares of Parent Common Stock equal to the number of shares of Company Common Stock that were issuable upon exercise of such Company Option immediately prior to the Effective Time multiplied by the Exchange Ratio (rounded down to the nearest whole number of shares of Parent Common Stock), and the per share exercise price of the shares of Parent Common Stock issuable upon exercise of such Parent Option shall be equal to the exercise price per share of Company Common Stock at which such Company Option was exercisable immediately prior to the Effective Time divided by the Exchange Ratio (rounded to the nearest whole cent). Other than pursuant to the terms of existing commitments (all of which commitments are identified in Section 2.2 of the Company Disclosure Letter (as defined in the preamble to Article III hereof)), the Company shall not, and shall cause any Company Stock Option Plan administrator not to, take any action prior to the Effective Time that will extend the exercise period of any Company Option or cause the vesting period of any Company Option to accelerate under any circumstances, regardless of whether such circumstances are to occur before or after the Effective Time, or otherwise amend the terms of outstanding Company Options. (b) All outstanding rights of the Company which it may hold immediately prior to the Effective Time to repurchase unvested shares of Company Common Stock (the "Repurchase Options") shall continue in effect following the Merger and shall continue to be exercisable by the Parent upon the same terms and conditions in effect immediately prior to the Effective Time, except that the shares purchasable pursuant to the Repurchase Options and the purchase price per shall be adjusted to reflect the conversion to Parent Common Stock and the Exchange Ratio. (c) Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of the Parent Options and to file all documents required to be filed to cause the shares of Parent Common Stock issuable upon exercise of the Parent Options to be listed on the Nasdaq National Market. As soon as practicable after the Effective Time, but no later than five business days after the Effective Time, Parent shall file a registration statement with the U.S. Securities and Exchange Commission (the "SEC") on Form S-8 (or any successor form) or another appropriate form with respect to the Parent Common Stock subject to such Parent Options, and shall use all commercially reasonable efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such Parent Options remain outstanding. As soon as practicable after the Effective Time, Parent shall inform in writing the holders of Company Options of their rights pursuant to the Company Stock Option Plans and the agreements evidencing the grants of such Company Options shall continue in effect on the same terms and conditions (subject to the adjustments required by Section 2.2(a) hereof), after giving effect to the Merger and the assumption by Parent of the Company Options as set forth herein. 5 10 (d) In the case of any Company Option to which Section 421 of the Code applies by reason of Section 422 of the Code ("Incentive Stock Options"), the option exercise price, the number of shares of Parent Common Stock purchasable pursuant to such option and the terms and conditions of exercise of such option shall be determined in order to comply with Section 424(a) of the Code. (e) Parent will make good faith efforts to ensure, to the extent permitted by the Code and to the extent required by and subject to the terms of any such Incentive Stock Options, that Company Options which qualified as Incentive Stock Options prior to the Closing Date continue to qualify as Incentive Stock Options of Parent after the Closing. Parent makes no representation regarding the qualification of such Company Options as Incentive Stock Options. Parent gives no guarantee or assurances of any particular result with respect to Taxes (as defined in Section 3.14 hereof) for any holder of Company Options. 2.3. Employee Stock Purchase Plan. The parties acknowledge that the Company's Employee Stock Purchase Plan (the "ESPP") shall continue to operate in accordance with its terms following the execution of this Agreement, except as provided below. Effective as of one business day prior to the Effective Time, the Company shall cause each outstanding purchase right to be automatically exercised in accordance with Section VII.G of the ESPP, the Company shall cause the ESPP to terminate, and no purchase rights shall be subsequently granted or exercised under the ESPP. The Company shall take all actions necessary to ensure that the ESPP will not be amended or modified in any respect after the date hereof, except to effect the terms of this Section 2.3. Notwithstanding the foregoing, the Company shall cause such amendments to be made to the ESPP such that, following such amendments, the operation of the ESPP will not cause "pooling-of-interests" accounting treatment to be unavailable for the transactions contemplated by the Agreement. 2.4. Exchange of Certificates. (a) Prior to the Effective Time, Parent shall designate a commercial bank, trust company or other financial institution, which may include Parent's stock transfer agent, to act as exchange agent ("Exchange Agent") in the Merger. (b) Promptly after the Effective Time, Parent shall make available to the Exchange Agent for exchange in accordance with this Article II, (i) the aggregate number of shares of Parent Common Stock issuable pursuant to Section 2.1 in exchange for outstanding shares of Company Common Stock, and (ii) cash in an amount sufficient to permit payment of cash in lieu of fractional shares pursuant to Section 2.1(f) (the "Exchange Fund"). (c) Promptly, and in any event no later than ten business days after the Effective Time, the Parent shall cause to be mailed to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates") (i) a letter of transmittal (which shall specify that 6 11 delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent, and shall be in such form and have such other provisions as Parent may reasonably specify and which shall be reasonably acceptable to the Company) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such letter of transmittal, duly completed and validly executed, and such other documents as may be reasonably required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange a certificate representing the number of whole shares of Parent Common Stock, plus cash lieu of fractional shares in accordance with Section 2.1(f), to which such holder is entitled pursuant to Section 2.1, and the Certificate so surrendered shall forthwith be canceled. Until surrendered as contemplated by this Section 2.4, each Certificate that, prior to the Effective Time, represented shares of Company Common Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends, to evidence the right to receive the number of full shares of Parent Common Stock into which such shares of Company Common Stock shall have been so converted and the right to receive an amount of cash in lieu of the issuance of any fractional shares in accordance with Section 2.1(f). (d) No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock. (e) None of Parent, the Surviving Corporation or the Exchange Agent shall be liable to any holder of shares of Company Common Stock for any amount properly delivered to a public official in compliance with any abandoned property, escheat or similar law. (f) At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of shares of Company Common Stock thereafter on the records of the Company. From and after the Effective Time, the holders of certificates representing shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares of Company Common Stock except as otherwise provided in this Agreement or by law. (g) Subject to any applicable escheat or similar laws, any portion of the Exchange Fund that remains unclaimed by the former stockholders of the Company for one year after the Effective Time shall be delivered by the Exchange Agent to Parent, upon demand of Parent, and any former stockholders of the Company shall thereafter look only to Parent for satisfaction of their claim for certificates representing shares of Parent Common Stock in exchange for their shares of Company Common Stock pursuant to the terms of Section 2.1 hereof. 7 12 (h) If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact, in form and substance acceptable to the Exchange Agent, by the person claiming such Certificate to be lost, stolen or destroyed, and complying with such other conditions as the Exchange Agent may reasonably impose (including the execution of an indemnification undertaking or the posting of an indemnity bond or other surety in favor of the Exchange Agent and Parent with respect to the Certificate alleged to be lost, stolen or destroyed), the Exchange Agent will deliver to such person, such shares of Parent Common Stock and cash in lieu of fractional shares, if any, as may be required pursuant to Section 2.1. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Merger Sub and Parent that the statements contained in this Article III are true and correct, except as set forth in the letter delivered by the Company to Merger Sub on the date hereof (the "Company Disclosure Letter") (which Company Disclosure Letter sets forth the exceptions to the representations and warranties contained in this Article III under captions referencing the Sections to which such exceptions apply): 3.1. Organization and Qualification. Each of the Company and its Subsidiaries (as defined below) is a company (or similar entity with corporate characteristics including limited liability of stockholders or other owners) duly organized, validly existing, duly registered and, if applicable, in good standing under the laws of the jurisdiction of its organization and each such entity has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of the Company and its Subsidiaries is duly qualified or licensed to carry on its business as it is now being conducted, and is qualified to conduct business, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, except for failures to be so qualified that would not, individually or in the aggregate, have, or would not reasonably be expected to have, a Company Material Adverse Effect (as defined below). Neither the Company nor any of its Subsidiaries is in violation of any of the provisions of its Certificate of Incorporation or other applicable charter document (any such document of any business entity hereinafter referred to as its "Charter Document") or its Bylaws, or other applicable governing document (any such documents of any business entity hereinafter referred to as its "Governing Document"). The Company has delivered to Merger Sub accurate and complete copies of the respective Charter Documents and Governing Documents, as currently in effect, of each of the Company and its Subsidiaries. As used in this Agreement, the term "Company Material Adverse Effect" means any change, effect, event or condition that (i) has a material adverse effect on the assets, business, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole (other than any such change, effect, event or condition that arises (A) as a result of the transactions contemplated hereby, or (B) from changes in general economic conditions, except to the extent such changes disproportionately affect the Company and its Subsidiaries, taken as a whole), or (ii) would prevent or materially delay the Company's ability to consummate the transactions contemplated hereby. As used in this Agreement, the term "Subsidiary" when used with respect to any party means any corporation or other organization, whether incorporated or 8 13 unincorporated, of which such party directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions. 3.2. Capital Stock of Subsidiaries. Neither the Company nor any of its Subsidiaries owns, controls or holds with the power to vote, directly or indirectly, of record, beneficially or otherwise, any share capital, capital stock or any equity or ownership interest in any company, corporation, partnership, association, joint venture, business, trust or other entity, except for the Subsidiaries described in the Company SEC Reports (as defined in Section 3.6(a) hereof) or listed in Section 3.2 of the Company Disclosure Letter, and except for ownership of securities in any publicly traded company held for investment by the Company or any of its Subsidiaries and comprising less than five percent of the outstanding stock of such company. Except as set forth in Section 3.2 of the Company Disclosure Letter, the Company is directly or indirectly the registered, record and beneficial owner of all of the outstanding share capital or shares of capital stock (or other ownership interests having by their terms ordinary voting power to elect a majority of directors or others performing similar functions with respect to such Subsidiary) of each of its Subsidiaries, there are no proxies with respect to such shares, and no equity securities of any of such Subsidiaries are or may be required to be issued by reason of any options, warrants, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, share capital or shares of any capital stock of any such Subsidiary, and there are no contracts, commitments, understandings or arrangements by which the Company or any such Subsidiary is bound to issue, transfer or sell any share capital or shares of such capital stock or securities convertible into or exchangeable for such shares. Other than as set forth in Section 3.2 of the Company Disclosure Letter, all of such shares so owned by the Company are validly issued, fully paid and nonassessable and are owned by it free and clear of any claim, lien, pledge, security interest or other encumbrance of any kind (collectively "Liens") with respect thereto other than restrictions on transfer pursuant to applicable securities laws. 3.3. Capitalization. The authorized capital stock of the Company consists of 175,000,000 shares of Company Common Stock and 2,000,000 shares of preferred stock, $.001 par value per share (of which 200,000 shares are designated Series A Junior Participating Preferred Stock) (the "Company Preferred Stock"). As of the close of business on February 18, 2000 (the "Company Measurement Date"), (a) 72,813,826 shares of Company Common Stock were issued and outstanding, (b) no shares of Company Preferred Stock were issued and outstanding, (c) the Company had no shares of Company Common Stock held in its treasury, (d) 12,665,428 shares of Company Common Stock were reserved for issuance under the Company Stock Option Plans and the ESPP, (e) Company Options to purchase 10,687,839 shares of Company Common Stock in the aggregate had been granted and remained outstanding under the Company Stock Option Plans, (f) no warrants to purchase shares of Company Common Stock were outstanding and (g) except for the Company Options, rights to the issuance of 199,786 shares of Company Common Stock in the aggregate under the ESPP and rights to purchase shares of Series A Junior Participating Preferred Stock pursuant to the Company Rights Agreement (defined in Section 3.26 hereof), there were no outstanding Rights (defined below). Except as permitted by Section 5.1(b), since the Company Measurement Date, no additional shares in the Company have been issued, except pursuant to the exercise of Company Options 9 14 listed in Section 3.3 of the Company Disclosure Letter and the ESPP, and no Rights have been granted. Except as described in the preceding sentence or as set forth in Section 3.3 of the Company Disclosure Letter, the Company has no outstanding bonds, debentures, notes or other securities or obligations the holders of which have the right to vote or which are convertible into or exercisable for securities having the right to vote on any matter on which any stockholder of the Company has a right to vote. All issued and outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. There are not as of the date hereof any existing options, warrants, stock appreciation rights, stock issuance rights, calls, subscriptions, convertible securities or other rights which obligate the Company or any of its Subsidiaries to issue, exchange, transfer or sell any shares in the capital of the Company or any of its Subsidiaries, other than rights to purchase shares of Series A Junior Participating Preferred Stock pursuant to the Company Rights Agreement, Company Common Stock issuable under the Company Stock Option Plans and the ESPP, or awards granted pursuant thereto (collectively, "Rights"). As of the date hereof, there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, reprice, redeem or otherwise acquire any shares of the capital of the Company or any of its Subsidiaries. As of the date hereof, there are no outstanding contractual obligations of the Company to vote or to dispose of any shares in the capital of any of its Subsidiaries. 3.4. Authority Relative to this Agreement. The Company has the requisite corporate power and authority to execute and deliver, and perform its obligations under, this Agreement and the Company Option Agreement and, subject to obtaining the necessary approval of its stockholders, to consummate the Merger and the other transactions contemplated hereby and thereby under applicable law. The execution and delivery of this Agreement and the Company Option Agreement and the consummation of the Merger and other transactions contemplated hereby and thereby have been duly and validly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or the Company Option Agreement or to consummate the Merger or other transactions contemplated hereby and thereby (other than approval by the Company's stockholders required by applicable law). This Agreement and the Company Option Agreement have been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by Parent and Merger Sub, each constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors rights generally or by general equitable principles. 10 15 3.5. No Conflict; Required Filings and Consents. (a) Assuming that all filings, permits, authorizations, consents and approvals or waivers thereof have been duly made or obtained as contemplated by Section 3.5(b) hereof, neither the execution and delivery of this Agreement or the Company Option Agreement by the Company nor the consummation of the Merger or other transactions contemplated hereby or thereby nor compliance by the Company with any of the provisions hereof will (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or suspension of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries under, any of the terms, conditions or provisions of (x) their respective Charter Documents or Governing Documents, (y) any note, bond, charge, lien, pledge, mortgage, indenture or deed of trust to which the Company or any such Subsidiary is a party or to which they or any of their respective properties or assets may be subject, or (z) any license, lease, agreement or other instrument or obligation to which the Company or any such Subsidiary is a party or to which they or any of their respective properties or assets may be subject, or (ii) violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its Subsidiaries or any of their respective properties or assets, except, in the case of clauses (i) (y) and (z) and (ii) above, for such violations, conflicts, breaches, defaults, terminations, suspensions, accelerations, rights of termination or acceleration or creations of liens, security interests, charges or encumbrances which would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. (b) No filing or registration with or notification to and no permit, authorization, consent or approval of any court, commission, governmental body, regulatory authority, agency or tribunal wherever located (a "Governmental Entity") is required to be obtained, made or given by the Company in connection with the execution and delivery of this Agreement or the Company Option Agreement or the consummation by the Company of the Merger or other transactions contemplated hereby or thereby except (i) (A) the filing of the Certificate of Merger as provided in Section 1.3 hereof, (B) in connection with the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (C) the filing of the Proxy Statement/Prospectus (as defined in Section 3.27 hereof) and such reports under Sections 13(a), 13(d), 15(d) or 16(a) with the SEC in accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act") and the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"), as may be required in connection with this Agreement, the Company Option Agreement and the transactions contemplated hereby or thereby, (D) in connection with the applicable requirements of the Communications Act of 1934, as amended (the "Communications Act"), or the rules, regulations or policies of the Federal Communications Commission (the "FCC"), (E) in connection with the applicable requirements of the Fair Trading Act in the United Kingdom (the "Fair Trading Act"), (F) in connection with the applicable requirements of the Investment Canada Act, (G) in connection with the applicable requirements of the Competition Act (Canada) or (H) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any country other than the United States, or (ii) where the failure to obtain any such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. 11 16 3.6. SEC Filings; Financial Statements. (a) The Company has filed all forms, reports, schedules, statements and other documents required to be filed by it since January 1, 1997 to the date hereof (collectively, as supplemented and amended since the time of filing, the "Company SEC Reports") with the SEC. The Company SEC Reports (i) were prepared in all material respects with all applicable requirements of the Securities Act and the Exchange Act, as the case may be and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The representation in clause (ii) of the preceding sentence does not apply to any misstatement or omission in any Company SEC Report filed prior to the date of this Agreement which was superseded by a subsequent Company SEC Report filed prior to the date of this Agreement. No Subsidiary of the Company is required to file any report, form or other document with the SEC. (b) The audited consolidated financial statements and unaudited consolidated interim financial statements of the Company and its Subsidiaries included or incorporated by reference in such Company SEC Reports (collectively, the "Financial Statements") have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be otherwise indicated in the notes thereto) and present fairly, in all material respects, the financial position and results of operations and cash flows of the Company and its Subsidiaries on a consolidated basis at the respective dates and for the respective periods indicated (except, in the case of all such financial statements that are interim financial statements, for footnotes and normal year-end adjustments). (c) Neither the Company nor any of its Subsidiaries has any liabilities or obligations of any nature, whether absolute, accrued, unmatured, contingent or otherwise whether due or to become due, known or unknown, or any unsatisfied judgments or any leases of personalty or realty or unusual or extraordinary commitments that are required to be disclosed under United States generally accepted accounting principles, except (i) as set forth in the Company SEC Reports or in Section 3.6(c) of the Company Disclosure Letter, (ii) the liabilities recorded on the Company's consolidated balance sheet at September 30, 1999 (the "Balance Sheet") included in the financial statements referred in Section 3.6(a) hereof and the notes thereto, (iii) liabilities or obligations incurred since September 30, 1999 (whether or not incurred in the ordinary course of business and consistent with past practice) that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, or (iv) liabilities that would not be required by United States generally accepted accounting principles to be disclosed in financial statements or in the notes thereto and that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. 12 17 3.7. Absence of Changes or Events. Except as set forth in Section 3.7 of the Company Disclosure Letter or in the Company SEC Reports, since September 30, 1999 through the date of this Agreement, the Company and its Subsidiaries have not incurred any liability or obligation that has resulted or would reasonably be expected to result in a Company Material Adverse Effect, and there has not been any change in the business, financial condition or results of operations of the Company or any of its Subsidiaries which has had, or would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, and the Company and its Subsidiaries have conducted their respective businesses in the ordinary course consistent with their past practices. 3.8. Absence of Certain Developments. Except as disclosed in the Company SEC Reports or as set forth in Section 3.8 of the Company Disclosure Letter, since September 30, 1999, the Company has not taken any of the actions set forth in Section 5.1 hereof. 3.9. Litigation. Except as disclosed in the Company SEC Reports or as set forth in Section 3.9 of the Company Disclosure Letter, there is no (a) claim, action, suit or proceeding pending or, to the Knowledge of the Company or any of its Subsidiaries, threatened against or relating to the Company or any of its Subsidiaries before any Governmental Entity, or (b) outstanding judgment, order, writ, injunction or decree (collectively, "Orders"), or application, request or motion therefor, of any Governmental Entity in a proceeding to which the Company, any Subsidiary of the Company or any of their respective assets was or is a party except actions, suits, proceedings or Orders that, individually or in the aggregate, has not had or would not reasonably be expected to have a Company Material Adverse Effect, and neither the Company nor any Subsidiary is in default in any material respect with respect to any such Order. 3.10. Title to Properties. The Company has heretofore made available to Parent correct and complete copies of all deeds and other instruments (as recorded) by which the Company has acquired any real property, as well as all title insurance policies, abstracts and surveys in the possession of the Company and relating to such real property. The Company has heretofore made available to Parent correct and complete copies of all leases, subleases and other agreements (collectively, the "Real Property Leases") under which the Company or any of its Subsidiaries uses or occupies or has the right to use or occupy, now or in the future, any real property or facility (the "Leased Real Property"), including without limitation all modifications, amendments and supplements thereto. Except in each case where the failure would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect or except as otherwise set forth in Section 3.10 of the Company Disclosure Letter, (i) the Company or one of its Subsidiaries has a valid leasehold interest in each parcel of Leased Real Property free and clear of all Liens except liens of record and other permitted liens and each Real Property Lease is in full force and effect, (ii) all rent and other sums and charges due and payable by the Company or its Subsidiaries as tenants thereunder are current in all material respects, (iii) no termination event or condition or uncured default of a material nature on the part of the Company or any such Subsidiary or, to the Knowledge of the Company or any such Subsidiary, the landlord, exists under any Real Property Lease, (iv) the Company or one of its Subsidiaries is in actual possession of each Leased Real Property and is entitled to quiet enjoyment thereof in accordance with the terms of the applicable Real Property Lease and applicable law, and (v) the Company and its Subsidiaries own outright all of the real and personal property (except for 13 18 leased property or assets for which it has a valid and enforceable right to use) which is reflected on the Balance Sheet, except for property since sold or otherwise disposed of in the ordinary course of business and consistent with past practice and except for liens of record and other permitted liens. The plant, property and equipment of the Company and its Subsidiaries that are used in the operations of their businesses are in good operating condition and repair, subject to ordinary wear and tear, and, subject to normal maintenance, are available for use. 3.11. Certain Contracts. Neither the Company nor any of its Subsidiaries has breached, or received in writing any claim or notice that it has breached, any of the terms or conditions of (i) any agreement, contract or commitment required to be filed as an exhibit to the Company SEC Reports (including any agreements, contracts or commitments entered into since September 30, 1999 that will be required to be filed by the Company with the SEC in any report), (ii) any agreements, contracts or commitments with manufacturers, suppliers, sales representatives, distributors, OEM strategic partners or customers of the Company pursuant to which the Company recognized revenues or payments in excess of $500,000 for the twelve-month period ended December 31, 1999, or (iii) any agreements, contracts or commitments containing covenants that limit the ability of the Company or any of its Subsidiaries to compete in any line of business or with any Person (as defined in Section 8.5 hereof), or that include any exclusivity provision or involve any restriction on the geographic area in which the Company or any of its Subsidiaries may carry on its business (collectively, "Company Material Contracts"), in such a manner as, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect. Section 3.11 of the Company Disclosure Letter lists each Company Material Contract described in clauses (ii) and (iii) of the preceding sentence. Each Company Material Contract that has not expired by its terms is in full force and effect and is the legal, valid and binding obligation of the Company and/or its Subsidiaries, enforceable against them in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity), except where the failure of such Company Material Contract to be in full force and effect or to be legal, valid, binding or enforceable against the Company and/or its Subsidiaries has not had and would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. Except as set forth in Section 3.11 of the Company Disclosure Letter, no consent, approval, waiver or authorization of, or notice to any Person is needed in order that each such Company Material Contract shall continue in full force and effect in accordance with its terms without penalty, acceleration or rights of early termination by reason of the consummation of the Merger and the other transactions contemplated by this Agreement. 3.12. Compliance with Law. All activities of the Company and its Subsidiaries have been, and are currently being, conducted in compliance in all material respects with all applicable United States federal, state, provincial and local and other foreign laws, ordinances, regulations, interpretations, judgments, decrees, injunctions, permits, licenses, certificates, governmental requirements, Orders and other similar items of any court or other Governmental Entity or any nongovernmental self-regulatory agency, and no notice has been received by the Company or any Subsidiary of any claims filed against the Company or any Subsidiary alleging a violation of any such laws, regulations or other requirements which would be required to be disclosed in any 14 19 Company SEC Report or any New SEC Report (as defined in Section 5.20 hereof). The Company Stock Option Plans and the ESPP have been duly authorized, approved and operated in compliance in all material respects with all applicable securities, corporate and other laws of each jurisdiction in which participants of such plans are located. The Company and its Subsidiaries have all permits, licenses and franchises from Governmental Entities required to conduct their businesses as now being conducted (including, but not limited to, permits issued under or pursuant to the Communications Act or the rules or regulations of the FCC), except for such permits, licenses and franchises the absence of which has not had and would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. 3.13. Intellectual Property Rights; Year 2000. (a) The Company and its Subsidiaries own, or are validly licensed or otherwise possess legally enforceable rights to use, all patents, trademarks, trade names, service marks, domain names and copyrights, any applications for and registrations of such patents, trademarks, trade names, service marks, domain names and copyrights, and all database rights, net lists, processes, formulae, methods, schematics, technology, know-how, computer software programs or applications and tangible or intangible proprietary information or material that are necessary to conduct the business of the Company and its Subsidiaries as currently conducted, or presently planned to be conducted, except for such rights the absence of which would not be reasonably expected to have a Company Material Adverse Effect (the "Company Intellectual Property Rights"). The Company and its Subsidiaries have taken all action reasonably necessary to protect the Company Intellectual Property Rights which is customary in the industry, including without limitation, use of reasonable secrecy measures to protect the trade secrets included in the Company Intellectual Property Rights. (b) The execution and delivery of this Agreement and consummation of the transactions contemplated hereby will not result in the breach of, or create on behalf of any third party the right to terminate or modify, any license, sublicense or other agreement relating to the Company Intellectual Property Rights, or any material licenses, sublicenses or other agreements as to which the Company or any of its Subsidiaries is a party and pursuant to which the Company or any of its Subsidiaries is authorized to use any third party patents, trademarks, copyrights or trade secrets ("Company Third Party Intellectual Property Rights"), including software that is used in the manufacture of, incorporated in, or forms a part of any product sold by or expected to be sold by the Company or any of its Subsidiaries, the breach of which would, individually or in the aggregate, be reasonably likely to have a Company Material Adverse Effect. The Company Disclosure Letter, under the caption referencing this Section 3.13, lists all royalties, license fees, sublicense fees or similar obligations reasonably expected to have a value in excess of $500,000 per year payable by the Company or any Subsidiary for any Company Third Party Intellectual Property Rights that are used in the manufacture of, incorporated in, or forms a part of any product sold by or expected to be sold by the Company or any of its Subsidiaries. (c) All patents, registered trademarks, service marks, domain names and copyrights which are held by the Company or any of its Subsidiaries, the loss or invalidity of which would reasonably be expected to cause a Company Material Adverse Effect, are valid and subsisting. The Company (i) has not been sued in any suit, action or proceeding, or received in 15 20 writing any claim or notice, which involves a claim of infringement or misappropriation of any patents, trademarks, service marks, domain names, copyrights or violation of any trade secret or other proprietary right of any third party; and (ii) has no Knowledge that the manufacturing, marketing, licensing or sale of its products or services infringe upon, misappropriate or otherwise come into conflict with any patent, trademark, service mark, copyright, trade secret or other proprietary right of any third party, which infringement, misappropriation or conflict in the cases of clause (i) and (ii) would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. To the Knowledge of the Company, no other Person has interfered with, infringed upon, or otherwise come into conflict with any Company Intellectual Property Rights or other proprietary information of the Company or any of its Subsidiaries which has or would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. (d) Each employee, agent, consultant or contractor who has materially contributed to or participated in the creation or development of any copyrightable, patentable or trade secret material on behalf of the Company, any of its Subsidiaries or any predecessor in interest thereto either: (i) is a party to an agreement under which the Company or such Subsidiary is deemed to be the original owner/author of all property rights therein; or (ii) has executed an assignment or an agreement to assign in favor of the Company, such Subsidiary or such predecessor in interest, as applicable, all right, title and interest in such material. (e) The Company and its Subsidiaries have experienced no material disruption or interruption of their business or operations as a result of or related to any of their information systems, data processing and other hardware, software and other systems, facilities, programs and procedures used or sold by the Company or any of its Subsidiaries (collectively, "Information Systems") failing to be Y2K Compliant. "Y2K Compliant" means, with respect to any Information System, that such Information System (i) handles date information involving any and all dates before, during and/or after January 1, 2000, including accepting input, providing output and performing date calculations in whole or in part; (ii) operates accurately without interruption on and in respect of any and all dates before, during and/or after January 1, 2000 and without any change in performance; (iii) responds to and processes two-digit year input without creating any ambiguity as to the century; and (iv) stores and provides date input information without creating any ambiguity as to the century, in each case without utilizing bridges, gateways and the like while still preserving the level of functionality, usability, reliability, efficiency, performance and accessibility of such data and associated programs as existed prior to any modification to such Information System and its constituent elements to make the same Y2K Compliant. 16 21 3.14. Taxes. (a) "Tax" or "Taxes" shall mean all United States federal, state, provincial, local or foreign taxes and any other applicable duties, levies, fees, charges and assessments that are in the nature of a tax, including income, gross receipts, property, sales, use, license, excise, franchise, ad valorem, value-added, transfer, social security payments, and health taxes and any deductibles relating to wages, salaries and benefits and payments to subcontractors for any jurisdiction in which the Company or any of its Subsidiaries does business (to the extent required under applicable Tax law), together with all interest, penalties and additions imposed with respect to such amounts. (b) Except as set forth in (or resulting from matters set forth in) Section 3.14 of the Company Disclosure Letter or as could not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect: (i) the Company and its Subsidiaries have prepared and timely filed with the appropriate governmental agencies all franchise, income and all other material Tax returns and reports required to be filed on or before the Effective Time (collectively "Returns"), taking into account any extension of time to file granted to or obtained on behalf of the Company and/or its Subsidiaries; (ii) all Taxes of the Company and its Subsidiaries shown on such Returns or otherwise known by the Company to be due or payable have been timely paid in full to the proper authorities, other than such Taxes as are being contested in good faith by appropriate proceedings or which are adequately reserved for in accordance with generally accepted accounting principles; (iii) all deficiencies resulting from Tax examinations of income, sales and franchise and all other material Returns filed by the Company and its Subsidiaries in any jurisdiction in which such Returns are required to be so filed have either been paid or are being contested in good faith by appropriate proceedings; (iv) no deficiency has been asserted or assessed against the Company or any of its Subsidiaries which has not been satisfied or otherwise resolved, and no examination of the Company or any of its Subsidiaries is pending or, to the Knowledge of the Company, threatened for any material amount of Tax by any taxing authority; (v) no extension of the period for assessment or collection of any material Tax is currently in effect and no extension of time within which to file any material Return has been requested, which Return has not since been filed; (vi) all Returns filed by the Company and its Subsidiaries are correct and complete or adequate reserves have been established with respect to any additional Taxes that may be due (or may become due) as a result of such Returns not being correct or complete; 17 22 (vii) to the Knowledge of the Company, no Tax liens have been filed with respect to any Taxes; (viii) neither the Company nor any of its Subsidiaries have made since January 1, 1997, and none will make, any voluntary adjustment by reason of a change in their accounting methods for any pre-Merger period; (ix) the Company and its Subsidiaries have made timely payments of the Taxes required to be deducted and withheld from the wages paid to their employees; (x) the Company and its Subsidiaries are not parties to any Tax sharing or Tax matters agreement; (xi) to the Knowledge of the Company, neither the Company nor any of its Subsidiaries is liable to suffer any recapture, clawback or withdrawal of any relief or exemption from Tax howsoever arising (including the entering into and the consummation of the Merger), and whether by virtue of any act or omission by the Company or any of its Subsidiaries or by any other person or persons; and (xii) to the Knowledge of the Company, neither the Company nor any of its Subsidiaries is liable to be assessed for or made accountable for any Tax for which any other person or persons may be liable to be assessed or made accountable whether by virtue of the entering into or the consummation of the Merger or by virtue of any act or acts done by or which may be done by or any circumstance or circumstances involving or which may involve any other person or persons. (c) The Company and its Subsidiaries are not parties to any agreement, contract, or arrangement that would, as a result of the transactions contemplated hereby, result, separately or in the aggregate, in (i) the payment of any "excess parachute payments" within the meaning of Section 280G of the Code by reason of the Merger or (ii) the payment of any form of compensation or reimbursement for any Tax incurred by any Person arising under Section 280G of the Code. 3.15. Employees. Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement, arrangement or labor contract with a labor union or labor organization, whether formal or otherwise. The Company Disclosure Letter, under the caption referencing this Section 3.15, lists all employment, severance and change of control agreements (or any other agreements that may result in the acceleration of outstanding options) of the Company or its Subsidiaries. Each of the Company and its Subsidiaries is in compliance with all applicable laws (including, without limitation, all applicable extension orders) respecting employment and employment practices, terms and conditions of employment, equal opportunity, anti-discrimination laws, and wages and hours, except where such noncompliance has not had and would not, individually or in the aggregate, reasonably be expected to have, a Company Material Adverse Effect. There is no labor strike, slowdown or stoppage pending (or, to the Knowledge of the Company or any of its Subsidiaries, any unfair labor practice complaints, labor disturbances or other controversies respecting employment which are pending or threatened which, if they actually occurred, would materially disrupt the operations of the Company or its Subsidiaries) against the Company or any of its Subsidiaries. 18 23 3.16. Employee Benefit Plans. (a) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and "Plan" means every plan, fund, contract, program and arrangement (whether written or not) which is maintained or contributed to by the Company for the benefit of present or former employees or with respect to which the Company otherwise has current or potential liability. "Plan" includes any arrangement intended to provide: (i) medical, surgical, health care, hospitalization, dental, vision, workers' compensation, life insurance, death, disability, legal services, severance, sickness, accident, or cafeteria plan benefits (whether or not defined in Section 3(1) of ERISA), (ii) pension, profit sharing, stock bonus, retirement, supplemental retirement or deferred compensation benefits (whether or not tax qualified and whether or not defined in Section 3(2) of ERISA), (iii) bonus, incentive compensation, stock option, stock appreciation right, phantom stock or stock purchase benefits, change in control benefits or (iv) salary continuation, unemployment, supplemental unemployment, termination pay, vacation or holiday benefits (whether or not defined in Section 3(3) of ERISA). The Company Disclosure Letter, under the caption referencing this Section 3.16(a), sets forth all material Plans by name and brief description identifying: (i) the type of Plan, including a specific reference to any Plan which provides benefits (or increased benefits or vesting) as a result of a change in control of the Company, and (ii) the participating employers in the Plan. (b) To the extent required (either as a matter of law or to obtain the intended tax treatment and tax benefits), all Plans comply with the requirements of ERISA and the Code, except where such noncompliance has not had and would not, individually or in the aggregate, reasonably be expected to have, a Company Material Adverse Effect. With respect to the Plans, (i) all required contributions which are due have been made and an accrual required by generally accepted accounting principles has been made on the books and records of the Company for all future contribution obligations; (ii) there are no actions, suits or claims pending, other than routine uncontested claims for benefits; and (iii) there have been no nonexempt prohibited transactions (as defined in Section 406 of ERISA or Section 4975 of the Code), except for such transactions, if any, which have not had and would not, individually or in the aggregate, reasonably be expected to have, a Company Material Adverse Effect. Except as otherwise disclosed in the Company Disclosure Letter under the caption referencing this Section 3.16(b), all benefits under the Plans (other than Code Section 125 cafeteria plans) are payable either through a fully-funded trust or an insurance contract and no welfare benefit Plan (as defined in Section 3(1) of ERISA) is self-funded. (c) Parent has received true and complete copies of (i) all Plan documents, including related trust agreements or funding arrangements; (ii) the most recent determination letter, if any, received by the Company from the Internal Revenue Service (the "IRS") regarding the Plans and any amendment to any Plan made subsequent to any Plan amendments covered by any such determination letter; (iii) the most recent financial statements for the Plans, if any; (iv) the most recently prepared actuarial valuation reports, if any; (v) current summary plan descriptions; (vi) annual returns/reports on Form 5500 and summary annual reports for each of 19 24 the most recent three plan years, and (vii) any filings with the IRS or the Department of Labor ("DOL") within the last five years preceding the date of this Agreement. To the knowledge of the Company, nothing has occurred that could materially adversely affect the qualification of the Plans and their related trusts. (d) Except as set forth in Section 3.16 of the Company Disclosure Letter, the Company does not maintain or contribute to (and has never contributed to) any multi-employer plan, as defined in Section 3(37) of ERISA. The Company has no actual or potential material liabilities under Title IV of ERISA, including under Section 4201 of ERISA for any complete or partial withdrawal from a multi-employer plan. (e) The Company has no actual or potential material liability for death or medical benefits after separation from employment, other than (i) death benefits under the employee benefit plans or programs (whether or not subject to ERISA) set forth in Section 3.16 of the Company Disclosure Letter and (ii) health care continuation benefits described in Section 4980B of the Code. (f) Neither the Company nor any of its directors, officers, employees or other "fiduciaries", as such term is defined in Section 3(21) of ERISA, has committed any breach of fiduciary responsibility imposed by ERISA or any other applicable law with respect to the Plans which would subject the Company, Parent or any of their respective directors, officers or employees to any liability under ERISA or any applicable law, except for such breaches, if any, which have not had and would not, individual or in the aggregate, reasonably be expected to have, a Company Material Adverse Effect. (g) There are no other trades or businesses (other than Subsidiaries of the Company), whether or not incorporated, which, together with the Company, would be deemed to be a "single employer" within the meaning of Code Sections 414(b), (c) or (m). (h) Except with respect to Taxes on benefits paid or provided, no Tax has been waived or excused, has been paid or is owed by any person (including, but not limited to, any Plan, any Plan fiduciary or the Company) with respect to the operations of, or any transactions with respect to, any Plan which would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. No action has been taken by the Company, nor has there been any failure by the Company to take any action, nor is any action or failure to take action contemplated by the Company (including all actions contemplated under this Agreement), that would subject any person or entity to any liability or Tax imposed by the IRS or DOL in connection with any Plan, except for such liability or Tax that has not had and would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. No reserve for any Taxes has been established with respect to any Plan by the Company nor has any advice been given to the Company with respect to the need to establish such a reserve, except for such reserves which would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. 20 25 (i) There are no (i) legal, administrative or other proceedings or governmental investigations or audits, or (ii) complaints to or by any Governmental Entity, which are pending, anticipated or, to the Knowledge of the Company, threatened, against any Plan or its assets, or against any Plan fiduciary or administrator, or against the Company or its officers or employees with respect to any Plan which would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. (j) There are no leased employees, as defined in Section 414(n) of the Code, providing services to the Company, that must be taken into account with respect to the requirements under Section 414(n)(3) of the Code. (k) Each Plan may be terminated directly or indirectly by Parent and the Company, in their sole discretion, at any time before or after the Effective Date in accordance with its terms, without causing the Parent or the Company to incur any liability to any person, entity or government agency for any conduct, practice or omission of the Company which occurred prior to the Effective Date, except for liabilities to, and the rights of, the employees thereunder accrued prior to the Effective Date, or if later, the time of termination, and except for continuation rights required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or other applicable law, reasonably expected to have a cost to the Company in excess of $500,000. 3.17. Environmental Matters. (a) The Company and its Subsidiaries (i) have been in compliance and are presently complying with all applicable health, safety and Environmental Laws (defined below), and (ii) have obtained all material permits, licenses and authorizations which are required under all applicable health, safety and Environmental Laws and are in compliance in all material respects with such permits, licenses and authorizations, except in each case for such failure to comply or to obtain permits, licenses or authorizations that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. To the Knowledge of the Company, (i) none of the real property owned by the Company or its Subsidiaries or the Leased Real Property (including without limitation soils and surface and ground waters) are contaminated with any Hazardous Materials in quantities which require investigation or remediation under Environmental Laws, (ii) neither the Company nor any of its Subsidiaries is liable for any off-site contamination, and (iii) there is no environmental matter which could reasonably be expected to expose the Company or any of its Subsidiaries to a claim to clean-up any Hazardous Materials or otherwise to remedy any pollution or damage at any of the properties utilized in the Company's business under any Environmental Laws, that would, with respect to any of (i), (ii) or (iii) above, be required to be disclosed in the Company SEC Reports. (b) For purposes of this Agreement, the term (i) "Environmental Laws" means all applicable United States federal, state, provincial, local and other foreign laws, rules, regulations, codes, ordinances, orders, decrees, directives, permits, licenses and judgments relating to pollution, contamination or protection of the environment (including, without limitation, all applicable United States federal, state, provincial, local and other foreign laws, rules, regulations, codes, ordinances, orders, decrees, directives, permits, licenses and judgments relating to Hazardous Materials in effect as of the date of this Agreement), and (ii) "Hazardous 21 26 Materials" means any dangerous, toxic or hazardous pollutant, contaminant, chemical, waste, material or substance as defined in or governed by any United States federal, state, provincial, local or other foreign law, statute, code, ordinance, regulation, rule or other requirement relating to such substance or otherwise relating to the environment or human health or safety, including without limitation any waste, material, substance, pollutant or contaminant that might cause any injury to human health or safety or to the environment or might subject the Company or any of its Subsidiaries to any imposition of costs or liability under any Environmental Law. 3.18. Insurance. The Company has made available to Parent copies of all material policies of insurance and bonds in force on the date hereof covering the businesses, properties and assets of the Company and its Subsidiaries, and all such policies are currently in effect and all premiums with respect thereto have been duly paid to date. Except as disclosed in Section 3.18 of the Company Disclosure Letter, there are no claims outstanding under any insurance policy which could, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect and, to the Knowledge of the Company or any of its Subsidiaries, neither the Company nor any of its Subsidiaries has failed to give any notice or to present any such claim with respect to its business under any such policy in due and timely fashion, except where such failure would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. 3.19. Foreign Corrupt Practices Act. Neither the Company nor any of its Subsidiaries (nor any person representing the Company or any of its Subsidiaries) has at any time during the last five years (a) made any payment in violation of the Foreign Corrupt Practices Act or similar laws of other countries where the Company engages in business, or (b) made any payment to any foreign, federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. 3.20. Export Control Laws. The Company has conducted its export transactions in accordance in all material respects with applicable provisions of United States export control laws and regulations, including but not limited to the Export Administration Act and implementing Export Administration Regulations. 3.21. Finders or Brokers. Except for such Persons as set forth in Section 3.21 of the Company Disclosure Letter, whose fees will be paid by the Company, none of the Company, the Subsidiaries of the Company, the Board of Directors of the Company (the "Company Board") or any member of the Company Board has employed any agent, investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who might be entitled to a fee or any commission in connection with the Merger or the other transactions contemplated hereby. 3.22. Board Recommendation. The Company Board has, at a meeting of such Company Board duly held on February 20, 2000, approved and adopted this Agreement, the Merger, the Company Option Agreement and the other transactions contemplated hereby and thereby, declared the advisability of the Merger and recommended that the stockholders of the Company approve the Merger and the other transactions contemplated hereby, and has not as of the date hereof rescinded or modified in any respect any of such actions. 22 27 3.23. Vote Required. The affirmative vote of the holders of a majority of the shares of Company Common Stock outstanding on the record date set for the Company Stockholders Meeting (as defined in Section 3.27 hereof) is the only vote of the holders of any of the Company's capital stock necessary to approve this Agreement and the transactions contemplated hereby. 3.24. Opinion of Financial Advisor. The Company has received the opinion of Broadview International LLC dated the date of the meeting of the Company Board referenced in Section 3.22 above, to the effect that, as of such date, the Exchange Ratio is fair, from a financial point of view, to the holders of Company Common Stock. 3.25. Tax Matters. Neither the Company nor, to its Knowledge, any of its affiliates has taken or agreed to take any action, or knows of any circumstances, that (without regard to any action taken or agreed to be taken by Parent or any of its affiliates) would prevent the business combination to be effected by the Merger from constituting a transaction qualifying as a reorganization within the meaning of Section 368 of the Code. 3.26. State Takeover Statutes; Rights Agreement. The Company Board has taken all actions so that the restrictions contained in Section 203 of the DGCL applicable to a "business combination" (as defined in Section 203 of the DGCL) will not apply to the execution, delivery of performance of this Agreement or the Company Option Agreement or the consummation of the Merger or the other transactions contemplated by this Agreement or by the Company Option Agreement. The Company has taken all actions and completed all amendments, if any, necessary or appropriate so that (a) the Rights Agreement, dated as of December 3, 1998, between the Company and U.S. Stock Transfer Corp. (the "Company Rights Agreement"), is inapplicable to the transactions contemplated by this Agreement or the Company Option Agreement, and (b) the execution of this Agreement or the Company Option Agreement and the consummation of the transactions contemplated hereby or thereby, do not and will not (i) result in Parent being an "Acquiring Person" (as such term is defined in the Company Rights Agreement), (ii) result in the ability of any person to exercise any Rights under the Company Rights Agreement, (iii) enable or require the "Rights" (as such term is defined in the Company Rights Agreement) to separate from the shares of Company Common Stock to which they are attached or to be triggered or become exercisable, or (iv) otherwise result in the occurrence of a "Distribution Date" or "Shares Acquisition Date" (as such terms are defined in the Company Rights Agreement). 3.27. Registration Statement; Proxy Statement/Prospectus. The information supplied by the Company for inclusion in the registration statement on Form S-4 (or such other or successor form as shall be appropriate) pursuant to which the shares of Parent Common Stock to be issued in the Merger will be registered with the SEC (the "Registration Statement") shall not at the time the Registration Statement (including any amendments or supplements thereto) is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in 23 28 light of the circumstances under which they were made, not misleading. The information supplied by the Company for inclusion in the proxy statement/prospectus to be sent to the stockholders of Company in connection with the meeting of Company's stockholders to consider the Merger (the "Company Stockholders Meeting") (such proxy statement/prospectus as amended or supplemented is referred to herein as the "Proxy Statement/Prospectus") shall not, on the date the Proxy Statement/Prospectus is first mailed to Company's stockholders, at the time of the Company Stockholders Meeting and at the Effective Time, contain any statement which, at such time, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they are made, not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event or information should be discovered by the Company which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/Prospectus, the Company shall promptly inform Parent. Notwithstanding the foregoing, the Company makes no representation, warranty or covenant with respect to any information supplied by Parent or Merger Sub which is contained in any of the foregoing documents. 3.28 First Quarter Performance. The Company has no Knowledge of any events, circumstances or other information that would cause the Company not to achieve substantially the internal projections of financial performance (other than fees and expenses relating to this Agreement or the transactions contemplated hereby) for the Company's first fiscal quarter (ending March 31, 2000) previously delivered to Parent. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT Merger Sub and Parent represent and warrant to the Company that the statements contained in this Article IV are true and correct: 4.1. Organization and Qualification. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota, with the corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Merger Sub is a corporation validly existing and in good standing under the laws of the State of Delaware. Each of Merger Sub and Parent is duly qualified or licensed to carry on its business as it is now being conducted, and is qualified to conduct business, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, except for failures to be so qualified that would not, individually or in the aggregate, have, or would not reasonably be expected to have, a Parent Material Adverse Effect (as defined below). Neither Parent nor Merger Sub is in violation of any of the provisions of its Charter Document or its Governing Document. As used in this Agreement, the term "Parent Material Adverse Effect" means any change, effect, event or condition that (i) has a material adverse effect on the assets, business, results of operations or financial condition of Parent and its Subsidiaries, taken as a whole (other than any such change, 24 29 effect, event or condition that arises from: (A) changes in general economic conditions, except to the extent such changes disproportionately affect Parent and its Subsidiaries, taken as a whole; or (B) changes in the market price of Parent Common Stock, in and of itself and not specifically related to any breach by Parent of any representation, warranty or covenant hereunder), or (ii) would prevent or materially delay Merger Sub's or Parent's ability to consummate the transactions contemplated hereby. 4.2. Capitalization. The authorized capital stock of Parent consists of 600,000,000 shares of Parent Common Stock and 10,000,000 shares of preferred stock, no par value (the "Parent Preferred Stock"). As of the close of business on February 18, 2000 (the "Parent Measurement Date"), (a) 303,334,825 shares of Parent Common Stock were issued and outstanding, (b) no shares of Parent Preferred Stock were issued and outstanding, (c) 69,355,717 shares of Parent Common Stock were reserved for issuance under the stock-based benefit plans of the Parent (the "Parent Stock Plans"), (d) options to purchase 40,499,483 shares of Parent Common Stock in the aggregate had been granted and remained outstanding under the Parent Stock Plans, and (e) except for the options, rights to acquire shares of Parent Common Stock under Parent's Employee Stock Purchase Plan (the "Parent ESPP") and rights to acquire shares of Parent Common Stock pursuant to the Second Amended and Restated Rights Agreement, dated as of November 28, 1995, as amended, between Parent and Norwest Bank, Minnesota, National Association (the "Parent SRP Plan"), there were no outstanding Parental Rights (as defined below). Since the Parent Measurement Date, no additional shares of Parent Common Stock have been issued and are outstanding, except pursuant to the exercise of options and the Parent ESPP, and no Parental Rights have been granted (other than additional Parent SRP Rights issued upon the issuance of shares of Parent Common Stock). All issued and outstanding shares of Parent Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights created by the Minnesota Business Corporation Act or Parent's Charter Document or Governing Document, or any other agreement with the Company. There are not at the date of this Agreement any existing options, warrants, calls, subscriptions, convertible securities or other rights which obligate Parent or any of its Subsidiaries to issue, exchange, transfer or sell any shares of capital stock of Parent or any of its Subsidiaries, other than shares of Parent Common Stock issuable under the Parent Stock Plans and the Parent ESPP, or awards granted pursuant thereto, and other than Parent SRP Rights issued upon the issuance of additional shares of Parent Common Stock (collectively, "Parental Rights"). 25 30 4.3. Authority Relative to this Agreement. Each of Parent and Merger Sub has the requisite corporate power and authority to execute and deliver, and to perform its obligations under, this Agreement and the Company Option Agreement, under applicable law. The execution and delivery by Parent and Merger Sub of this Agreement and the Company Option Agreement, and the consummation of the Merger and the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of Parent and Merger Sub. This Agreement and the Company Option Agreement have been duly and validly executed and delivered by Parent and Merger Sub and, assuming the due authorization, execution and delivery of this Agreement and the Company Option Agreement by the Company, is a valid and binding obligation of Parent and Merger Sub, enforceable against them in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors rights generally or by general equitable principles. The shares of Parent Common Stock to be issued by Parent pursuant to the Merger, as well as the Parent Options and the shares of Parent Common Stock to be issued upon exercise thereof: (i) have been duly authorized, and, when issued in accordance with the terms of the Merger and this Agreement (or the applicable option agreements), will be validly issued, fully paid and nonassessable and will not be subject to preemptive rights, (ii) will, when issued in accordance with the terms of the Merger and this Agreement (or the applicable option agreements), be registered under the Securities Act, and registered or exempt from registration under applicable United States "Blue Sky" laws and (iii) will, when issued in accordance with the terms of the Merger and this Agreement (or the applicable option agreements), be listed on the Nasdaq National Market. 4.4. No Conflicts; Required Filings and Consents. (a) Neither the execution, delivery or performance of this Agreement by Merger Sub or Parent, nor the consummation of the transactions contemplated hereby, nor compliance by Merger Sub or Parent with any provision hereof will (i) conflict with or result in a breach of any provision of the Charter Documents or Governing Documents of Merger Sub or Parent, (ii) cause a default or give rise to any right of termination, cancellation or acceleration or loss of a material benefit under, or result in the creation of any lien, charge or other encumbrance upon any of the properties of Merger Sub or Parent under any of the terms, conditions or provisions of any note, bond, mortgage or indenture, or any other material instrument, obligation or agreement to which Merger Sub or Parent is a party or by which its properties or assets may be bound or (iii) violate any law applicable to Merger Sub or Parent or binding upon any of its properties, except for, in the case of clauses (ii) and (iii), such defaults or violations which would not, individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect. (b) No filing or registration with or notification to and no permit, authorization, consent or approval of any Governmental Entity is required to be obtained, made or given by Merger Sub or Parent in connection with the execution and delivery of this Agreement or the consummation by Merger Sub of the Merger or other transactions contemplated hereby except (i) (A) in connection with the applicable requirements of the HSR Act, (B) the filing of a Registration Statement (defined in Section 5.3 hereof) with the SEC, in accordance with the Securities Act, as further described in Section 5.3 hereof, (C) in connection 26 31 with the applicable requirements of the Fair Trading Act, (D) in connection with the applicable requirements of the Investment Canada Act, (E) in connection with the applicable requirements of the Competition Act, (Canada), (F) in connection with the applicable requirements of the Brazilian Federal Law No. 8884 of June 11, 1994 or (G) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any country other than the United States, or (ii) where the failure to obtain any such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect. 4.5. SEC Filings; Financial Statements. (a) Parent has filed all forms, reports, schedules, statements and other documents required to be filed by it since November 1, 1997 to the date hereof (collectively, as supplemented and amended since the time of filing, the "Parent SEC Reports") with the SEC. The Parent SEC Reports (i) were prepared in all material respects with all applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The representation in clause (ii) of the preceding sentence does not apply to any misstatement or omission in any Parent SEC Report filed prior to the date of this Agreement which was superseded by a subsequent Parent SEC Report filed prior to the date of this Agreement. (b) The audited consolidated financial statements and unaudited consolidated interim financial statements of Parent and its Subsidiaries included or incorporated by reference in such Parent SEC Reports have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (except as may otherwise be indicated in the notes thereto) and present fairly, in all material respects, the financial position and results of operations and cash flows of Parent and its Subsidiaries on a consolidated basis at the respective dates and for the respective periods indicated (except, in the case of all such financial statements that are interim financial statements, for normal year-end adjustments). (c) Neither Parent nor any of its Subsidiaries has any liabilities or obligations of any nature, whether absolute, accrued, unmatured, contingent or otherwise, whether due or to become due, known or unknown, or any unsatisfied judgments or any leases of personalty or realty or unusual or extraordinary commitments that are required to be disclosed under United States generally accepted accounting principles, except (i) as set forth in the Parent SEC Reports, (ii) the liabilities recorded on Parent's consolidated balance sheet at October 31, 1999 included in the financial statements referred in Section 4.5(a) hereof and the notes thereto, (iii) liabilities or obligations incurred since October 31, 1999 (whether or not incurred in the ordinary course of business and consistent with past practice) that would not, individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect, or (iv) liabilities that would not be required by United States generally accepted accounting principles to be disclosed in financial statements or in the notes thereto and that would not, individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect. 27 32 4.6. Absence of Changes or Events. Except as set forth in the Parent SEC Reports, since October 31, 1999 through the date of this Agreement, Parent and its Subsidiaries have not incurred any liability or obligation that has resulted or would reasonably likely be expected to result in a Parent Material Adverse Effect, and there has not been any change in the business, financial condition or results of operations of Parent or any of its Subsidiaries which has had, or is reasonably expected to have, individually or in the aggregate, a Parent Material Adverse Effect, and Parent and its Subsidiaries have conducted their respective businesses in the ordinary course consistent with their past practices. 4.7. Litigation. Except as disclosed in the Parent SEC Reports, there is no (i) claim, action, suit or proceeding pending or, to the Knowledge of Parent, threatened against or relating to Parent or any of its Subsidiaries before any Governmental Entity, or (ii) outstanding Orders, or application, request or motion therefor, of any Governmental Entity in a proceeding to which Parent, any Subsidiary of Parent or any of their respective assets was or is a party except actions, suits, proceedings or Orders that, individually or in the aggregate, has not had or would not reasonably be expected to have a Parent Material Adverse Effect, and neither Parent nor any Subsidiary is in default in any material respect with respect to any such Order. 4.8. Compliance with Law. All activities of Merger Sub and Parent have been, and are currently being, conducted in compliance in all material respects with all applicable United States federal, state and local and other foreign laws, ordinances, regulations, interpretations, judgments, decrees, injunctions, permits, licenses, certificates, governmental requirements, Orders and other similar items of any court or other Governmental Entity or any nongovernmental self-regulatory agency, and no notice has been received by Parent of any claims filed against either Merger Sub or Parent alleging a violation of any such laws, regulations or other requirements which would be required to be disclosed in the Parent SEC Reports. Merger Sub and Parent have all permits, licenses and franchises from Governmental Entities required to conduct their businesses as now being conducted, except for such permits, licenses and franchises the absence of which would not, individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect. 4.9. Finders or Brokers. Except for Lehman Brothers, whose fees will be paid by Parent, none of Parent, Merger Sub, the other Subsidiaries of Parent, the Boards of Directors of Parent and Merger Sub or any member of such Boards of Directors has employed any agent, investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who might be entitled to a fee or any commission in connection with the Merger or the other transactions contemplated hereby. 4.10. Tax Matters. Neither Parent nor, to its Knowledge, any of its affiliates has taken or agreed to take any action, or knows of any circumstances, that (without regard to any action taken or agreed to be taken by the Company or any of its affiliates) would prevent the business combination to be effected by the Merger from constituting a transaction qualifying as a reorganization within the meaning of Section 368 of the Code. 28 33 4.11. Registration Statement; Proxy Statement/Prospectus. The information supplied by Parent and Merger Sub for inclusion in the Registration Statement shall not, at the time the Registration Statement (including any amendments or supplements thereto) is declared effective by the SEC, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The information supplied by Parent for inclusion in the Proxy Statement/Prospectus shall not, on the date the Proxy Statement/Prospectus is first mailed to the Company's stockholders, at the time of the Company Stockholders Meeting and at the Effective Time, contain any statement which, at such time, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which it is made, not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event or information should be discovered by Parent or Merger Sub which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/Prospectus, Parent or Merger Sub will promptly inform the Company. Notwithstanding the foregoing, Parent and Merger Sub make no representation, warranty or covenant with respect to any information supplied by the Company which is contained in any of the foregoing documents. ARTICLE V COVENANTS AND AGREEMENTS 5.1. Conduct of Business of the Company Pending the Merger. Except as contemplated by this Agreement or as expressly agreed to in writing by Parent, during the period from the date of this Agreement to the earlier of (i) the termination of this Agreement or (ii) the Effective Time, each of the Company and its Subsidiaries will conduct their respective operations according to its ordinary course of business consistent with past practice, and will use commercially reasonable efforts consistent with past practice and policies to preserve intact its business organization, to keep available the services of its officers and employees and to maintain satisfactory relationships with suppliers, distributors, customers and others having business relationships with it and will take no action which would adversely affect the ability of the parties to consummate the transactions contemplated by this Agreement, or the timing thereof. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement, prior to the Effective Time, the Company will not nor will it permit any of its Subsidiaries to, without the prior written consent of Parent: (a) amend any of its Charter Documents or Governing Documents; (b) authorize for issuance, issue, sell, deliver, grant any options, warrants, stock appreciation rights, or stock issuance rights for, or otherwise agree or commit to issue, sell, deliver, pledge, dispose of or otherwise encumber any shares of any class of its share capital or any securities convertible into shares of any class of its share capital, except (i) pursuant to and in accordance with the terms of Company Options outstanding on the Company Measurement Date or granted pursuant to clause (iii) below, (ii) pursuant to the ESPP (to the extent shares of 29 34 Company Common Stock have been paid for with payroll deductions), or (iii) the grant of Company Options consistent with past practices to new employees, which Company Options will represent the right to acquire no more than 10,000 shares of Company Common Stock per new employee; (c) subdivide, cancel, consolidate or reclassify any shares of its share capital, issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its share capital, declare, set aside or pay any dividend or other distribution (whether in cash, shares or property or any combination thereof) in respect of its share capital or purchase, redeem or otherwise acquire any shares of its own share capital or of any of its Subsidiaries, except as otherwise expressly provided in this Agreement; (d) (i) incur or assume any long-term or short-term debt or issue any debt securities except for borrowings under existing lines of credit in the ordinary course of business consistent with past practice; (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the material obligations of any other person (other than Subsidiaries of the Company); or (iii) make any material loans, advances or capital contributions to, or investments in, any other person (other than to Subsidiaries of the Company), except as set forth in Section 5.1(d) of the Company Disclosure Letter or pursuant to existing commitment, all of which commitments are disclosed in Section 5.1(d) of the Company Disclosure Letter; (e) except as otherwise expressly contemplated by this Agreement, (i) increase in any manner the compensation of (A) any employee who is not an officer of the Company or any Subsidiary (a "NonExecutive Employee"), except in the ordinary course of business consistent with past practice or (B) any of its directors or officers, except in the ordinary course of business, consistent with past practice, after consultation with Parent, (ii) pay or agree to pay any pension, retirement allowance or other employee benefit not required, or enter into, amend or agree to enter into or amend any agreement or arrangement with any such director or officer or employee, whether past or present, relating to any such pension, retirement allowance or other employee benefit, except as required to comply with law or under currently existing agreements, plans or arrangements or with respect to NonExecutive Employees, in the ordinary course of business consistent with past practice; (iii) grant any rights to receive any severance or termination pay to, or enter into or amend any employment or severance agreement with, any employee or any of its directors or officers, except as required by applicable law or with respect to severance or termination pay to NonExecutive Employees in the ordinary course of business, consistent with past practices; or (iv) except as may be required to comply with applicable law, become obligated (other than pursuant to any new or renewed collective bargaining agreement) under any new pension plan, welfare plan, multiemployer plan, employee benefit plan, benefit arrangement, or similar plan or arrangement, which was not in existence on the date hereof, including any bonus, incentive, deferred compensation, share purchase, share option, share appreciation right, group insurance, severance pay, retirement or other benefit plan, agreement or arrangement, or employment or consulting agreement with or for the benefit of any person, or amend any of such plans or any of such agreements in existence on the date hereof; provided, however, that this clause (iv) shall not prohibit the Company from renewing any such plan, agreement or arrangement already in existence on terms no more favorable to the parties to such plan, agreement or arrangement; 30 35 (f) except as otherwise expressly contemplated by this Agreement, enter into, amend in any material respect or terminate any Company Material Contracts other than in the ordinary course of business consistent with past practice; (g) sell, lease, license, mortgage or dispose of any of its properties or assets, other than (i) transactions in the ordinary course of business consistent with past practice, (ii) sales of assets, for the fair market value thereof, which sales do not individually or in the aggregate exceed $1,000,000, (iii) as may be required or contemplated by this Agreement or (iv) as set forth in Section 5.1(g) of the Company Disclosure Letter; (h) except as otherwise contemplated by the Merger, acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, limited liability company, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets, other than transactions set forth in Section 5.1(h) of the Company Disclosure Letter the acquisition of assets that are in the ordinary course of business consistent with past practice and not material to the Company and its Subsidiaries taken as a whole; (i) alter (through merger, liquidation, reorganization, restructuring or in any fashion) the corporate structure or ownership of the Company or any Subsidiary; (j) authorize or commit to make any material capital expenditures not reflected in the budget previously provided in writing by the Company to Parent without the prior written consent of Parent, which consent shall not be unreasonably withheld; (k) make any change in the accounting methods or accounting practices followed by the Company, except as required by generally accepted accounting principles or applicable law; (l) make any election under United States, Canadian, Brazilian, U.K. or Swiss Tax law which would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect; (m) take any action that (without regard to any action taken or agreed to be taken by Parent or any of its Affiliates) would prevent Parent from accounting for the business combination to be effected by the Merger as a pooling-of-interests; (n) settle any action, suit, claim, investigation or proceeding (legal, administrative or arbitrative) requiring a payment by the Company or its Subsidiaries in excess of $500,000 without the consent of Parent, which consent shall not be unreasonably withheld or delayed; 31 36 (o) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of claims, liabilities or obligations reflected or reserved against in, or contemplated by, the most recent financial statements (or the notes thereto) of the Company included in the Company SEC Reports or incurred in the ordinary course of business consistent with past practice; or (p) authorize, recommend, propose, agree or announce an intention to do any of the foregoing or enter into any contract, agreement, commitment or arrangement to do any of the foregoing; provided, however, that nothing contained herein shall limit the ability of Parent to exercise its rights under the Company Option Agreement; provided, further, that the Company may continue to proceed with its proposed acquisition of assets, the terms and conditions of which have been fully disclosed to Parent in Section 5.1 of the Company Disclosure Letter, provided that the Company shall not close such transaction without the prior approval of Parent, which approval shall not be unreasonably withheld. 5.2. Preparation of Registration Statement; Proxy Statement/Prospectus; Blue Sky Laws. As promptly as practicable and no later than 20 business days after the date hereof, Parent and the Company shall prepare, and Parent shall file with the SEC, the Registration Statement, in which the Proxy Statement/Prospectus will be included as part thereof. Parent and the Company shall use all commercially reasonable efforts to have such Registration Statement declared effective under the Securities Act as promptly as practicable after filing. The Proxy Statement/Prospectus will, when prepared pursuant to this Section 5.2 and mailed to the Company's stockholders, comply in all material respects with the applicable requirements of the Exchange Act and the Securities Act. Each of Parent and the Company shall indemnify and hold harmless the other from any obligations, claims or liabilities arising from any statement supplied by such party for inclusion in the Registration Statement or in the Proxy Statement/Prospectus which, at the time such statement was made, is false or misleading with respect to any material fact, or omits to state any material fact necessary in order to make the statement, in light of the circumstances under which is was made, not false or misleading. Subject to Section 5.6, the Proxy Statement/Prospectus shall include the declaration of the Company Board of the advisability of the Merger and its recommendation that the Company's stockholders approve the Merger. The Proxy Statement/Prospectus shall be reviewed and approved by Parent and Parent's counsel prior to the mailing of such Proxy Statement/Prospectus to the Company's stockholders. Parent shall also take any action required to be taken under any applicable provincial or state securities laws (including "Blue Sky" laws) in connection with the issuance of the Parent Common Stock in the Merger; provided, however, that neither Parent nor the Company shall be required to register or qualify as a foreign corporation or to take any action that would subject it to service of process in any jurisdiction where any such entity is not now so subject, except as to matters and transactions arising solely from the offer and sale of Parent Common Stock or the Parent Options. 5.3 Meeting of Stockholders. The Company shall, promptly after the date hereof, take all action necessary in accordance with the DGCL and its Certificate of Incorporation and Bylaws to convene the Company Stockholders Meeting within 45 days of the Registration 32 37 Statement being declared effective by the SEC, whether or not the Company Board determines at any time after the date hereof that the Merger is no longer advisable. The Company shall consult with Parent regarding the date of the Company Stockholders Meeting. Subject to Section 5.2 and Section 5.6 hereof, the Company shall use commercially reasonable efforts to solicit from stockholders of the Company proxies in favor of the Merger and shall take all other commercially reasonable action necessary or advisable to secure the vote or consent of stockholders required to effect the Merger. 5.4. Additional Agreements, Cooperation. (a) Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, and to cooperate, subject to compliance with applicable law, with each other in connection with the foregoing, including using its best efforts (i) to obtain all necessary waivers, consents and approvals from other parties to loan agreements, material leases and other material contracts, (ii) to obtain all necessary consents, approvals and authorizations as are required to be obtained under any United States federal or state, Canadian, Brazilian, United Kingdom, Swiss or other foreign law or regulations, (iii) to defend all lawsuits or other legal proceedings challenging this Agreement or the Company Option Agreement or the consummation of the transactions contemplated hereby or thereby, (iv) to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby, (v) to effect all necessary registrations and filings and submissions of information requested by Governmental Entities, and (vi) to fulfill all conditions to this Agreement. (b) Each of the parties hereto agrees, subject to compliance with applicable law, to furnish to each other party hereto such necessary information and reasonable assistance as such other party may request in connection with its preparation of necessary filings or submissions to any regulatory or governmental agency or authority, including, without limitation, any filing necessary under the provisions of the HSR Act, the Communications Act, the Exchange Act, the Securities Act or any other United States federal or state, or foreign statute or regulation. Each party hereto shall promptly inform each other party of any material communication from the U.S. Federal Trade Commission, the FCC or any other government or governmental authority regarding any of the transactions contemplated thereby. 5.5. Publicity. Except as otherwise required by law or the rules of any applicable securities exchange or the Nasdaq National Market, so long as this Agreement is in effect, Parent and the Company will not, and will not permit any of their respective affiliates or representatives to, issue or cause the publication of any press release or make any other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld or delayed. Parent and the Company will cooperate with each other in the development and distribution of all press releases and other public announcements with respect to this Agreement and the transactions contemplated hereby, and will furnish the other with drafts of any such releases and announcements as far in advance as possible. 33 38 5.6. No Solicitation. (a) Immediately upon execution of this Agreement, the Company shall (and shall cause its officers, directors, employees, investment bankers, attorneys and other agents or representatives to) cease all discussions, negotiations, responses to inquiries (except as set forth in the proviso to this sentence) and other communications relating to any potential business combination with all third parties who, prior to the date hereof, may have expressed or otherwise indicated any interest in pursuing an Acquisition Proposal (as hereinafter defined) with the Company; provided that, if any such inquiries are made after the date hereof, the Company shall respond by stating that it is a party to a binding agreement with Parent and is prohibited thereby from further responding to such inquiries. (b) Prior to termination of this Agreement pursuant to Article VII hereof, the Company and its Subsidiaries shall not, nor shall the Company authorize or permit any officers, directors or employees of, or any investment bankers, attorneys or other agents or representatives retained by or acting on behalf of, the Company or any of its Subsidiaries to, (i) initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal that constitutes an Acquisition Proposal, (ii) except as permitted below, engage or participate in negotiations or discussions with, or furnish any information or data to, or take any other action to, facilitate any inquiries or making any proposal by, any third party relating to an Acquisition Proposal, or (iii) except as permitted below, enter into any agreement with respect to any Acquisition Proposal or approve an Acquisition Proposal. Notwithstanding anything to the contrary contained in this Section 5.6 or in any other provision of this Agreement, prior to the Company Stockholders Meeting, the Company Board may participate in discussions or negotiations with or furnish information to any third party making an unsolicited Acquisition Proposal (a "Potential Acquiror") or approve or recommend an unsolicited Acquisition Proposal if both (A) a majority of the directors of the Company Board, without including directors who may be considered Affiliates (as defined in Rule 405 under the Securities Act) of any person making an Acquisition Proposal ("disinterested directors") determines in good faith, after receiving advice from its independent financial advisor, that a Potential Acquiror has submitted to the Company an Acquisition Proposal that is a Superior Proposal (as hereinafter defined), and (B) a majority of the disinterested directors of the Company Board determines in good faith, after receiving advice from reputable outside legal counsel experienced in such matters (and the parties hereto agree that the law firm of Stradling Yocca Carlson & Rauth is so experienced), that the failure to participate in such discussions or negotiations or to furnish such information or to approve or recommend such unsolicited Acquisition Proposal is inconsistent with the Company Board's fiduciary duties under applicable law. In the event that the Company shall receive any Acquisition Proposal, it shall promptly (and in no event later than 24 hours after receipt thereof) furnish to Parent the identity of the recipient of the Acquisition Proposal and of the Potential Acquiror, the terms of such Acquisition Proposal, copies of all information requested by the Potential Acquiror, and shall further promptly inform Parent in writing as to the fact such information is to be provided after compliance with the terms of the preceding sentence. Nothing contained herein shall prevent the Company from complying with Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal or making any disclosure to the Company's stockholders if, in the good faith judgment of the Company Board, 34 39 after receiving advice from reputable outside legal counsel experienced in such matters (and the parties hereto agree that the law firm of Stradling Yocca Carlson & Rauth is so experienced), such disclosure is required by applicable law. Without limiting the foregoing, the Company understands and agrees that any violation of the restrictions set forth in this Section 5.6(b) by the Company or any of its Subsidiaries, or by any director or officer of the Company or any of its Subsidiaries or any financial advisor, attorney or other advisor or representative of the Company or any of its Subsidiaries, whether or not such person is purporting to act on behalf of the Company or any of its Subsidiaries or otherwise, shall be deemed to be a breach of this Section 5.6(b) sufficient to enable Parent to terminate this Agreement pursuant to Section 7.1(d)(i) hereof. (c) For the purposes of this Agreement, "Acquisition Proposal" shall mean any proposal, whether in writing or otherwise, made by any person other than Parent and its Subsidiaries to acquire "beneficial ownership" (as defined under Rule 13(d) of the Exchange Act) of 20% or more of the assets of, or 20% or more of the outstanding capital stock of any of the Company or its Subsidiaries pursuant to a merger, consolidation, exchange of shares or other business combination, sale of shares of capital stock, sales of assets, tender offer or exchange offer or similar transaction involving the Company or its Subsidiaries. (d) The term "Superior Proposal" means any bona fide Acquisition Proposal to acquire, directly or indirectly, for consideration consisting of cash and/or securities, more than 50% of the Company Common Stock then outstanding or all or substantially all the assets of the Company, and otherwise on terms that a majority of the disinterested directors determines, in good faith, to be more favorable to the Company and its stockholders than the Merger (after receiving advice from the Company's independent financial advisor that the Acquisition Proposal is more favorable to the Company's stockholders, from a financial point of view, than the Merger) and for which financing, to the extent required, is then committed. 5.7. Access to Information. From the date of this Agreement until the Effective Time, and upon reasonable notice, the Company will give Parent and its authorized representatives (including counsel, other consultants, accountants and auditors) reasonable access during normal business hours to all facilities, personnel and operations and to all books and records of it and its Subsidiaries, will permit Parent to make such inspections as it may reasonably require, will cause its officers and those of its Subsidiaries to furnish Parent with such financial and operating data and other information with respect to its business and properties as Parent may from time to time reasonably request and confer with Parent to keep it reasonably informed with respect to operational and other business matters relating to the Company and its Subsidiaries and the status of satisfaction of conditions to the Closing. All information obtained by Parent pursuant to this Section 5.7 shall be kept confidential in accordance with the Reciprocal Confidentiality Agreement, dated September 25, 1998, between Parent and the Company. 5.8. Notification of Certain Matters. The Company or Parent, as the case may be, shall promptly notify the other of (a) its obtaining of Knowledge as to the matters set forth in clauses (i), (ii) and (iii) below, or (b) the occurrence, or failure to occur, of any event, which occurrence or failure to occur would be likely to cause (i) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at any time from 35 40 the date hereof to the Effective Time, (ii) any material failure of the Company or Parent, as the case may be, or of any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement or (iii) the institution of any claim, suit, action or proceeding arising out of or related to the Merger or the transactions contemplated hereby; provided, however, that no such notification shall affect the representations or warranties of the parties or the conditions to the obligations of the parties hereunder. 5.9. Resignation of Officers and Directors. At or prior to the Effective Time, the Company shall deliver to Parent the resignations of such officers and directors of the Company and shall use its best efforts to deliver to Parent the resignations of such officers and directors of its Subsidiaries (in each case, in their capacities as officers and directors, but not as employees if any of such persons are employees of the Company or any Subsidiary) as Parent shall specify, which resignations shall be effective at the Effective Time and shall contain an acknowledgment that the relevant individual has no outstanding claims for compensation for loss of office, redundancy, unfair dismissal or otherwise, other than those claims specified on Section 5.9 of the Company Disclosure Letter. 5.10. Indemnification. (a) As of the Effective Time and for a period of seven years following the Effective Time, Parent will indemnify and hold harmless from and against all claims, damages, losses, obligations or liabilities ("Losses") any persons who were directors or officers of the Company or any Subsidiary prior to the Effective Time (the "Indemnified Persons") to the fullest extent such person could have been indemnified for such Losses under applicable law, under the Governing Documents of the Company or any Subsidiary or under the indemnification agreements listed on Schedule 5.10 (a true and accurate form of which has been filed as Exhibit 10.27 to the Company's Form S-1) in effect immediately prior to the date hereof, with respect to any act or failure to act by any such Indemnified Person prior to the Effective Time. (b) Any determination required to be made with respect to whether an Indemnified Person's conduct complies with the standards set forth under the DGCL or other applicable law shall be made by independent counsel selected by Parent and reasonably acceptable to the Indemnified Persons. Parent shall pay such counsel's fees and expenses so long as the Indemnified Persons do not challenge any such determination by such independent counsel). (c) In the event that Parent or any of its successors or assigns (i) consolidates with or merges into any other person, and Parent or such successor or assign is not the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers all or substantially all of its properties and assets to any person, then, and in each case, proper provision shall be made so that such person or the continuing or surviving corporation assumes the obligations set forth in this Section 5.10 and none of the actions described in clauses (i) and (ii) above shall be taken until such provision is made. 36 41 (d) Parent shall maintain in effect for not less than five years from the Effective Time the current policies of directors' and officers' liability insurance maintained by the Company (provided that Parent may substitute therefor policies of at least comparable coverage containing terms and conditions which are no less advantageous to the Indemnified Parties in all material respects so long as no lapse in coverage occurs as a result of such substitution) with respect to all matters, including the transactions contemplated hereby, occurring prior to, and including the Effective Time; provided that, in the event that any Claim is asserted or made within such five-year period, such insurance shall be continued in respect of any such Claim until final disposition of any and all such Claims; and provided, further, that Parent shall not be obligated to make annual premium payments for such insurance to the extent such premiums exceed 150% of the premiums paid as of the date hereof by the Company or any Subsidiary for such insurance. In such case, Parent shall purchase as much coverage as possible for 150% of the premiums paid as of the date hereof for such insurance, which coverage shall be at least as favorable as that provided by Parent to its directors. 5.11. Stockholder Litigation. The Company shall give Parent the reasonable opportunity to participate in the defense of any stockholder litigation against or in the name of the Company and/or its respective directors relating to the transactions contemplated by this Agreement. 5.12. Employee Benefit Plans. (a) 401(k) Plan. Company shall take the following steps with respect to the PR Taylor Multiple Employer 401(k) Plan: (i) as soon as administratively feasible after the parties have entered into this Agreement, the Company shall cause its portion of such plan to be spun off and established as a separate 401(k) Plan ("Spinoff 401(k) Plan"); (ii) the Company shall cause its counsel to deliver, coincident with the spinoff, a written opinion that the form of the Spinoff 401(k) Plan complies in all material respects with ERISA and the Code; (iii) at least three days prior to the Effective Time, the Company shall terminate the Spinoff 401(k) Plan pursuant to written resolutions, the form and substance of which shall be satisfactory to Parent. Individuals employed by the Company at the Effective Time ("Company Employees") shall be allowed to participate in Parent's 401(k) plan effective as of the first payroll following the Effective Time; and all service with the Company shall be considered service with Parent for purposes of determining eligibility, vesting, and benefit accural (i.e., matching contributions) under Parent's 401(k) plan. As soon as administratively feasible after assets are distributed from the Spinoff 401(k) Plan, Company Employees shall be offered an opportunity to roll their Spinoff 401(k) Plan account balances into Parent's 401(k) Plan. (b) Welfare Plans. Company Employees shall be eligible to participate in Parent's short term disability plan, long term disability plan, group life insurance plan, medical plan, dental plan, and section 125 cafeteria plan as soon as administratively feasible after the Effective Time but in no event later than January 1, 2001. Prior to such time, Company Employees shall remain eligible for Company's welfare plans, as applicable, and such plans will not be amended or changed by Parent or Company. Parent shall include service and prior earnings with the Company for purposes of determining eligibility, participation, and benefit accrual under its short term disability plan, group life insurance plan medical plan, dental plan, 37 42 and section 125 cafeteria plan. Parent shall include such service for purposes of determing benefit eligibility or participation in Parent's long term disability plan; however, such participation shall be subject to the insurer's twelve month preexisting condition exclusion. (c) Vacation and PTO. Company Employees shall be eligible to participate in Parent's vacation or PTO policy, as applicable, as soon as administratively feasible after the Effective Time but in no event later than January 1, 2001. Prior to such date Company Employees shall remain eligible for Company's vacation pay or sick pay policies, as applicable, and such plans or policies will not be amended or changed by Parent or Company. Parent shall include service with the Company for purposes of determining eligility, participation, and calculation of vacation pay, sick pay, or paid time off (PTO) under Parent's vacation or PTO policy, as applicable. Subject to the terms of the Company plans or policies, each Company Employee will be entitled to carry over all vacation days and sick leave acrued but unused as of the Effective Time. 5.13. Determination of Optionholders . At least ten business days before the Effective Time, the Company shall provide Parent with a true and complete list of (a) the holders of Company Options, (b) the number of shares of Company Common Stock subject to Company Options held by each such optionholder and (c) the address of each such optionholder as set forth in the books and records of the Company or any Subsidiary, following upon which there shall be no additional grants of Company Options without Parent's prior consent. From the date such list is provided to Parent until the Effective Time, the Company shall provide a daily option activity report to Parent containing such information as Parent shall reasonably request. 5.14. Preparation of Tax Returns. The Company shall file (or cause to be filed) at its own expense, on or prior to the due date thereof, all Returns required to be filed on or before the Closing Date. The Company shall provide Parent with a copy of appropriate workpapers, schedules, drafts and final copies of each foreign and domestic, federal, provincial and state income Tax return or election of the Company (including returns of all Employee Benefit Plans) at least ten days before filing such return or election and shall consult with Parent with respect thereto prior to such filing. 38 43 5.15. Pooling Affiliates. (a) Promptly following the date of this Agreement, the Company shall deliver to Parent a list of names and addresses of those persons who are affiliates within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act or otherwise applicable SEC accounting releases with respect to the Company (the "Company Pooling Affiliates"). The Company shall provide Parent such information and documents as Parent shall reasonably request for purposes of reviewing such list. The Company shall deliver to Parent, on or prior to the Closing, an affiliate letter in the form attached hereto as Exhibit D, executed by each of the Company Pooling Affiliates identified in the foregoing list. Parent shall be entitled to place legends as specified in such affiliate letters on the certificates evidencing any of the Parent Common Stock to be received by such Company Pooling Affiliates pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for the Parent Common Stock, consistent with the terms of such letters. (b) Parent shall procure, on or prior to the Effective Time, an affiliate letter in the form attached hereto as Exhibit E, executed by appropriate affiliates of Parent. (c) For so long as resales of shares of Parent Common Stock issued pursuant to the Merger are subject to the resale restrictions set forth in Rule 145 under the Securities Act, Parent will use good faith efforts to comply with Rule 144(c)(1) under the Securities Act. 5.16. Pooling Actions. Between the date of this Agreement and the Effective Time, the parties will each take all actions reasonably necessary for Parent to account for the business combination to be effected by the Merger as a pooling of interests. 5.17 Tax-Free Reorganization. Parent and the Company shall each use all commercially reasonable efforts to cause the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Code. Neither Parent nor the Company shall take or fail to take, or cause any third party to take or fail to take, any action that would cause the Merger to fail to qualify as a "reorganization" within the meaning of Section 368(a) of the Code. 5.18. SEC Filings; Compliance. The Company and Parent shall each cause the forms, reports, schedules, statements and other documents required to be filed with the SEC by the Company and Parent, respectively, between the date of this Agreement and the Effective Time (with respect to either the Company or Parent, the "New SEC Reports") to be prepared in all material respects with all applicable requirements of the Securities Act and the Exchange Act, as the case may be, and such New SEC Reports will not at the time they are filed contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 5.19. Listing of Additional Shares. Prior to the Effective Time, Parent shall file with the Nasdaq National Market a Notification Form for Listing of Additional Shares with respect to the shares of Parent Common Stock to be issued in the Merger. 39 44 5.20. Rights Agreement. Prior to the Effective Time, the Company Board shall not take any action in contravention of the actions required by Section 3.26 of this Agreement. 5.21. Stock Repurchase Plan. As of the date of this Agreement, the Company shall terminate its stock repurchase plan, if any. ARTICLE VI CONDITIONS TO CLOSING 6.1. Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger is subject to the satisfaction or waiver on or prior to the Effective Date of the following conditions: (a) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the requisite vote of the stockholders of the Company under the DGCL and the Company's Charter Document and Governing Documents. (b) Governmental Action; No Injunction or Restraints. No action or proceeding shall be instituted by any Governmental Entity seeking to prevent consummation of the Merger, asserting the illegality of the Merger or this Agreement or seeking material damages directly arising out of the transactions contemplated hereby which continues to be outstanding. No judgment, order, decree, statute, law, ordinance, rule or regulation entered, enacted, promulgated, enforced or issued by any court or other Governmental Entity of competent jurisdiction or other legal restraint or prohibition shall be in effect (i) imposing or seeking to impose material sanctions, damages, or liabilities directly arising out of the Merger on the Company or any of its officers or directors; or (ii) preventing the consummation of the Merger. (c) Governmental Consents. All necessary authorizations, consents, orders or approvals of, or declarations or filings with, or expiration or waiver of waiting periods imposed by, any Governmental Entity of any applicable jurisdiction required for the consummation of the transactions contemplated by this Agreement shall have been filed, expired or obtained, as to which the failure to obtain, make or occur would have the effect of making the Merger or this Agreement or any of the transactions contemplated hereby illegal or which, individually or in the aggregate, would have a Parent Material Adverse Effect (assuming the Merger had taken place), including, but not limited to: the expiration or termination of the applicable waiting period, or any extensions thereof, pursuant to the HSR Act. 6.2. Conditions to Obligations of Parent. The obligation of Parent to effect the Merger is further subject to satisfaction or waiver of the following conditions: (a) Representations and Warranties. The representations and warranties of the Company set forth herein shall be true and correct both when made and at and as of the Effective Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to materiality or 40 45 material adverse effect set forth therein) does not have, and would not, individually or in the aggregate, reasonably be expected to have, a Company Material Adverse Effect. (b) Performance of Obligations of the Company. The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Date. (c) No Material Adverse Effect. Since the date of this Agreement, there has not been a Company Material Adverse Effect nor has there been any change, event or condition that, with the passage of time, would reasonably be expected to result in a Company Material Adverse Effect. Without limitation of the foregoing, (i) if (A) there has been any breach or misrepresentation of the representation and warranty set forth in Section 3.28 hereof (with respect to the Company's first fiscal quarter 2000 financial results) or (B) the Company fails to achieve the composite Wall Street research analysts estimates for total consolidated revenue of at least $55,000,000, Avidia product revenue of at least $5,000,000, and loss per share of no greater than $0.03 per share for the Company's first fiscal quarter (ending March 31, 2000), then, such breach or misrepresentation or failure shall, in and of itself, constitute a Company Material Adverse Effect for purposes of this Section 6.2(c), and (ii) the termination of employment prior to the Effective Time of more than 50% of the Avidia product engineers employed by the Company as of the date hereof shall, in and of itself, be deemed to be a Company Material Adverse Effect for purposes of this Section 6.2(c)). (d) No Injunctions or Restraints. No judgment, order, decree, statute, law, ordinance, rule or regulation entered, enacted, promulgated, enforced or issued by any court or other Governmental Entity of competent jurisdiction or other legal restraint or prohibition shall be in effect (i) imposing or seeking to impose material limitations on the ability of Parent to acquire or hold or to exercise full rights of ownership of any securities of the Company; (ii) imposing or seeking to impose material limitations on the ability of Parent or its Affiliates to combine and operate the business and assets of the Company; (iii) imposing or seeking to impose other material sanctions, damages, or liabilities directly arising out of the Merger on Parent or any of its officers or directors; or (iv) requiring or seeking to require divestiture by Parent of any significant portion of the business, assets or property of the Company or of Parent. (e) Delivery of Closing Documents. At or prior to the Effective Time, the Company shall have delivered to Parent all of the following: (i) a certificate of the President and the Chief Financial Officer of the Company, dated as of the Effective Date, stating that the conditions precedent set forth in Sections 6.2(a), (b) and (c) hereof have been satisfied; and (ii) a copy of (A) the Certificate of Incorporation of the Company, dated as of a recent date, certified by the Secretary of State of the State of Delaware, and (B) the Bylaws of the Company and the resolutions of the Company Board and stockholders authorizing the Merger and the other transactions contemplated by this Agreement, certified by the Secretary of the Company. 41 46 (f) Director and Officer Resignations. Merger Sub shall have received the resignation of the directors and officers of the Company as are described in Section 5.9 hereof. (g) Key Employee Agreements. Four out of the five persons identified in Section 6.2(g) of the Company Disclosure Letter shall have entered into employment agreements with Parent, and such agreements shall be in full force and effect, and none of such employees shall have indicated any intention of not fulfilling his or her obligations thereunder. (h) Pooling Letters. Parent and the Company shall have received the letters described in the third Recital to this Agreement from Deloitte & Touche LLP and Arthur Andersen LLP and such letters shall not have been withdrawn, modified or qualified in any material respect as of the Effective Time, as certified by Deloitte & Touche LLP and Arthur Andersen LLP, respectively, in a writing addressed to their respective addresses and dated as of the Effective Date, and Parent shall have received the letter of Arthur Andersen LLP, addressed to Parent and dated as of the Effective Date, stating that, in reliance on the letter and the certificate of Deloitte & Touche LLP described in this paragraph (h) and based on its familiarity with Parent, the Merger will qualify as a pooling-of-interests transaction under Opinion 16. (i) Company Affiliate Letters. Parent shall have received all of the letters described in Section 5.15(a) hereof executed by each of the Company Pooling Affiliates. (j) Employees. From the list of employees identified by the Company on Annex F to Section 3.15 of the Company Disclosure Letter as having change of control agreements in place as of the date hereof, Parent shall specify thirty (30) of such employees who will be offered positions by Parent providing equal or better duties, responsibilities and base compensation, of whom at least twenty-two (22) shall have executed and delivered to Parent waivers of certain terms of such change of control agreements to the satisfaction of Parent as specified below, and such waivers shall not have been in any way amended or rescinded; such waivers shall include (i) a waiver of all change in control benefits provided in Part Two of such agreements, other than the accelerated vesting provisions set forth in Section 1 of Part Two, provided that such employees acknowledge that the position and duties as may be initially assigned to them immediately following the Effective Time by Parent do not represent a material reduction in the position, duties, responsibilities and management reporting relationships that such employees had when employed at the Company for purposes of determining Involuntary Termination as defined in such change of control agreements, and (ii) an irrevocable waiver of the second paragraph of the introduction of Part Two of such agreements. 6.3. Conditions to Obligations of the Company. The obligation of the Company to effect the Merger is further subject to satisfaction or waiver of the following conditions: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub set forth herein shall be true and correct both when made and at and as of the Effective Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to materiality or 42 47 material adverse effect set forth therein) does not have, and would not, individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect. (b) Performance of Obligations of Parent. Parent shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Date. (c) Delivery of Closing Documents. At or prior to the Effective Time, the Parent shall have delivered to the Company a certificate of the President and the Chief Financial Officer of Parent, dated as of the Effective Date, stating that the conditions precedent set forth in Sections 6.3(a) and (b) hereof have been satisfied. (d) Tax Opinion. The Company shall have received the opinion of Stradling Yocca Carlson & Rauth, counsel to the Company, in form and substance satisfactory to the Company, to the effect that the Merger will be treated for U.S. federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; provided that, if Stradling Yocca Carlson & Rauth does not render such opinion, this condition shall nonetheless be deemed satisfied if Dorsey & Whitney LLP renders such opinion to the Company (it being agreed that Parent and the Company shall each provide reasonable cooperation, including making reasonable representations, to Stradling Yocca Carlson & Rauth or Dorsey & Whitney LLP, as the case may be, to enable them to render such opinion). (e) No Parent Material Adverse Effect. Since the date of this Agreement, there has not been a Parent Material Adverse Effect nor has there been any change, event or condition that, with the passage of time, would reasonably be expected to result in a Parent Material Adverse Effect. ARTICLE VII TERMINATION 7.1. Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger by the Company's stockholders: (a) by mutual written consent of the Company and Parent (on behalf of Parent and Merger Sub); (b) by either the Company or Parent (on behalf of Parent and Merger Sub): (i) if the Merger shall not have been completed by August 31, 2000; provided, however, that the right to terminate this Agreement pursuant to this Section 7.1(b)(i) shall not be available to any party whose failure to perform any of its obligations under this Agreement results in the failure of the Merger to be consummated by such time; 43 48 (ii) if stockholder approval shall not have been obtained at the Company Stockholders Meeting duly convened therefor or at any adjournment or postponement thereof; provided, however, that the right to terminate this Agreement pursuant to this Section 7.1(b)(ii) shall not be available to any party whose failure to perform any of its obligations under this Agreement results in the failure to obtain stockholder approval. (iii) if any restraint having any of the effects set forth in Section 6.1(b) or Section 6.2(d) hereof shall be in effect and shall have become final and nonappealable; provided, however, that the right to terminate this Agreement pursuant to this Section 7.1(b)(iii) shall not be available to any party whose failure to perform any of its obligations under this Agreement results in such restraint to continue in effect; or (iv) if the Company enters into a merger, acquisition or other agreement (including an agreement in principle) or understanding to effect a Superior Proposal or the Company Board or a committee thereof resolves to do so; provided, however, that the Company may not terminate this Agreement pursuant to this Section 7.1(b)(iv) unless (a) the Company has delivered to Parent and Merger Sub a written notice of the Company's intent to enter into such an agreement to effect such Acquisition Proposal, which notice shall include, without limitation, the material terms and conditions of the Acquisition Proposal and the identity of the Person making the Acquisition Proposal, (b) three business days have elapsed following delivery to Parent and Merger Sub of such written notice by the Company and (c) during such three-business-day period, the Company has fully cooperated with Parent and Merger Sub to allow Parent and Merger Sub within such three-business-day period to propose amendments to the terms of this Agreement to be at least as favorable as the Superior Proposal; provided, further, that the Company may not terminate this Agreement pursuant to this Section 7.1(b)(iv) unless, at the end of such three-business-day-period, the Company Board continues reasonably to believe that the Acquisition Proposal constitutes a Superior Proposal; (c) by the Company, if Parent or Merger Sub shall have breached any of its representations and warranties contained in Article IV hereof which breach has or is reasonably likely to have a Parent Material Adverse Effect or Parent or Merger Sub shall have breached or failed to perform in any material respect any of its covenants or other agreements contained in this Agreement, in each case, which breach or failure to perform has not been cured by Parent or Merger Sub within thirty days following receipt of notice thereof from the Company; or (d) by Parent (on behalf of Parent and Merger Sub): (i) if the Company shall have breached any of its representations and warranties contained in Article III hereof which breach has or is reasonably likely to have a Company Material Adverse Effect or the Company shall have breached or failed to perform in any material respect any of its covenants or other agreements contained in this Agreement, in each case (other than a breach of Section 5.6(b) hereof, as to which no cure 44 49 period shall apply), which breach or failure to perform has not been cured by the Company within thirty days following receipt of notice thereof from Parent; (ii) if (a) the Company Board or any committee thereof shall have withdrawn or modified in a manner adverse to Parent its approval or recommendation of the Merger or this Agreement, or approved or recommended an Acquisition Proposal (including a Superior Proposal), or (b) the Company Board or any committee thereof shall have resolved to take any of the foregoing actions; or (iii) at any time after 6:00 a.m. Minneapolis time on February 23, 2000, if the Company Option Agreement shall not have been executed and delivered by the Company to Parent prior to such termination. 7.2. Effect of Termination. The termination of this Agreement pursuant to the terms of Section 7.1 hereof shall become effective upon delivery to the other party of written notice thereof. In the event of the termination of this Agreement pursuant to the foregoing provisions of this Article VII, there shall be no obligation or liability on the part of any party hereto (except as provided in Section 7.3 hereof) or its stockholders or directors or officers in respect thereof, except for agreements which survive the termination of this Agreement, except for liability that Parent or Merger Sub or the Company might have to the other party or parties arising from a breach of this Agreement due to termination of this Agreement in accordance with Sections 7.1(c) or 7.1(d) or due to the fraudulent or willful misconduct of such party, and except that any termination shall not affect the Company Option Agreement. 7.3. Fees and Expenses. (a) Except as provided in this Section 7.3, whether or not the Merger is consummated, the Company, on the one hand, and Parent and Merger Sub, on the other, shall bear their respective expenses incurred in connection with the Merger, including, without limitation, the preparation, execution and performance of this Agreement and the transactions contemplated hereby, and all fees and expenses of investment bankers, finders, brokers, agents, representatives, counsel and accountants, except that the registration and filing fees incurred in connection with the Registration Statement and Proxy Statement/Prospectus shall be shared equally by the Company and Parent. (b) Notwithstanding any provision in this Agreement to the contrary, if this Agreement is terminated (x) by the Company or Parent pursuant to Section 7.1(b)(ii) and if, after the date hereof and prior to the termination date, an Acquisition Proposal occurs, or (y) by Parent pursuant to Section 7.1(b)(iv), 7.1(d)(i) or 7.1(d)(ii) hereof, then, in each case, the Company shall (without prejudice to any other rights Parent may have against the Company for breach of this Agreement), reimburse Parent upon demand for all out-of-pocket fees and expenses incurred or paid by or on behalf of Parent or any Affiliate of Parent in connection with this Agreement, the Merger and transactions contemplated herein, including all fees and expenses of counsel, investment banking firm, accountants and consultants. 45 50 (c) Notwithstanding any other provision in this Agreement to the contrary, if (x) this Agreement is terminated by the Company or Parent at a time when Parent is entitled to terminate this Agreement pursuant to Section 7.1(b)(ii) (except if, immediately prior to the Company Stockholder Meeting, an event or condition exists that would result in a Parent Material Adverse Effect) or 7.1(d)(i) (other than due to a breach of Section 5.6(b) hereof) and, concurrently with or within nine months after such a termination, the Company shall enter into an agreement, arrangement or binding understanding with respect to an Acquisition Proposal (which shall include, for this purpose, the commencement by a third party of a tender offer or exchange offer or similar transaction directly with the Company's stockholders) with a third party (collectively, a "Third Party Deal") or (y) this Agreement is terminated pursuant to Section 7.1(b)(iv), Section 7.1(d)(i) (if such termination results from a breach of Section 5.6(b) hereof), 7.1(d)(ii) (except, in the case of 7.1(d)(ii) only, if the Company Board's withdrawal or modification of its approval or recommendation of this Agreement or the Merger occurs after the occurrence of a Parent Material Adverse Effect) or 7.1(d)(iii), then, in each case, the Company shall (in addition to any obligation under Section 7.3(b) hereof and as liquidated damages and not as a penalty or forfeiture) pay to Parent U.S. $43,000,000 (the "Termination Fee") in cash, such payment to be made promptly, but in no event later than the second business day following, in the case of clause (x), the later to occur of such termination and the entry into of such Third Party Deal, or, in the case of clause (y), such termination. (d) Notwithstanding any provision in this Agreement to the contrary, if this Agreement is terminated by the Company pursuant to Section 7.1(c) hereof, then Parent shall (without prejudice to any other rights the Company may have against Parent for breach of this Agreement), reimburse the Company upon demand for all out-of-pocket fees and expenses incurred or paid by or on behalf of the Company or any Affiliate of the Company in connection with this Agreement, the Merger and the transactions contemplated herein, including all fees and expenses of counsel, investment banking firm, accountants and consultants. (e) The parties acknowledge that the agreements contained in Sections 7.3(b), (c) and (d) hereof are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Parent and Merger Sub on the one hand, and the Company on the other, would not enter into this Agreement. Accordingly, if the Company fails promptly to pay the amounts due pursuant to Sections 7.3(b) and/or (c) hereof, or if Parent fails promptly to pay the amounts due pursuant to Section 7.3(d) hereof, (i) the party failing to so pay shall pay interest on such amounts at the prime rate announced by U.S. Bank National Association, Minneapolis office, in effect on the date the Termination Fee (or fees and expenses) were required to be paid, and (ii) if, in order to obtain such payment, a party commences a suit or takes other action which results in a judgment or other binding determination against the nonpaying party for the fees and expenses in Sections 7.3(b) or 7.3(d) hereof or the Termination Fee, the nonpaying party shall also pay to the party entitled to receive payment its costs and expenses (including reasonable attorneys' fees) in connection with such suit, together with interest payable under the preceding clause (i). 46 51 ARTICLE VIII MISCELLANEOUS 8.1. Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 8.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. 8.2. Waiver. At any time prior to the Effective Date, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of any other party hereto, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements of any other party or with any conditions to its own obligations contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing duly authorized by and signed on behalf of such party. 8.3. Notices. (a) Any notice or communication to any party hereto shall be duly given if in writing and delivered in person or mailed by first class mail and airmail, if overseas (registered or return receipt requested), facsimile (with receipt electronically acknowledged) or overnight air courier guaranteeing next day delivery, to such other party's address. If to Parent: ADC Telecommunications, Inc. 12501 Whitewater Drive Minnetonka, MN 55343 Telephone No.: (612) 938-8080 Facsimile No.: (612) 946-3292 Attention: General Counsel with a copy to: Dorsey & Whitney LLP 220 South Sixth Street Minneapolis, Minnesota 55402 Telephone No.: (612) 340-2600 Facsimile No.: (612) 340-8738 Attention: Robert A. Rosenbaum, Esq. 47 52 If to the Company: PairGain Technologies, Inc. 14661 Franklin Avenue Tustin, CA 92780 Telephone No.: (714) 832-9922 Facsimile No.: (714) 730-2463 Attention: with copies to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, CA 92660 Telephone No.: (949) 725-4000 Facsimile No.: (949) 725-4100 Attention: Nick E. Yocca, Esq. (b) All notices and communications will be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, if mailed; when sent, if sent by facsimile; and one business day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. 8.4. Counterparts. This Agreement may be executed via facsimile in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.5. Interpretation. The language used in this Agreement and the other agreements contemplated hereby shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. The headings of articles and sections herein are for convenience of reference, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. As used in this Agreement, "Person" means any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or other entity; "Knowledge" means the actual knowledge of a director or any executive officer of the applicable party or any of its Subsidiaries, as such knowledge has been obtained or would have been obtained after reasonable inquiry by such person in the normal conduct of the business; and all amounts shall be deemed to be stated in U.S. dollars, unless specifically referenced otherwise. 8.6. Amendment. This Agreement may be amended by the parties at any time before or after any required approval of matters presented in connection with the Merger by the stockholders of the Company; provided, however, that after any such approval, there shall not be made any amendment that by law requires further approval by such stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. 48 53 8.7. No Third Party Beneficiaries. Except for the provisions of Section 5.10 hereof (which is intended to be for the benefit of the persons referred to therein, and may be enforced by such persons) nothing in this Agreement shall confer any rights upon any person or entity which is not a party or permitted assignee of a party to this Agreement. 8.8. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware. 8.9. Entire Agreement. This Agreement (together with the Exhibits and the Company Disclosure Letter, and the other documents delivered pursuant hereto or contemplated hereby) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof, in each case other than the Company Option Agreement and the Reciprocal Confidentiality Agreement. 8.10. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. * * * * * 49 54 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers all as of the day and year first above written. ADC TELECOMMUNICATIONS, INC. By: /s/ ARUN SOBTI ---------------------------------- Arun Sobti Senior Vice President, President Broadband Access and Transport Group ROMAN ACQUISITION CORP. By: /s/ ARUN SOBTI ---------------------------------- Arun Sobti President PAIRGAIN TECHNOLOGIES, INC. By: /s/ CHARLES S. STRAUCH ---------------------------------- Charles S. Strauch Chairman of the Board of Directors 50 EX-99.1 3 JOINT PRESS RELEASE 1 EXHIBIT 99.1 [PAIRGAIN] THE POWER BEHIND DSL ACCESS N E W S R E L E A S E We urge investors and security holders to read ADC's Registration Statement on Form S-4 and the Prospectus/Proxy Statement of ADC and PairGain relating to the merger transaction described below, when they become available, because they will contain important information. When these and other documents relating to the transaction are filed with the U.S. Securities and Exchange Commission, they may be obtained free at the SEC's web site at http://www.sec.gov. You may also obtain each of these documents (when they become available) for free from ADC or from PairGain by directing your request to the investor relations contact persons identified below. FOR IMMEDIATE RELEASE CONTACTS: Mark Borman - Investor Relations Kim Gower or Robert Price ADC PairGain Technologies 612-946-3338 714-832-9922 Rob Clark - Public Relations ADC 612-914-6355 ADC BECOMES LEADING SUPPLIER OF DSL BROADBAND ACCESS SYSTEMS WITH ACQUISITION OF PAIRGAIN TECHNOLOGIES Proposed $1.6 Billion Acquisition Strengthens ADC's Position As A Leading Global Supplier of Broadband, Multiservice Systems Connecting Residences and Businesses MINNEAPOLIS / TUSTIN, CALIF. - FEBRUARY 23, 2000 - ADC (Nasdaq: ADCT, www.adc.com), a leading global supplier of network equipment, software and integration services for broadband, multiservice networks, and PairGain Technologies, Inc. (Nasdaq: PAIR, www.pairgain.com), a leader in the design, manufacture, marketing and sale of digital subscriber line (DSL) networking systems, have reached an agreement for the acquisition of PairGain by ADC. Under the terms of the agreement, each share of PairGain's common stock will be converted into 0.43 share of ADC common stock with a fixed exchange ratio. Based on the closing share price of $46.81 for ADC's stock on February 22, 2000, the transaction is valued at approximately $1.6 billion. The proposed transaction is expected to be completed during ADC's third fiscal quarter, which ends July 31, 2000, and is intended to be accounted for as a pooling of interests and to be treated as a tax-free reorganization for U.S. federal income tax purposes. ADC expects the acquisition to be nondilutive to its earnings per share for the balance of fiscal year 2000 and $0.05 accretive in fiscal year 2001. Closing of the proposed transaction is subject to the approval of PairGain's stockholders, receipt of required regulatory approvals and other customary conditions. After closing the transaction, ADC expects to take a one-time charge for various acquisition-related expenses the amount of which has not yet been determined. ADC STRENGTHENS DSL MARKET POSITION AND EXPANDS BROADBAND ACCESS OFFERINGS ADC's proposed acquisition of PairGain results from ADC's aggressive and determined strategy to become a leading supplier of DSL broadband access systems. The PairGain acquisition strengthens ADC's DSL market position. The acquisition also expands ADC's local loop offerings of broadband access systems with PairGain's Avidia(R) System, A next-generation digital subscriber line access multiplexer (DSLAM) system. The combination of ADC's and PairGain's DSL products results in a complete offering of local loop access, transport and network management products based on HDSL, HDSL2, ADSL and SDSL technologies. "Our acquisition of PairGain represents another significant step forward in ADC's mission to enable communications service providers to serve their residential and business customers with broadband, multiservice networks offering faster, cost-effective and bundled Internet/data, video and voice services. The power of this acquisition comes from joining ADC's comprehensive, end-to-end systems leadership in broadband access with PairGain's strong position and technology leadership in DSL products," said William J. Cadogan, chairman and CEO of ADC. "The PairGain acquisition has many strategic benefits and synergies for the customers, employees and shareowners of both companies. First, it strengthens the position of the combined companies as a leading supplier in the DSL broadband access market. Second, the PairGain acquisition brings together the finest talent and expertise in the delivery of broadband, multiservice communications over DSL. And third, it enhances ADC's `triple-play' package of network equipment, software and integration services used by broadband service providers to compete in the `last mile/kilometer' of communications networks. These synergies and benefits strengthen our combined teams of people to better assist our customers in meeting their goals of deploying competitive bundles of broadband communications services to consumers and businesses over high-speed network connections." 2 ADC ACQUIRES PAIRGAIN TECHNOLOGIES, INC./2 The DSL market for business and residential communications is expected to be fast growing. The DSLAM market is expected to grow at an annualized rate of 47% from 1999 to 2003 according to the Yankee Group. Credit Suisse First Boston reports that high-speed communications connections, such as HDSL, T3, frame relay and optical lines, to businesses are growing at an annual rate of greater than 30%. Additionally, a joint industry study by Sanford C. Bernstein & Co. and McKinsey & Company forecasts DSL lines to residences and small businesses to grow at a faster rate - from 300,000 lines in 1999 to over 2.5 million lines in 2000, then projected to 13.9 million lines by 2004. "As a result of market deregulation and competition, the world's incumbent and new competitive communications service providers are seeking innovative approaches to win and retain customers," said Michael Pascoe, president and CEO of PairGain. "The ADC-PairGain combination joins two companies with a shared vision of helping service providers deploy broadband, multiservice communications services to residences and businesses over high-speed connections. PairGain augments ADC's strategy by providing a critical mass of DSL broadband access systems, a large and dedicated customer base of incumbent and new competitive communications service providers in a fast growing market, and a skilled and driven team of industry professionals. ADC benefits PairGain with its comprehensive offerings of network equipment, software and integration services that add tremendous value to PairGain's customers and attractive growth opportunities for PairGain's employees. We are thrilled to join the ADC team and look forward to enhancing value to our shareowners by contributing to ADC's broadband, multiservice network strategy." PAIRGAIN'S TECHNOLOGY LEADERSHIP AND INNOVATIVE PRODUCTS For more than 10 years, PairGain has been recognized as a technology leader and industry innovator of telecommunications equipment. PairGain offers the widest range of DSL-based systems available. More than 1.7 million PairGain DSL circuits are installed in over 100 countries. PairGain's product lines for high-bandwidth access, broadband access and subscriber carrier systems include: o HIGH-BANDWIDTH ACCESS SYSTEMS PairGain's high-bandwidth access systems include HDSL and HDSL2 technologies that establish T1/E1 (1.5 Mbps/2.0 Mbps) connections over the existing infrastructure of copper telephone wires. These systems are deployed by communications service providers to deliver high-speed Internet/data and voice services to businesses. PairGain's new HDSL2 system set a standard for interoperability and efficiency as one of the industry's first practical implementations of HDSL2. Providing full-rate T1 access using just a single copper-pair cable, compared to two copper-pair cables for HDSL, HDSL2 enables service providers to quickly and cost effectively meet the demand for more Internet/data and voice services - services that have become increasingly hard to deliver due to the shortage of copper cable in the "last mile/kilometer" of communications networks. o BROADBAND ACCESS SYSTEMS PairGain's broadband access offerings include the Avidia System, a multiservice access platform, which is used for the deployment of numerous services, including high-speed Internet access, remote local area network (LAN) access and virtual private networks (VPN). The Avidia System is an ATM edge switch that enables service providers and private network owners to establish DSL access networks for their remote users and subscribers. The Avidia System can be configured as a next-generation DSLAM, access server or LAN extension concentrator, supporting G.lite, full-rate DMT ADSL, SDSL, T1, IP voice and frame relay services, in addition to supporting ATM over ADSL and Ethernet frames over SDSL. The product is NEBS Level 3 compliant, a requirement for deployment in major telecom networks in North America. The Avidia System delivers the service flexibility, port density, deployment options and quality of service (QoS) guarantees necessary for widespread deployment of broadband access services. 3 ADC ACQUIRES PAIRGAIN TECHNOLOGIES, INC./3 o SUBSCRIBER CARRIER SYSTEMS PairGain's subscriber carrier systems provide communications service providers worldwide with a modular solution for transmitting greater capacity over existing copper telephone lines. These products deliver up to 32 channels over one or two pairs of copper phone lines, so service providers can meet the growing demand for additional phone, fax and Internet/data lines in residential and business areas by better utilizing existing copper-pair cables. PairGain subscriber carrier products reduce equipment and labor costs associated with line installation and provide a quick solution for filling service orders. PairGain's sales for the year ended December 31, 1999 were $225 million. PairGain's customers include incumbent and new competitive communications service providers and enterprise organizations. PairGain has sales offices in the U.S., Switzerland, Hong Kong, Dubai U.A.E., Canada, England, China and Brazil. ABOUT ADC ADC Telecommunications, Inc. is a leading global supplier of network equipment, software and integration services for broadband, multiservice networks that deliver data, video and voice communications over telephone, cable television, Internet, broadcast, wireless and enterprise networks. ADC's broadband, multiservice network solutions enable local access, high-speed transmission and software management of communications services from service providers to consumers and businesses over fiber-optic, copper, coaxial and wireless media. Headquartered in Minneapolis, Minnesota, ADC has approximately 14,400 employees around the world and annual sales of $2.1 billion. ADC's stock is included in the Standard & Poor's 500 Index and the Nasdaq-100 Index. For additional information, visit our Web site at www.adc.com. ABOUT PAIRGAIN TECHNOLOGIES PairGain Technologies, Inc. is the leader in the design, manufacture, marketing and sale of DSL networking systems. Service providers and private network operators worldwide use PairGain's products to deploy DSL-based services such as high-speed Internet, remote LAN access and enterprise LAN extension. Additional information about PairGain is available on the Internet at www.pairgain.com. CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Any forward-looking statements contained herein reflect management's current expectations or beliefs. ADC Telecommunications cautions readers that future actual results could differ materially from those in forward-looking statements depending on the outcome of certain factors, including the risks and uncertainties identified in Exhibit 99-a to ADC's Report on Form 10-K for the fiscal year ended October 31, 1999. PairGain Technologies cautions readers that future actual results could differ materially from those in forward-looking statements depending on the outcome of certain factors, including the risks and uncertainties identified in PairGain's periodic Form 10-Q and Form 10-K filings with the Securities and Exchange Commission. EX-99.2 4 STOCK OPTION AGREEMENT 1 EXHIBIT 99.2 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated as of February 22, 2000 (the "Agreement"), between ADC Telecommunications, Inc., a Minnesota corporation ("Optionee"), and PairGain Technologies, Inc., a Delaware Corporation (the "Company"). Capitalized terms which are used but not defined herein shall have the meanings ascribed to them in the Merger Agreement (as defined below). WITNESSETH: WHEREAS, simultaneously with the execution and delivery of this Agreement, Optionee and the Company are entering into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), which provides for a wholly owned subsidiary of Optionee to be merged with and into the Company in accordance with the General Corporation Law of the State of Delaware and the terms of the Merger Agreement, as a result of which the Company will be the surviving corporation and a wholly owned subsidiary of Optionee; WHEREAS, as a condition to Optionee's willingness to enter into the Merger Agreement, Optionee has requested that the Company grant to Optionee an option to purchase up to 14,489,951 authorized but unissued shares of the Company's common stock, upon the terms and subject to the conditions hereof; and WHEREAS, in order to induce Optionee to enter into the Merger Agreement, the Company has agreed to grant Optionee the requested option. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. The Option; Exercise; Adjustments. (a) The Company hereby grants to Optionee an irrevocable option (the "Option") to purchase from time to time up to 14,489,951 authorized but unissued shares of common stock, par value $.0005 per share, of the Company (the "Company Common Stock") upon the terms and subject to the conditions set forth herein (the "Optioned Shares," which represent 19.9% of the issued and outstanding shares of Company Common Stock as of the date hereof); provided, however, that in no event shall the number of shares of Company Common Stock for which the Option is exercisable exceed 19.9% of the issued and outstanding shares of Company Common Stock at the time of exercise (excluding any such shares issued or issuable under the Option). (b) Subject to the terms and conditions set forth in this Agreement, the Option may be exercised by Optionee in whole or, from time to time, in part, at any time within 270 A-1 2 days after the date hereof that the conditions in Section 2(a) hereof are satisfied and prior to the termination of the Option in accordance with Section 11 hereof. In the event Optionee wishes to exercise the Option, Optionee shall send a written notice to the Company (the "Stock Exercise Notice") specifying the total number of Optioned Shares it wishes to purchase and a date for the closing of such purchase, which date shall be not less than five days or more than 60 days after the Company's receipt of the Stock Exercise Notice (the "Closing Date"). Optionee may revoke an exercise of the Option at any time prior to the Closing Date by written notice to the Company. At any Closing Date, the Company will deliver to Optionee a certificate or certificates representing the Optioned Shares (which shall be endorsed with appropriate restrictive legends) in the denominations designated by Optionee in its Stock Exercise Notice, free and clear of all liens and encumbrances and subject to no preemptive rights, as well as an executed new agreement with the same terms as this Agreement evidencing the right to purchase the balance of the Optioned Shares purchasable hereunder, if any. After payment of the Exercise Price for the Optioned Shares covered by the Stock Exercise Notice, the Option shall be deemed exercised to the extent of the Optioned Shares specified in the Stock Exercise Notice as of the date such Stock Exercise Notice is given to the Company. (c) In the event of any change in the number of issued and outstanding shares of Company Common Stock by reason of any share dividend, reclassification, consolidation, division, subdivision or cancellation or other similar change in the corporate or capital structure of the Company, the number of Optioned Shares subject to the Option and the Exercise Price (as hereinafter defined) per Optioned Share shall be appropriately adjusted. In the event that any additional shares of Company Common Stock are issued after the date of this Agreement (other than pursuant to an event described in the preceding sentence or pursuant to this Agreement), the number of Optioned Shares subject to the Option shall be adjusted so that, after such issuance, it equals at least 19.9% of the number of shares of Company Common Stock then issued and outstanding (without considering any shares subject to or issued pursuant to the Option). 2. Conditions to Exercise of Option and Delivery of Optioned Shares. (a) Optionee's right to exercise the Option is subject to the following conditions: (i) No preliminary or permanent injunction or other order having been issued by any federal or state court of competent jurisdiction in the United States invalidating the grant or prohibiting the exercise of the Option shall be in effect; and (ii) One or more of the following events shall have occurred on or after the date hereof or Optionee shall have become aware on or after the date hereof of the occurrence of any of the following: (A) any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or other entity or group (referred to hereinafter, singularly or collectively, as a "Person"), other than Optionee or its "affiliates" (as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as A-2 3 amended (the "Exchange Act")), acquires or becomes the beneficial owner of 20% or more of the outstanding shares of Company Common Stock; (B) any new group is formed which beneficially owns 20% or more of the outstanding shares of Company Common Stock (other than a group which includes or may reasonably be deemed to include Optionee or any of its affiliates); (C) any Person (other than Optionee or its affiliates) shall have commenced a tender or exchange offer for 20% or more of the then outstanding shares of Company Common Stock or publicly proposed any bona fide merger, consolidation or acquisition of all or substantially all the assets of the Company, or other similar business combination involving the Company; (D) any Person (other than Optionee or its affiliates) is granted any option or right, conditional or otherwise, to acquire or otherwise become the beneficial owner of shares of Company Common Stock which, together with all shares of Company Common Stock beneficially owned by such Person, results or would result in such Person being the beneficial owner of 20% or more of the outstanding shares of Company Common Stock; or (E) any event or circumstance occurs that would entitle Optionee to receive the Termination Fee provided for in Section 7.3(c) of the Merger Agreement. For purposes of this subparagraph (iii), the terms "group" and "beneficial owner" shall be defined by reference to Section 13(d) of the Exchange Act. (b) Optionee's obligation to purchase the Optioned Shares following the exercise of the Option, and the Company's obligation to deliver the Optioned Shares, are subject to the conditions that: (i) No preliminary or permanent injunction or other order issued by any federal or state court of competent jurisdiction in the United States prohibiting the delivery of the Optioned Shares shall be in effect; (ii) The purchase of the Optioned Shares will not violate Rule 14e-5 promulgated under the Exchange Act; and (iii) All applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall have expired or been terminated. 3. Exercise Price for Optioned Shares. Optionee will purchase the Optioned Shares from the Company at a price per Optioned Share equal to $18.03 (the "Exercise Price"), payable in cash. Any payment made by Optionee to the Company pursuant to this Agreement shall be made by wire transfer of federal funds to a bank account designated by the Company or a check payable in immediately available funds. A-3 4 4. Representations and Warranties of the Company. The Company represents and warrants to Optionee as follows: (a) Corporate Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by the Company's Board of Directors and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms except to the extent that its enforceability may be limited to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other laws affecting creditors rights generally and to general equitable principles. (b) Shares Reserved for Issuance. The Company has taken all necessary corporate action to authorize and reserve and permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms, will have reserved for issuance upon exercise of this Option, that number of Optioned Shares equal to the maximum number of shares of Company Common Stock at any time and from time to time purchasable upon exercise of the Option, and the Optioned Shares, when issued and delivered by the Company to Optionee upon exercise of the Option, will be duly authorized, validly issued, fully paid and nonassessable, free and clear of all liens or encumbrances, free of preemptive rights, and the Optioned Shares shall be listed on the Nasdaq National Market. (c) Consents; No Violations. Except as otherwise required by the HSR Act, except for routine filings and subject to Section 7, the execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby do not and will not require the consent, approval or authorization of, or filing with, any Person or public authority and (i) will not violate, breach or conflict with the Company's Charter Documents or Governing Documents, or (ii) result in the acceleration or termination of, or constitute a default under, any agreement, lease, contract, note, indenture, license, approval, permit, understanding or other instrument, or any statute, rule, regulation, judgment, order or other restriction binding upon or applicable to the Company or any of its subsidiaries or any of their respective properties or assets, except for any such acceleration, termination or default which could not reasonably be expected to have a Company Material Adverse Effect. 5. Representations and Warranties of Optionee. Optionee represents and warrants to the Company as follows: (a) Corporate Authority. The execution and delivery of this Agreement by Optionee and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Optionee and this Agreement has been duly executed and delivered by Optionee and constitutes a valid and binding agreement of Optionee, except to the extent that its enforceability may be limited to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other laws affecting creditors rights generally and to general equitable principles. A-4 5 (b) Investment Representations. Optionee is acquiring the Option and, if and when it exercises the Option, will be acquiring the Optioned Shares issuable upon the exercise thereof, for its own account and not with a view to distribution or resale in any manner which would be in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any rule or regulation under the Securities Act, and will not sell or otherwise dispose of the Optioned Shares except pursuant to an effective registration statement under the Securities Act or a valid exemption from registration under the Securities Act. 6. The Closing. Any closing hereunder shall take place on the Closing Date specified by Optionee in its Stock Exercise Notice pursuant to Section 1 at 10:00 a.m., U.S. Pacific Time, or the first business day thereafter on which all of the conditions in Section 2 are met, at the executive office of the Company located in Tustin, California, or at such other time and place as the parties hereto may agree. 7. Filings Related to Optioned Shares. The Company will make such filings with the SEC as are required by the Exchange Act, and will make all necessary filings by the Company under the HSR Act and to list the Optioned Shares on the Nasdaq National Market. 8. Registration Rights. (a) Demand Registration Rights. After the date the Option becomes exercisable pursuant to Section 1(b), the Company shall, subject to the conditions of Section 8(c) below, if requested by Optionee within 12 months following such date, as expeditiously as possible prepare and file a registration statement under the Securities Act if such registration is necessary in order to permit the sale or other disposition of any or all shares of Company Common Stock or other securities that have been acquired by or are issuable to the Selling Shareholder upon exercise of the Option in accordance, subject to the terms and conditions of this Section 8, with the intended method of sale or other disposition stated by the Optionee in such request, including without limitation a "shelf" registration statement under Rule 415 under the Securities Act or any successor provision ("Rule 415"), and the Company shall use its best efforts to qualify such shares or other securities for sale under any applicable state securities laws; provided, however, that the Company shall not be required to consent to general jurisdiction or qualify to do business in any state where it is not otherwise required to so consent to such jurisdiction or to so qualify to do business. (b) Additional Registration Rights. If the Company, at any time after the exercise of the Option, proposes to register any securities of the Company or rights representing securities of the Company under the Securities Act, the Company will promptly give written notice to the Optionee of its intention to do so and, upon the written request of any Optionee given within thirty (30) days after receipt of any such notice (which request shall specify the number of Shares of Company Common Stock intended to be included in such public offering by A-5 6 the Optionee), the Company will cause all such shares for which a Optionee requests participation in such registration, to be so registered and included in such public offering; provided, however, that the Company may elect not to cause any such shares to be so registered (i) if such public offering is to be underwritten and the underwriters in good faith object for valid business reasons, or (ii) in the case of a registration solely to implement an employee benefit plan or a registration filed on Form S-4 of the Securities Act or any successor form; provided, further, however, that such election pursuant to (i) may only be made twice. If some but not all of the shares of Company Common Stock with respect to which the Company shall have received requests for registration pursuant to this Section 8(b) shall be excluded from such registration, the Company shall make appropriate allocation of shares to be registered among the selling shareholders desiring to register their shares pro rata in the proportion that the number of shares requested to be registered by each such selling shareholder bears to the total number of shares requested to be registered by all such selling shareholders then desiring to have shares of Company Common Stock registered for sale. (c) Conditions to Required Registration. The Company shall use all reasonable efforts to cause each registration statement referred to in Section 8(a) above to become effective and to obtain all consents or waivers of other parties which are required therefor and to keep such registration effective; provided, however, that the Company may delay any registration of Optioned Shares required pursuant to Section 8(a) above for a period not exceeding 90 days provided the Company shall in good faith determine that any such registration would adversely affect the Company (provided that this right may not be exercised more than once during any twelve (12) month period), and the Company shall not be required to register Optioned Shares under the Securities Act pursuant to Section 8(a) above: (i) on more than one occasion during any calendar year; (ii) on more than two occasions in total; (iii) within ninety (90) days after the effective date of a registration referred to in Section 8(b) above pursuant to which the Optionee was afforded the opportunity to register such shares under the Securities Act and such shares were registered as requested; or (iv) if all the Optioned Shares proposed to be registered could be sold by the Optionee in a ninety (90) day period in accordance with Rule 144. In addition to the foregoing, the Company shall not be required to maintain the effectiveness of any registration statement, other than a registration statement filed under Rule 415, after the expiration of six (6) months from the effective date of such registration statement. The Company shall use all reasonable efforts to make any filings, and take all steps, under all applicable state securities laws to the extent necessary to permit the sale or other disposition of the Optioned Shares so registered in accordance with the intended method of distribution for such shares; provided, however, that the Company shall not be required to consent to general A-6 7 jurisdiction or qualify to do business in any state where it is not otherwise required to so consent to such jurisdiction or to so qualify to do business. The Optionee shall provide the Company with all information reasonably requested by the Company that is necessary for inclusion in any registration statement required to be filed hereunder. (d) Expenses. Except where applicable state law prohibits such payments, the Company will pay all expenses (including without limitation registration fees, qualification fees, blue sky fees and expenses (including the fees and expenses of counsel), legal expenses, including the reasonable fees and expenses of one counsel to the holders whose Optioned Shares are being registered, printing expenses and the costs of special audits or "cold comfort" letters, expenses of underwriters, excluding discounts and commissions but including liability insurance if the Company so desires or the underwriters so require, and the reasonable fees and expenses of any necessary special experts) in connection with each registration pursuant to Section 8(a) or 8(b) above (including the related offerings and sales by holders of Optioned Shares) and all other qualifications, notifications or exemptions pursuant to Section 8(a) or 8(b) above. (e) Indemnification. In connection with any registration under Section 8(a) or 8(b) above, the Company hereby indemnifies the Optionee, and each underwriter thereof, including each person, if any, who controls such Optionee or underwriter within the meaning of Section 15 of the Securities Act, against all expenses, losses, claims, damages and liabilities caused by any untrue, or alleged untrue, statement of a material fact contained in any registration statement or prospectus or notification or offering circular (including any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission, or alleged omission, to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such expenses, losses, claims, damages or liabilities of such indemnified party are caused by any untrue statement or prospectus or notification or offering circular (including any amendments or supplements thereto) in reliance upon and in conformity with, information furnished in writing to the Company by such indemnified party expressly for use therein, and the Company and each officer, director and controlling person of the Company shall be indemnified by Optionee, or by such underwriter, as the case may be, for all such expenses, losses, claims, damages and liabilities caused by any untrue, or alleged untrue, statement, that was included by the Company in any such registration statement or prospectus or notification or offering circular (including any amendments or supplements thereto) in reliance upon, and in conformity with, information furnished in writing to the Company by or on behalf of Optionee or such underwriter, as the case may be, expressly for such use. Promptly upon receipt by a party indemnified under this Section 8(e) of notice of the commencement of any action against such indemnified party in respect of which indemnity or reimbursement may be sought against any indemnifying party under this Section 8(e), such indemnified party shall notify the indemnifying party in writing of the commencement of such action, but the failure so to notify the indemnifying party shall not relieve it or any liability which it may otherwise have to any indemnified party under this Section 8(e) except to the extent the indemnified party is materially prejudiced thereby. In case notice of commencement of any A-7 8 such action shall be given to the indemnifying party as above provided, the indemnifying party shall be entitled to participate in and, to the extent it may wish, jointly with any other indemnifying party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and reasonably satisfactory to such indemnified party. The indemnified party shall have the right to employ separate counsel (other than reasonable costs of investigation) shall be paid by the indemnified party unless (i) the indemnified party either agrees to pay the same, (ii) the indemnifying party fails to assume the defense of such action with counsel reasonably satisfactory to the indemnified party, or (iii) the indemnified party has been advised by counsel that one or more legal defenses may be available to the indemnifying party that may be contrary to the interest of the indemnified party, in which case the indemnifying party shall be entitled to assume the defense of such action notwithstanding its obligation to bear fees and expenses of such counsel. No indemnifying party shall be liable for any settlement entered into without its consent, which consent may not be unreasonably withheld. If the indemnification provided for in this Section 8(e) is unavailable to a party otherwise entitled to be indemnified in respect of any expenses, losses, claims, damages or liabilities referred to herein, then the indemnifying party, in lieu of indemnifying such party otherwise entitled to be indemnified, shall contribute to the amount paid or payable by such party to be indemnified as a result of such expenses, losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative benefits received by the Company, the Optionee and the underwriters from the offering of the securities and also the relative fault of the Company, the Optionee and the underwriters in connection with the statements or omissions which resulted in such expenses, losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The amount paid or payable by a party as a result of the expenses, losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim; provided, however, that in no case shall Optionee be responsible, in the aggregate, for any amount in excess of the net offering proceeds attributable to its Optioned Shares included in the offering. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Any obligation by Optionee to contribute shall be several and not joint with other holders. In the event of an underwritten public offering pursuant to Section 8(b), the Company and the Optionee shall enter into an underwriting agreement containing customary terms and provisions; provided that the contribution provisions as they relate to Optionee shall contain substantially the same limitations as the provisions set forth herein. (f) Miscellaneous Reporting. The Company shall comply with all reporting requirements and will do all other such things as may be necessary to permit the expeditious sale at any time of any Optioned Shares by the Optionee in accordance with and to the extent permitted by any rule or regulation promulgated by the SEC from time to time, including, without limitation, Rule 144. The Company shall provide the Optionee with any information necessary in connection with the completion and filing of any reports or forms required to be filed by them under the Securities Act or the Exchange Act, or required pursuant to any state securities laws or the rules of any stock exchange. A-8 9 (g) Issue Taxes. The Company will pay all stamp taxes in connection with the issuance and the sale of Optioned Shares and in connection with the exercise of the Option, and will hold the Optionee harmless, without limitation as to time, against any and all liabilities, with respect to all such taxes. 9. Optional Put. Prior to the termination of the Option in accordance with Section 11 hereof, if the Option has become exercisable pursuant to Section 1(b) hereof and pursuant to the second sentence of this Section 9, Optionee shall have the right, upon three (3) business days' prior written notice to the Company, to require the Company to purchase the Option from Optionee (the "Put Right") at a cash purchase price (the "Put Price") equal to the product determined by multiplying (A) the number of Optioned Shares as to which the Option has not yet been exercised by (B) the Spread (as defined below). As used herein, the term "Spread" shall mean the excess, if any, of (i) the greater of (x) the highest price (in cash or fair market value of securities or other property) per share of Company Common stock paid or to be paid within twelve (12) months preceding the date of exercise of the Put Right for any Company Common Stock beneficially owned by any Person who shall have acquired or become the beneficial owner of 20% or more of the outstanding shares of Company Common Stock after the date hereof or (y) the weighted (by volume of shares traded each day during the measurement period described herein) average closing price of the Company Common Stock during the 15-day period ending on the trading day immediately preceding the written notice of exercise of the Put Right over (ii) the Exercise Price. This Put Right shall become exercisable with respect to the events described in clauses (A), (B), (C) and (D) of Section 2(a)(ii) hereof only if the beneficial ownership by the Person or group referenced in such clauses equals or exceeds 30% of the outstanding Company Common Stock. Upon exercise of Optionee's right to receive cash pursuant to this Section 9, the obligation of the Company to deliver Optioned Shares pursuant to this Agreement shall terminate with respect to such number of Optioned Shares for which Optionee shall have elected to be paid in cash under this Section 9. 10. Profit Limitation. (a) Notwithstanding any other provision of this Agreement, in no event shall Optionee's Total Profit (as hereinafter defined) exceed $43,000,000 and, if it otherwise would exceed such amount, Optionee, at its sole election, shall either (i) deliver to the Company for cancellation Optioned Shares previously acquired by Optionee pursuant to this Agreement, (ii) pay cash or other consideration to the Company, or (iii) undertake any combination thereof, in each case, so that Optionee's Total Profit shall not exceed $43,000,000 after taking into account the foregoing actions. (b) As used herein, the term "Total Profit" shall mean the sum (before taxes) of the following: (i) the amount of cash received by Optionee pursuant to Section 9 hereof, (ii)(A) the net cash amounts received by Optionee pursuant to the sale of Optioned Shares (or any other securities into which such Optioned Shares are converted or exchanged) to any unaffiliated party, less (B) the aggregate Exercise Price paid for all Optioned Shares acquired by Optionee hereunder, and (iii) any Termination Fee received pursuant to the Merger Agreement. A-9 10 11. Termination. This Agreement and the Option shall terminate upon the earlier of (i) the Effective Time (as defined in the Merger Agreement) and (ii) the termination of the Merger Agreement in accordance with its terms; provided, however, the Option shall terminate pursuant to clause (ii) nine (9) months following termination of the Merger Agreement if (A) the Merger Agreement is terminated by Optionee pursuant to Section 7.1(d)(i) or (d)(ii) thereof or (B) the Merger Agreement is terminated by Optionee or the Company pursuant to Section 7.1(b)(ii) or (b)(iv) thereof and, in each such case, the Company has not paid to Optionee the Termination Fee which the Company is then obligated to pay. 12. Expenses. Each party hereto shall pay its own expenses incurred in connection with this Agreement, except as otherwise provided in Section 8 hereof or as specified in the Merger Agreement. 13. Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement, without the necessity of proving damages or posting any bond, and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 14. Notice. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given and made if in writing and if served by personal delivery upon the party for whom it is intended or if sent by telex or facsimile (with receipt electronically confirmed) to the person at the address set forth below, or such other address as may be designated in writing hereafter, in the same manner, by such person: (a) if to Optionee: ADC Telecommunications, Inc. 12501 Whitewater Drive Minnetonka, Minnesota 55343 Attention: General Counsel Facsimile No.: (612) 946-3292 Telephone No.: (612) 938-8080 with a copy to: Dorsey & Whitney LLP Pillsbury Center South 220 South Sixth Street Minneapolis, Minnesota 55402 Attention: Robert A. Rosenbaum, Esq. Facsimile No.: (612) 340-8738 Telephone No.: (612) 340-2600 A-10 11 (b) if to the Company: PairGain Technologies, Inc. 14661 Franklin Avenue Tustin, California 92780 Attention: Facsimile No.: (714) 730-2463 Telephone No.: (714) 832-9922 with a copy to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, CA 92660 Attention: Nick E. Yocca, Esq. Facsimile No.: (949) 725-4100 Telephone No.: (949) 725-4000 15. Parties in Interest. This Agreement shall inure to the benefit of and be binding upon the parties named herein and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any Person other than Optionee or the Company, or their permitted successors or assigns any rights or remedies under or by reason of this Agreement. 16. Entire Agreement; Amendments. This Agreement, together with the Merger Agreement and the other documents referred to therein, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, both written or oral, between the parties with respect to the subject matter hereof. This Agreement may not be changed, amended or modified orally, but only by an agreement in writing signed by the party against whom any waiver, change, amendment, modification or discharge may be sought. 17. Assignment. No party to this Agreement may assign any of its rights or delegate any of its obligations under this Agreement (whether by operation of law or otherwise) without the prior written consent of the other party hereto, except that Optionee may, without a written consent and without affecting its obligations hereunder, assign its rights and delegate its obligations hereunder in whole or in part to one or more of its direct or indirect wholly owned subsidiaries. A-11 12 18. Interpretation. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. The headings of articles and sections herein are for convenience of reference, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. 19. Counterparts. This Agreement may be executed via facsimile in two or more counterparts, each of which, when executed, shall be deemed to be an original and all of which together shall constitute one and the same document. 20. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflicts of laws thereof. 21. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. 22. Defined Terms. Capitalized terms which are used but not defined herein shall have the meanings ascribed to them in the Merger Agreement. * * * * * A-12 13 IN WITNESS WHEREOF, Optionee and the Company have caused this Stock Option Agreement to be duly executed and delivered on the day and year first above written. PAIRGAIN TECHNOLOGIES, INC. By: /s/ CHARLES S. STRAUCH ---------------------------------- Charles S. Strauch Chairman of the Board of Directors ADC TELECOMMUNICATIONS, INC. By: /s/ ARUN SOBTI ---------------------------------- Arun Sobti Senior Vice President, President Broadband Access and Transport Group A-13 EX-99.3 5 VOTING AGREEMENT 1 EXHIBIT 99.3 VOTING AGREEMENT VOTING AGREEMENT, dated as of February 22, 2000 (the "Agreement"), by and among ADC Telecommunications, Inc., a Minnesota corporation ("Buyer"), and each stockholder of PairGain Technologies, Inc., a Delaware Corporation (the "Company"), whose signature is set forth on the signature pages to this Agreement (each a "Stockholder" and, collectively, the "Stockholders"). Capitalized terms which are used but not defined herein shall have the meanings ascribed to them in the Merger Agreement (as defined below). WITNESSETH: WHEREAS, simultaneously with the execution and delivery of this Agreement, Buyer and the Company are entering into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), which provides for a wholly owned subsidiary of Buyer to be merged with and into the Company in accordance with the General Corporation Law of the State of Delaware and the terms of the Merger Agreement, as a result of which the Company will be the surviving corporation and will be a wholly owned subsidiary of Buyer; WHEREAS, the Stockholders own in the aggregate approximately 3% of the Company Common Stock issued and outstanding; and WHEREAS, the Stockholders desire that the Company and Buyer consummate the Merger contemplated by the Merger Agreement and are willing to enter into this Agreement to induce Buyer to enter into the Merger Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements set forth herein, the parties hereto, intending to be legally bound, agree as follows: 1. Agreement to Vote. At such time as the Company convenes a meeting of, solicits written consents from or otherwise seeks a vote of, the Company's stockholders for the purpose of considering and approving the Merger and the other transactions contemplated by the Merger Agreement, each of the Stockholders hereby agrees to vote all shares of Company Common Stock owned by such Stockholder (whether held directly or beneficially) in favor of the Merger and the other transactions contemplated by the Merger Agreement and all other actions necessary or desirable for the consummation of the Merger. If the Merger contemplated by the Merger Agreement is restructured by the parties as a tender offer, each of the Stockholders hereby agrees to tender all shares of Company Common Stock owned by such Stockholder to the Buyer. 2. Limitation. Each Stockholder shall retain at all times the right to vote such Stockholder's shares of Company Common Stock in that Stockholder's sole discretion on all B-1 2 matters, other than those set forth in Section 1, that are at any time or from time to time presented for consideration by the Company's stockholders generally. 3. No Solicitation. (a) Immediately upon execution of this Agreement, the Stockholders shall (and shall use reasonable efforts to cause the Company and its officers, directors, employees, investment bankers, attorneys and other agents or representatives to) cease all discussions, negotiations, responses to inquiries and other communications with all third parties who, prior to the date hereof, may have expressed or otherwise indicated any interest in pursuing an Acquisition Proposal with the Company. (b) Prior to termination of this Agreement pursuant to Section 7 hereof, each Stockholder hereby covenants and agrees that he or she will not, and each Stockholder shall use reasonable efforts to cause the Company and its officers, directors, employees, investment bankers, attorneys and other agents or representatives not to, directly or indirectly, (i) initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal that constitutes an Acquisition Proposal, (ii) except as permitted below, engage or participate in negotiations or discussions with, or furnish any information or data to, or take any other action to, facilitate any inquiries or making any proposal by, any third party relating to an Acquisition Proposal, or (iii) except as permitted below, enter into any agreement with respect to any Acquisition Proposal or approve an Acquisition Proposal. Notwithstanding anything to the contrary contained in this Section 3 (or in Section 5.6 or any other provision of the Merger Agreement), prior to the Company Stockholders Meeting, the Company and its Board of Directors (the "Company Board") may participate in discussions or negotiations with or furnish information to any third party making an unsolicited Acquisition Proposal (a "Potential Acquiror") or approve or recommend an unsolicited Acquisition Proposal if both (A) a majority of the directors of the Company Board, without including directors who may be considered Affiliates (as defined in Rule 405 under the Securities Act), of any person making an Acquisition Proposal ("disinterested directors") determines in good faith, after receiving advice from its independent financial advisor, that a Potential Acquiror has submitted to the Company an Acquisition Proposal that is a Superior Proposal (as hereinafter defined), and (B) a majority of the disinterested directors of the Company Board determines in good faith, after receiving advice from reputable outside legal counsel experienced in such matters (and the parties hereto agree that the law firm of Stradling Yocca Carlson & Rauth is so experienced), that the failure to participate in such discussions or negotiations or to furnish such information or to approve or recommend such unsolicited Acquisition Proposal is inconsistent with the Company Board's fiduciary duties under applicable law. In the event that any Stockholder shall receive any Acquisition Proposal, he or she shall promptly (and in no event later than 24 hours after receipt thereof) furnish to Buyer the identity of the Potential Acquiror, the terms of such Acquisition Proposal, copies of all information requested by the Potential Acquiror, and shall further promptly inform Buyer in writing as to the fact such information is to be provided after compliance with the terms of the preceding sentence. Without limiting the foregoing, each of the Stockholders understands and agrees that any violation of the restrictions set forth in this Section 3 by any Stockholder, whether or not such Stockholder is purporting to act on behalf of B-2 3 the Company or any of its Subsidiaries or otherwise, shall be deemed to be a breach of Section 5.6(b) of the Merger Agreement sufficient to enable Buyer to terminate the Merger Agreement pursuant to Section 7.1(d)(i) thereof. (c) For the purposes of this Agreement, "Acquisition Proposal" shall mean any proposal, whether in writing or otherwise, made by any person other than Buyer and its Subsidiaries to acquire "beneficial ownership" (as defined under Rule 13(d) of the Exchange Act) of 20% or more of the assets of, or 20% or more of the outstanding capital stock of any of the Company or its Subsidiaries pursuant to a merger, consolidation, exchange of shares or other business combination, sale of shares of capital stock, sales of assets, tender offer or exchange offer or similar transaction involving the Company or its Subsidiaries. (d) The term "Superior Proposal" means any bona fide Acquisition Proposal to acquire, directly or indirectly, for consideration consisting of cash and/or securities, more than 50% of the Company Common Stock then outstanding or all or substantially all the assets of the Company, and otherwise on terms that a majority of the disinterested directors determines, in good faith, to be more favorable to the Company and its stockholders than the Merger (after receiving advice from the Company's independent financial advisor that the Acquisition Proposal is more favorable to the Company's stockholders, from a financial point of view, than the Merger) and for which financing, to the extent required, is then committed. 4. Representations and Warranties of the Stockholders. The Stockholders severally, but not jointly, hereby represent and warrant to Buyer that: (a) Each Stockholder has the requisite legal capacity and authority to execute and deliver this Agreement, to perform the obligations of the Stockholder under this Agreement and to consummate the transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by such Stockholder and constitutes a valid and legally binding obligation of such Stockholder enforceable in accordance with its terms, except to the extent that enforceability thereof may be limited by bankruptcy and other similar laws and general principles of equity; (b) Each Stockholder's execution, delivery and performance of this Agreement will not result in the creation of any Lien upon any of the shares of Company Common Stock held by such Stockholder under any of the terms, conditions or provisions of any contract to which such Stockholder is a party; (c) No filing or registration with or notification to and no permit, authorization, consent or approval of, any court, commission, governmental body, regulatory authority, agency or tribunal wherever located is required to be obtained, made or given by any Stockholder in connection with the execution, delivery and performance by any Stockholder of this Agreement; and (d) The signature page of this Agreement correctly sets forth the number of shares of Company Common Stock owned by each Stockholder as of the date of this Agreement. B-3 4 Each Stockholder has good title to all of the shares of Company Common Stock set forth below his name on the signature page hereto free and clear of all liens, security interests and encumbrances or any restrictions on transfer. 5. Capacity. The parties hereby agree that the Stockholders are executing this Agreement solely in their capacity as Stockholders of the Company. Nothing contained in this Agreement shall limit or otherwise affect the conduct or exercise of the Stockholders' fiduciary duties as officers or directors of the Company. 6. Further Assurances. Each Stockholder will, upon the request of Buyer, execute and deliver such documents and take such action reasonably requested by Buyer to effectuate the purposes of this Agreement and to consummate the transactions contemplated by the Merger Agreement. 7. Termination. This Agreement shall terminate upon the earlier of (i) the Effective Time and (ii) the termination of the Merger Agreement in accordance with its terms. In the event this Agreement is terminated, this Agreement shall immediately become void, there shall be no liability under this Agreement on the part of Buyer, its officers or directors or the Stockholders, and all rights and obligations of the parties to this Agreement shall cease. 8. Expenses. Each party hereto shall pay its own expenses incurred in connection with this Agreement, except as otherwise specified in the Merger Agreement. 9. Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement, without the necessity of proving damages or posting any bond, and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 10. Notice. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given and made if in writing and if served by personal delivery upon the party for whom it is intended or if sent by telex or facsimile (with receipt electronically confirmed) to the person at the address set forth below, or such other address as may be designated in writing hereafter, in the same manner, by such person: (a) if to a Stockholder: To the address set forth on the signature page(s) hereto with a copy to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, CA 92660 Attention: Nick E. Yocca, Esq. Facsimile No.: (949) 725-4100 Telephone No.: (949) 725-4000 B-4 5 (b) if to Buyer: ADC Telecommunications, Inc. 12501 Whitewater Drive Minnetonka, MN 55343 Attention: General Counsel Facsimile No.: (612) 946-3292 Telephone No.: (612) 938-8080 with a copy to: Dorsey & Whitney LLP Pillsbury Center South 220 South Sixth Street Minneapolis, MN 55402 Attention: Robert A. Rosenbaum, Esq. Facsimile No.: (612) 340-8738 Telephone No.: (612) 340-2600 11. Parties in Interest. This Agreement shall inure to the benefit of and be binding upon the parties named herein and their respective successors and assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any Person other than the Stockholders or Buyer, or their permitted successors or assigns, any rights or remedies under or by reason of this Agreement. 12. Entire Agreement; Amendments. This Agreement, together with the Merger Agreement and the other documents referred to therein, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, both written or oral, between the parties with respect to the subject matter hereof. This Agreement may not be changed, amended or modified orally, but only by an agreement in writing signed by the party against whom any waiver, change, amendment, modification or discharge may be sought. 13. Assignment. No party to this Agreement may assign any of its rights or delegate any of its obligations under this Agreement (whether by operation of law or otherwise) without the prior written consent of the other party hereto. 14. Interpretation. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. The headings of articles and sections herein are for convenience of reference, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. B-5 6 15. Counterparts. This Agreement may be executed via facsimile in two or more counterparts, each of which, when executed, shall be deemed to be an original and all of which together shall constitute one and the same document. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflicts of laws thereof. 17. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. * * * * * B-6 7 IN WITNESS WHEREOF, the parties hereto have caused this Voting Agreement to be executed as of the day and year first written above. ADC TELECOMMUNICATIONS, INC. By: /s/ ARUN SOBTI -------------------------------- Arun Sobti Senior Vice President, President Broadband Access and Transport Group STOCKHOLDERS By: /s/ CHARLES S. STRAUCH -------------------------------- Name: Charles S. Strauch Address: 10 Vista De San Clemente, Laguna Beach, CA 92651 Number of Shares Held: 792,173 By: /s/ MICHAEL PASCOE -------------------------------- Name: Michael Pascoe Address: 11377 Seneca Knoll Drive, Great Falls, VA 22066 Number of Shares Held: 0 By: /s/ HOWARD S. FLAGG -------------------------------- Name: Howard S. Flagg Address: 5301 Winnetka Avenue Woodland Hills, CA 91364 Number of Shares Held: 491,376 By: /s/ BENEDICT A. ITRI -------------------------------- Name: Benedict A. Itri Address: 21201 Poston Lane, Huntington Beach, CA 92646 Number of Shares Held: 1,049,747 By: /s/ ROBERT R. PRICE -------------------------------- Name: Robert R. Price Address: 7 White Pine Drive, Newport Coast, CA 92657 Number of Shares Held: 602 By: /s/ HOWARD G. BUBB -------------------------------- Name: Howard G. Bubb Address: 21 Fernwood Place Mountain Lakes, NJ 07046 Number of Shares Held: 0 By: /s/ ROBERT C. HAWK -------------------------------- Name: Robert C. Hawk Address: 785 S. Biscay Street, Aurora, CO 80016 Number of Shares Held: 0 By: /s/ ROBERT A. HOFF -------------------------------- Name: Robert A. Hoff Address: 15 Bluff View, Irvine, CA 92715 Number of Shares Held: 19,980 By: /s/ B. ALLEN LAY -------------------------------- Name: B. Allen Lay Address: 19 Caballeros Road, Rolling Hills, CA 90274 Number of Shares Held: 85,676 B-7 -----END PRIVACY-ENHANCED MESSAGE-----