<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. ___________)*
SQA, INC.
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(Name of Issuer)
COMMON STOCK, $0.01 PAR VALUE PER SHARE
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(Title of Class of Securities)
784637100
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(CUSIP Number)
PAUL D. LEVY, RATIONAL SOFTWARE CORPORATION, 2800 SAN TOMAS EXPRESSWAY,
SANTA CLARA, CA 95051 (408)496-3600
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
NOVEMBER 12, 1996
----------------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [] .
Check the following box if a fee is being paid with the statement [] . (A fee is
not required only if the reporting person: (1) has a previous statement on file
reporting beneficial ownership of more than five percent of the class of
securities described in Item 1; and (2) has filed no amendment subsequent
thereto reporting beneficial ownership of five percent or less of such class.)
(See Rule 13d-7.)
NOTE: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
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SCHEDULE 13D
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CUSIP No. 784637100 PAGE 2 OF 11 PAGES
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<TABLE>
<CAPTION>
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<S> <C>
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
RATIONAL SOFTWARE CORPORATION
54-1217099
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (A) []
(B).
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3 SEC USE ONLY
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4 SOURCE OF FUNDS*
OO
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5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(D) OR 2(E)
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
STATE OF DELAWARE
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NUMBER OF 7 SOLE VOTING POWER
SHARES 1,213,296 (acquisition of such shares is conditioned upon the occurrence of certain events
BENEFICIALLY specified in that certain Stock Option Agreement dated November 12, 1996 and filed as Exhibit 3 to
OWNED BY this Schedule 13D
EACH
REPORTING
PERSON
WITH
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8 SHARED VOTING POWER
-0-
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9 SOLE DISPOSITIVE POWER
1,213,296 (acquisition of such shares is conditioned upon the occurrence of certain events
specified in that certain Stock Option Agreement dated November 12, 1996 and filed as Exhibit 3 to
this Schedule 13D)
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10 SHARED DISPOSITIVE POWER
-0-
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11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,213,296
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12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
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13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
12.7%
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14 TYPE OF REPORTING PERSON*
CO
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</TABLE>
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE>
SCHEDULE 13D
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CUSIP No. 784637100 PAGE 3 OF 11 PAGES
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Neither the filing of this Schedule 13D nor any of its contents shall be
deemed to constitute an admission by Rational Software Corporation that it is
the beneficial owner of any of the Common Stock referred to herein for purposes
of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Act"),
---
or for any other purpose, and such beneficial ownership is expressly disclaimed.
ITEM 1. SECURITY AND ISSUER.
This statement on Schedule 13D relates to the common stock, par value $0.01
per share ("Issuer Common Stock"), of SQA, Inc., a Delaware corporation
-------------------
("Issuer"). The principal executive offices of Issuer are located at One
------
Burlington Woods, Burlington, Massachusetts 01803.
ITEM 2. IDENTITY AND BACKGROUND.
The name of the person filing this statement is Rational Software
Corporation, a Delaware corporation ("Rational"). The address of the principal
office and--------principal business of Rational is 2800 San Tomas Expressway,
Santa Clara California 95051-0951. Rational develops, markets and supports a
comprehensive solution for the component-based development of software systems.
Set forth in Schedule A is a list of each of Rational's directors and executive
officers, as of the date hereof, along with the present principal occupation or
employment of such directors and executive officers, their respective
citizenship and the name, principal business and address of any corporation or
other organization other than Rational in which such employment is conducted.
During the past five years neither Rational nor, to Rational's knowledge, any
person named in Schedule A to this statement, has been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors). Also during
the past five years neither Rational nor, to Rational's knowledge, any person
named in Schedule A to this statement, was a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction as a result of which
such person was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activity subject to, federal
or state securities laws or finding any violation with respect to such laws.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
Pursuant to an Agreement and Plan of Reorganization dated November 12, 1996
(the "Merger Agreement") among Rational, Sunshine Acquisition Corp., a Delaware
----------------
corporation and a wholly-owned subsidiary of Rational ("Merger Sub") and Issuer,
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and subject to the conditions set forth therein (including approval by
stockholders of Issuer and Rational), Merger Sub will be merged with and into
Issuer (the "Merger"), with each share of Issuer Common Stock being converted
------
into the right to receive 0.86 shares of Rational common stock, $0.01 par value
per share ("Rational Common Stock"). The foregoing summary of the Merger is
---------------------
qualified in its entirety by reference to the copy of the Merger Agreement
included as Exhibit 1 to this Schedule 13D and incorporated herein in its
entirety by reference.
This statement on Schedule 13D also relates to an option granted by Issuer
to Rational to purchase shares of Common Stock from Issuer and certain other
matters as described in Item 4 below.
ITEM 4. PURPOSE OF TRANSACTION.
As described in Item 3 above, this statement relates to the Merger of
Merger Sub, a wholly-owned subsidiary of Rational, with and into Issuer in
a statutory merger pursuant to the Delaware General Corporation Law
("Delaware Law"). At the effective time of the Merger (the "Effective Time"),
the separate existence of
<PAGE>
SCHEDULE 13D
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CUSIP No. 784637100 PAGE 4 OF 10 PAGES
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Merger Sub will cease and Issuer will continue as the surviving corporation and
as a wholly-owned subsidiary of Rational ("Surviving Corporation"). The initial
--------- -----------
directors of the Surviving Corporation shall be the directors of Merger Sub
immediately prior to the Effective Time, and the initial officers of the
Surviving Corporation shall be the officers of Merger Sub immediately prior to
the Effective Time. The Certificate of Incorporation of SQA as in effect
immediately prior to the Merger shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter amended as provided by the Delaware Law
and such Certificate of Incorporation; provided, however, at the Effective Time
the Certificate of Incorporation of the Surviving Corporation shall be amended
so that the name of the Surviving Corporation shall be "SQA Holdings, Inc." The
Bylaws of Merger Sub as in effect immediately prior to the Merger shall be the
Bylaws of the Surviving Corporation until thereafter amended.
In connection with the Merger, holders of outstanding Issuer Common Stock
will receive, in exchange for each share of Issuer Common Stock held by them,
0.86 shares of Rational Common Stock. In addition, Rational will assume all
options outstanding under the Issuer's 1990 Incentive and Nonqualified Stock
Option Plan, 1995 Stock Plan, and 1995 Non-Employee Director Stock Option Plan,
and will assume all purchase rights outstanding under the Issuer's 1995 Employee
Stock Purchase Plan. If the Merger is consummated, the Issuer Common Stock will
be deregistered under the Act and delisted from The Nasdaq National Market.
The Merger Agreement contains customary representations and warranties on
the part of Rational and Issuer, and the consummation of the Merger is subject
to customary closing conditions, including, without limitation, approval by the
stockholders of Rational and Issuer and no event with a material adverse effect
with respect to either party. The Merger Agreement also contains covenants
regarding the activities of the parties pending consummation of the Merger.
Generally, each of the parties must conduct its business in the ordinary course
consistent with past practice.
After the occurrence of a Trigger Event or a Takeover Proposal (as defined
below), if the Merger Agreement is terminated because (i) the SQA board changes
its recommendation that SQA stockholders approve the Merger, (ii) SQA fails to
hold a special meeting of its stockholders, or (iii) SQA fails to obtain
stockholder approval of the Merger, then SQA must pay Rational a $6 million
break-up fee (the "SQA Break-Up Fee").
----------------
In addition, in the event of (x) the payment of the SQA Break-Up Fee, or (y) in
the absence of payment of the SQA Break-Up Fee, the Merger Agreement is
terminated because of (i) a change in the Board of Directors' recommendation
that SQA stockholders approve the Merger, (ii) SQA's failure to hold a special
meeting of its stockholders, (iii) SQA's failure to obtain the approval of the
SQA stockholders, (iv) SQA's breach of its representations and warranties in the
Merger Agreement, or (v) the occurrence of a Trigger Event or Takeover Proposal
within 180 days of SQA's termination of the Merger Agreement, then SQA must
reimburse Rational up to $1 million in expenses incurred in connection with the
Merger Agreement and transactions contemplated thereby.
If (i) the Rational board changes its recommendation that Rational
stockholders approve the Merger, (ii) Rational fails to hold a special meeting
of Rational stockholders, or (iii) Rational fails to obtain stockholder approval
of the Merger, then Rational must pay to SQA a break-up fee of $20 million (the
"Rational Break-Up Fee"). In addition, upon the payment of the Rational Break-
---------------------
Up Fee or if Rational breaches its representations and warranties in the Merger
Agreement, then Rational must reimburse SQA up to $1 million in expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby.
As used herein, a "Trigger Event" shall occur if any Person (other than a
-------------
person disclosing its beneficial ownership of shares of SQA's Common Stock on
Schedule 13G under the Exchange Act) acquires securities representing 20% or
more, or commences a tender or exchange offer following the successful
consummation of which the offeror and its affiliate would beneficially own
securities representing 20% or more, of the voting power of SQA.
<PAGE>
SCHEDULE 13D
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CUSIP No. 784637100 PAGE 5 OF 11 PAGES
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As used herein, "Takeover Proposal" means any offer or proposal for, or any
-----------------
indication of interest in, a merger or other business combination involving SQA
or the acquisition of 20% or more of the outstanding shares of capital stock of
SQA, or the sale or transfer of any material assets (excluding the sale or
disposition of assets in the ordinary course of business) of SQA, other than,
(i) the transactions contemplated by the Agreement and (ii) transactions by
persons disclosing their beneficial ownership of shares of SQA's Common Stock on
Schedule 13G under the Exchange Act.
The foregoing summary of the Merger is qualified in its entirety by
reference to the copy of the Merger Agreement included as Exhibit 1 to this
Schedule 13D and incorporated herein in its entirety by reference.
As an inducement to Rational to enter into the Merger Agreement, certain of
SQA's stockholders (the "SQA Stockholders") have each entered into a
----------------
Participation Agreement dated as of November 12, 1996 (the "Voting Agreement")
----------------
with Rational. Pursuant to the Voting Agreement, the stockholders have agreed
to vote the shares of Issuer Common Stock owned by them (i) in favor of approval
and adoption of the Merger Agreement and the Merger and any matter that could
reasonably be expected to facilitate the Merger and (ii) against approval of any
proposal made in opposition to or competition with consummation of the Merger.
The stockholders have also agreed if requested by Rational to execute and
deliver to Rational an irrevocable proxy granting Rational the authority to vote
the shares of Issuer Common Stock owned by the stockholders in the manner
described in the previous sentence. The Voting Agreement terminates upon the
earlier to occur of the Effective Time or the termination of the Merger
Agreement. Each SQA Stockholder and the number of outstanding shares of Issuer
Common Stock held of record by each SQA Stockholder is set forth in Schedule B
hereto which is hereby incorporated by this reference. Rational did not pay any
additional consideration to any stockholder in connection with the execution and
delivery of the Voting Agreement. The foregoing summary of the Voting Agreement
is qualified in its entirety by reference to a copy of the form of Voting
Agreement included as Exhibit 2 to this Schedule 13D and incorporated herein in
its entirety by reference.
Also as an inducement to Rational to enter into the Merger Agreement,
Rational and Issuer entered into a Stock Option Agreement dated November 12,
1996 ("Stock Option Agreement") pursuant to which Issuer granted Rational the
----------------------
right (the "Option"), under certain conditions, to purchase up to 1,213,296
------
shares of Issuer Common Stock at a price of $35.26 per share. In the event
Rational exercises the option, Rational will determine the source of funds to be
used in payment for the SQA Common Stock.
Subject to certain conditions, the Stock Option may be exercised in whole
but not in part by Rational, at any time, (i) upon the occurrence of any of the
events giving rise to the obligation of SQA to pay the SQA Break-Up Fee (as
defined above), or (ii) if the SQA board changes its recommendation that SQA
stockholders approve the Merger, if, in such event, (x) prior to such event,
there shall have been a Trigger Event or Takeover Proposal (as those terms are
defined above) or (y) within 180 days after such event, there shall be a Trigger
Event or a Takeover Proposal (any of such events described in clause (i) or (ii)
being referred to herein as an "Exercise Event"). The Stock Option terminates
upon the earliest of (i) the Effective Time, (ii) 180 days following the
termination of the Agreement, if an Exercise Event shall have occurred on or
prior to the date of such termination (or, if later, ten days following the
event described in clause (ii)(y) above), and (iii) the date on which the Merger
Agreement is terminated if an Exercise Event shall not have occurred on or prior
to such date; provided, however, with respect to the preceding clause (ii) of
this sentence, that if, at the expiration of the period specified therein, the
Stock Option cannot be exercised by reason of any applicable judgment, decree,
order, laws or regulation, or because the waiting period related to the issuance
of the shares subject to the Stock Option under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), if applicable, shall not
have expired or been terminated, then the Stock Option shall not terminate until
the tenth business day after such impediment to exercise shall have been removed
or shall have become final and not subject to appeal. Notwithstanding the
<PAGE>
SCHEDULE 13D
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CUSIP No. 784637100 PAGE 6 OF 11 PAGES
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foregoing, the Stock Option may not be exercised if Rational is in breach of any
of its covenants or agreements contained in the Agreement, or more than one year
after the Exercise Event.
The foregoing summary of the Stock Option Agreement is qualified in its
entirety by reference to the form of Stock Option Agreement included as Exhibit
3 to this Schedule 13D and incorporated herein in its entirety by reference.
Also in connection with the Merger Agreement, certain stockholders of
Rational (each an "Affiliate") have each entered into an affiliate agreement
---------
with Rational (collectively, the "Affiliate Agreements") pursuant to which each
--------------------
Affiliate has agreed to not sell, exchange, transfer, pledge, dispose or
otherwise reduce such Affiliate's interest in or risk relative to any shares of
Rational Common Stock or other equity securities of Rational owned by such
Affiliate during the period commencing November 12, 1996 and ending at such time
as financial results covering at least 30 days of combined operations of
Rational and Issuer have been published by Rational, such publication to be in
the form of a quarterly earnings report, an effective registration statement
filed with the Securities and Exchange Commission (the "Commission"), a report
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to the Commission on Form 10-K, 10-Q or 8-K or any other public filing or
announcement which includes the combined results of operations of Rational and
Issuer, so as not to interfere with Rational accounting for the Merger as a
pooling of interests. The foregoing summary of the Affiliate Agreements is
qualified in its entirety by reference to the copy of a form of the Affiliate
Agreement included as Exhibit 4 to this Schedule 13D and incorporated herein in
its entirety by reference.
Also in connection with the Merger Agreement, the SQA Stockholders have
each entered into an affiliate agreement with Rational. The substance of these
agreements is substantially similar to the substance Affiliate Agreements,
except that each SQA Stockholder has also agreed that any sale, transfer or
other disposition of Issuer Common Stock by such SQA Stockholder will be made in
accordance with Rule 145 promulgated by the Commission under the Securities Act
of 1933, as amended, and has made certain representations pertaining to
continuity of interest with respect to the shares held by such SQA Stockholder.
A copy of a form of this agreement is included as Exhibit 5 to this Schedule 13D
and incorporated herein in its entirety by reference.
ITEM 5. INTEREST IN SECURITIES OF ISSUER.
As a result of and subject to the Voting Agreement, Rational has shared
power with the SQA Stockholders to vote an aggregate of 1,545,460 shares of
Issuer Common Stock (including an aggregate of 138,532 shares subject to options
purchasable by the SQA Stockholder within 60 days hereof) for the limited
purposes described in Item 4 above, and such shares constitute approximately
16.2% of the issued and outstanding shares of Issuer Common Stock as of November
12, 1996. To the extent that Rational, as permitted by the Voting Agreement,
requests proxies to vote all of the shares of Issuer Common Stock subject to the
Voting Agreement and such proxies are granted pursuant to the Voting Agreement,
Rational will have sole power to vote such shares. If pursuant to the Stock
Option Agreement the Option becomes exercisable, Rational would have the right
to acquire up to 1,213,296 shares of Issuer Common Stock. If such shares are
acquired, Rational would have sole voting and dispositive power over such
shares, and such shares would constitute approximately 12.7% of the issued and
outstanding shares of Issuer Common Stock as of November 12, 1996. The SQA
Stockholders are not parties to the Option Agreement and do not have any rights
to acquire Issuer Common Stock thereunder. As a result of the Voting Agreement
and if the Option is exercised, Rational may be deemed to beneficially own an
aggregate of 2,758,756 shares of Issuer Common Stock (including an aggregate of
138,532 shares subject to options purchasable by the SQA Stockholders within 60
days hereof) or 28.9% of the issued and outstanding shares of Issuer Common
Stock as of November 12, 1996.
<PAGE>
SCHEDULE 13D
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CUSIP No. 784637100 PAGE 7 OF 10 PAGES
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To Rational's knowledge, no shares of Issuer Common Stock are beneficially
owned by any of the persons named in Schedule A. In addition, Rational has not
affected any transaction in Issuer Common Stock during the past 60 days and to
Rational's knowledge, none of the person named in Schedule A has affected any
transaction in Issuer Common Stock during the past 60 days.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO SECURITIES OF ISSUER.
Other than as described herein, to Rational's knowledge, there are no
contracts, arrangements, understandings or relationships (legal or otherwise)
among the persons named in Item 2 and between such persons and any person with
respect to any securities of Issuer, including but not limited to transfer or
voting of any of the securities, finder's fees, joint ventures, loan or option
arrangements, puts or calls, guarantees or profits, division or profits or loss,
or the giving or withholding or proxies.
ITEM 7. MATERIALS TO BE FILED AS EXHIBITS.
The following documents are filed as exhibits:
1. Form of Agreement and Plan or Reorganization dated November 12, 1996
by and among Rational Software Corporation, a Delaware corporation,
Sunshine Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Rational Software Corporation, and SQA, Inc., a Delaware
corporation.
2. Form of Participation Agreement dated November 12, 1996 by and among
Rational Software Corporation, a Delaware corporation, Sunshine
Acquisition Corp., a Delaware corporation, and certain stockholders of
SQA, Inc., a Delaware corporation.
3. Form of Stock Option Agreement dated November 12, 1996 by and between
SQA, Inc., a Delaware corporation and Rational Software Corporation, a
Delaware corporation.
4. Form of Affiliate Agreement dated November 12, 1996 by and among
Rational Software Corporation, a Delaware corporation, and certain
stockholders of Rational Software Corporation, a Delaware corporation.
5. Form of Affiliate Agreement dated November 12, 1996 by and among
Rational Software Corporation, a Delaware corporation, and certain
stockholders of SQA, Inc., a Delaware corporation.
<PAGE>
SCHEDULE 13D
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CUSIP No. 784637100 PAGE 8 OF 10 PAGES
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: November 26, 1996
RATIONAL SOFTWARE CORPORATION
By: /s/ Paul D. Levy
-------------------
Title: Chairman of the Board and Chief
Executive Officer
<PAGE>
SCHEDULE 13D
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CUSIP NO. 784637100 PAGE 9 OF 10 PAGES
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SCHEDULE A
DIRECTORS AND EXECUTIVE OFFICERS OF RATIONAL SOFTWARE CORPORATION
<TABLE>
<CAPTION>
Name Present Principal Occupation, Including Name of Employer Citizenship
- --------------------- ----------------------------------------------------------- -----------
<S> <C> <C>
Paul D. Levy Chairman of the Board of Directors and Chief Executive U.S.
Officer of Rational
Michael T. Devlin President and Director of Rational U.S.
Robert T. Bond Senior Vice President, Finance, Chief Financial Officer, U.S.
Chief Operating Officer, and Secretary of Rational
David H. Bernstein Senior Vice President and General Manager, Products U.S.
of Rational
John R. Lovitt Senior Vice President North American Field Operations U.S.
of Rational
Stephen F. Zeigler Senior Vice President and General Manager, UNIX U.S.
Application Construction Products of Rational
Timothy A. Brennan Vice President, Finance and Administration of Rational U.S.
Kevin J. Haar Vice President, Major Accounts, North American Field U.S.
Operations of Rational
Ivar Jacobson Vice President, Business Engineering of Rational SWEDEN
Joseph N. Marasco Vice President and General Manager, Windows Application U.S.
Construction Products of Rational
Gregory L. Meyers Vice President and General Manager, Object Modeling U.S.
Products of Rational
Richard P. Reitman Vice President, Process and Project Management Products U.S.
of Rational
Gerard J. Rudisin Vice President, Corporate Marketing of Rational U.S.
James S. Campbell Director of Rational and Managing Director of Management U.S.
Partners International Corporation
Daniel H. Case III Director of Rational and President and Chief Executive U.S.
Officer of Hambrecht & Quist Group
Leslie G. Denend Director of Rational and President and Chief Executive U.S.
Officer of Network General Corporation
John E. Montague Director of Rational and Vice President, Financial Strategies U.S.
at Lockheed Martin Corporation
Allison R. Schleicher Director of Rational and Vice President, Finance of U.S.
IBM Credit Corporation
</TABLE>
<PAGE>
SCHEDULE 13D
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CUSIP NO. 784637100 PAGE 10 OF 11 PAGES
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SCHEDULE B
<TABLE>
<CAPTION>
Issuer Common Stock Held of
Stockholder Record as of June 1, 1996
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<S> <C>
Highland Capital Partners II 628,180
Limited Partnership or its Managing
General Partner, Highland Management
Partners II Limited Partnership
Aegis Select Limited Partnership 109,290
& Aegis II Limited Partnership
North Bridge Venture Partners or its 506,363
Managing General Partner, North
Bridge Venture Management, L.P.
Edward T. Anderson 43,547
Ted R. Dintersmith 14,642
Paul A. Maeder 73,832
Thomas I. Csathy 1,000
Ronald H. Nordin 123,247 (includes right
to acquire 95,217)
Frederick J. Ciaramaglia 14,070 (includes right
to acquire 12,320)
William T. Dedrick 2,640 (includes right
to acquire 2,640)
Roger A. Hodskins 4,519 (includes right
to acquire 4,225)
Eric L. Schurr 4,130 (includes right
to acquire 4,130)
David J. Orfao 20,000 (includes right
to acquire 20,000)
---------
TOTAL: 1,545,460
=========
</TABLE>
<PAGE>
EXHIBIT 1
================================================================================
AGREEMENT AND PLAN
OF
REORGANIZATION
BY AND AMONG
RATIONAL SOFTWARE CORPORATION,
SUNSHINE ACQUISITION CORPORATION
AND SQA, INC.
November 12, 1996
================================================================================
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of November 12, 1996, by and among Rational Software
Corporation, a Delaware corporation ("Acquiror"), Sunshine Acquisition
Corporation, a Delaware corporation ("Merger Sub") and wholly owned subsidiary
of Acquiror, and SQA, Inc., a Delaware corporation ("Target").
RECITALS
A. The Boards of Directors of Target, Acquiror and Merger Sub believe it
is in the best interests of their respective companies and the stockholders of
their respective companies that Target and Merger Sub combine into a single
company through the statutory merger of Merger Sub with and into Target (the
"Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding shares of
Target Common Stock, $.01 par value ("Target Common Stock"), shall be converted
into shares of Acquiror Common Stock, no par value ("Acquiror Common Stock"), at
the rate set forth herein.
C. Target, Acquiror and Merger Sub desire to make certain representations
and warranties and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code.
E. The parties intend to cause the Merger to be accounted for as a
pooling of interests pursuant to APB Opinion No. 16.
F. Concurrent with the execution of this Agreement and as an inducement
to Acquiror and Merger Sub to enter into this Agreement, (a) Target and Acquiror
have entered into a stock option agreement dated the date hereof (the "Option
Agreement") providing for the purchase by Acquiror of newly-issued shares of
Target's Common Stock, and (b) certain of the affiliates of Target who are
stockholders, officers or directors have on the date hereof entered into an
agreement to vote the shares of Target's Common Stock owned by such person to
approve the Merger and against any competing proposals.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
<PAGE>
ARTICLE I
THE MERGER
----------
1.1 The Merger. At the Effective Time (as defined in Section 1.2)
----------
and subject to and upon the terms and conditions of this Agreement, the
Certificate of Merger attached hereto as Exhibit A (the "Certificate of Merger")
---------
and the applicable provisions of the Delaware General Corporation Law ("Delaware
Law"), Merger Sub shall be merged with and into Target, the separate corporate
existence of Merger Sub shall cease and Target shall continue as the surviving
corporation. Target as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation."
1.2 Closing: Effective Time. The closing of the transactions
-----------------------
contemplated hereby (the "Closing") shall take place as soon as practicable
after the satisfaction or waiver of each of the conditions set forth in Article
VI hereof or at such other time as the parties hereto agree (the "Closing
Date"). The Closing shall take place at the offices of Wilson Sonsini Goodrich
& Rosati, P.C., 650 Page Mill Road, Palo Alto, California, or at such other
location as the parties hereto agree. In connection with the Closing, the
parties hereto shall cause the Merger to be consummated by filing the
Certificate of Merger with the Secretary of State of the State of Delaware and
with the Recorder of the County in which the registered office of each of Target
and Merger Sub is located, in accordance with the relevant provisions of
Delaware Law (the time of such filing being the "Effective Time").
1.3 Effect of the 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 Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Target and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Target and
Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
1.4 Certificate of Incorporation: Bylaws.
------------------------------------
(a) At the Effective Time, the Certificate of Incorporation of
Target, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation;
provided, however, that Article I of the Certificate of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is SQA Holdings, Inc.."
(b) The Bylaws of Target, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
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1.5 Directors and Officers. At the Effective Time, the directors and
----------------------
officers of the Surviving Corporation shall be the directors and officers,
respectively, of Merger Sub, until their respective successors are duly elected
or appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
-----------------------
action on the part of Merger Sub, Target or the holders of any of the following
securities:
(a) Conversion of Target Common Stock. At the Effective Time,
---------------------------------
each share of Target Common Stock issued and outstanding immediately prior to
the Effective Time (other than any shares of Target Common Stock to be canceled
pursuant to Section 1.6(b)) will be canceled and extinguished and be converted
automatically into the right to receive 0.86 shares of Acquiror Common Stock
(the "Exchange Ratio").
(b) Cancellation of Target Common Stock Owned by Acquiror or
--------------------------------------------------------
Target. At the Effective Time, all shares of Target Commonthat are owned by
- ------
Stock Target as treasury stock and each share of Target Common Stock owned by
Acquiror or any direct or indirect wholly owned subsidiary of Acquiror or of
Target immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(c) Target Stock Option Plans. At the Effective Time, all
-------------------------
options to purchase Target Common Stock then outstanding under the Target 1990
Incentive and Nonqualified Stock Option Plan, the 1995 Stock Plan and the 1995
Non-Employee Director Stock Option Plan (collec tively, the "Target Stock Option
Plans") shall be assumed by Acquiror in accordance with Sec tion 5.11. At the
Effective Time, in accordance with the terms of Target's 1995 Employee Stock
Purchase Plan (the "Target ESPP"), all rights to purchase shares of Target
Common Stock under the Target ESPP shall be converted into rights to purchase a
number of shares of Acquiror Common Stock as provided in the Target ESPP (based
on the Exchange Ratio), all such rights shall be assumed by Acquiror, and the
offering period in effect under the Target ESPP immediately prior to the
Effective Time shall not be terminated early. At the Effective Time, each
warrant to purchase Target Common Stock shall be converted into warrants to
purchase a number of shares of Acquiror Common Stock, based on the Exchange
Ratio.
(d) Capital Stock of Merger Sub. At the Effective Time, each
---------------------------
share of Common Stock, $.001 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, $.001 par value, of the Surviving
Corporation. 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 to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Acquiror Common Stock or Target Common Stock), reorganization, recapitalization
or other like change with respect to Acquiror Common Stock or Target Common
Stock occurring after the date hereof and prior to the Effective Time.
-3-
<PAGE>
(f) Fractional Shares. No fraction of a share of Acquiror Common
-----------------
Stock will be issued, but in lieu thereof each holder of shares of Target Common
Stock who would otherwise be entitled to a fraction of a share of Acquiror
Common Stock (after aggregating all fractional shares of Acquiror Common Stock
to be received by such holder) shall receive from Acquiror an amount of cash
(rounded to the nearest whole cent) equal to the product of (i) such fraction,
multiplied by (ii) the average of the closing prices of a share of Acquiror
Common Stock for the ten most recent days that Acquiror Common Stock has traded
ending on the trading day immediately prior to the Effective Time, as reported
on the Nasdaq National Market.
1.7 Dissenting Shares.
-----------------
(a) The shares of any holder of Target Common Stock who has
demanded and perfected appraisal rights for such shares in accordance with
Delaware Law and who, as of the Effective Time, has not effectively withdrawn or
lost such appraisal rights ("Dissenting Shares"), shall not be converted into or
represent a right to receive Acquiror Common Stock pursuant to Sec tion 1.6, but
the holder thereof shall only be entitled to such rights as are granted by
Delaware Law.
(b) Notwithstanding the foregoing, if any holder of shares of
Target Common Stock who demands appraisal of such shares under Delaware Law
shall effectively withdraw the rights to appraisal, then, as of the later of the
Effective Time and the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive Acquiror
Common Stock, without interest thereon, upon surrender of the certificate
representing such shares.
(c) Target shall give Acquiror (i) prompt notice of any written
demands for appraisal of any shares of Target Common Stock, withdrawals of such
demands, and any other instruments served pursuant to Delaware Law and received
by Target which relate to any such demand for appraisal and (ii) the opportunity
to participate in all negotiations and proceedings which take place prior to the
Effective Time with respect to demands for appraisal under Delaware Law. Target
shall not, except with the prior written consent of Acquiror or as may be
required by applicable law, voluntarily make any payment with respect to any
demands for appraisal of Acquiror Common Stock or offer to settle or settle any
such demands.
(d) The above provisions of this Section 1.7 shall apply only to
the extent that appraisal rights are required pursuant to Delaware law, and
shall not be construed to diminish the parties' obligations under Section 5.17.
1.8 Surrender of Certificates.
-------------------------
(a) Exchange Agent. ChaseMellon Shareholder Services or such
--------------
other party as the Acquiror and Target may agree upon shall act as exchange
agent (the "Exchange Agent") in the Merger.
(b) Acquiror to Provide Common Stock and Cash. Promptly after
-----------------------------------------
the Effective Time, Acquiror shall make available to the Exchange Agent for
exchange in accordance with this
-4-
<PAGE>
Article 1, through such reasonable procedures as Acquiror may adopt, (i) the
shares of Acquiror Common Stock issuable pursuant to Section 1.6(a) in exchange
for shares of Target Common Stock outstanding immediately prior to the Effective
Time and (ii) cash in an amount sufficient to permit payment of cash in lieu of
fractional shares pursuant to Section 1.6(f).
(c) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Surviving Corporation shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding shares of Target Common Stock, whose
shares were converted into the right to receive shares of Acquiror Common Stock
(and cash in lieu of fractional shares) pursuant to Section 1.6, (i) a letter of
trans mittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon receipt of the
Certificates by the Exchange Agent, and shall be in such form and have such
other provisions as Acquiror may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of Acquiror Common Stock (and cash in lieu of fractional
shares). Upon surrender of a Certificate for cancella tion to the Exchange
Agent or to such other agent or agents as may be appointed by Acquiror, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing the
number of whole shares of Acquiror Common Stock and payment in lieu of
fractional shares which such holder has the right to receive pursuant to Section
1.6, and the Certificate so surrendered shall forthwith be canceled. Until so
surrendered, each outstanding Certificate that, prior to the Effective Time,
represented shares of Target Common Stock will be deemed from and after the
Effective Time, for all corporate purposes, subject to Section 1.8(d) below as
to the payment of dividends, to evidence the ownership of the number of full
shares of Acquiror Common Stock into which such shares of Target Common Stock
shall have been so converted and the right to receive an amount in cash in lieu
of the issuance of any fractional shares in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No
------------------------------------------------
dividends or other distributions with respect to Acquiror 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 Acquiror 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 Acquiror Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of any such dividends or other distributions with a record date after the
Effective Time theretofore payable (but for the provisions of this Section
1.8(d)) with respect to such shares of Acquiror Common Stock.
(e) Transfers of Ownership. If any certificate for shares of
----------------------
Acquiror Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Acquiror or any agent designated by
it any transfer or other taxes required by reason of the issuance of a
certificate for shares of Acquiror Common Stock in any name
-5-
<PAGE>
other than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of Acquiror or any agent designated by it that
such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in
------------
this Section 1.8, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to any person for any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
1.9 No Further Ownership Rights in Target Common Stock. All shares
--------------------------------------------------
of Acquiror Common Stock issued upon the surrender for exchange of shares of
Target Common Stock in accordance with the terms hereof (including any cash paid
in lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Common Stock, and
there shall be no further registration of transfers on the records of the
Surviving Corpora tion of shares of Target Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article 1.
1.10 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of
Acquiror Common Stock (and cash in lieu of fractional shares) as may be required
pursuant to Section 1.6; provided, however, that Acquiror may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Acquiror, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.11 Tax and Accounting Consequences. It is intended by the parties
-------------------------------
hereto that the Merger shall (i) constitute a reorganization within the meaning
of Section 368(a) of the Code and (ii) qualify for accounting treatment as a
pooling of interests.
1.12 Taking of Necessary Action; Further Action. 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 assets, property, rights, privileges,
powers and franchises of Target and Merger Sub, the officers and directors of
Target and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action, so long as such action is not inconsistent with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
----------------------------------------
In this Agreement, any reference to any event, change, condition or
effect being "material" with respect to any entity or group of entities means
any material event, change, condition or effect
-6-
<PAGE>
related to the financial condition, assets (including intangible assets),
business or results of operations of such entity or group of entities. In this
Agreement, any reference to a "Material Adverse Effect" with respect to any
entity or group of entities means any event, change or effect that is materially
adverse to the financial condition, assets (including intangible assets),
business or results of operations of such entity and its subsidiaries, taken as
a whole; provided, however, that a "Material Adverse Effect" with respect to
-------- -------
Target shall not include any adverse effect on the revenues or gross margins of
Target (or the direct consequences thereof) following the date of this Agreement
which is attributable to a delay of, reduction in or cancellation or change in
the terms of product orders by customers of Target, where Target sustains the
burden of reasonably demonstrating that any such delay, reduction, cancellation
or change is directly attributable to the transactions contemplated by this
Agreement.
In this Agreement, any reference to a party's "knowledge" means such
party's actual knowledge after reasonable inquiry of officers and directors of
such party.
Except as disclosed in a document of even date herewith and delivered
by Target to Acquiror prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Target
Disclosure Letter"), Target represents and warrants to Acquiror and Merger Sub
as follows:
2.1 Organization; Standing and Power. Each of Target and SQA
--------------------------------
(Europe) Limited and SQA Securities Corporation, being Target's only two
subsidiaries, is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization. Each of Target and
its subsidiaries has the corporate power to own its properties and to carry on
its business as now being conducted and as proposed to be conducted and is duly
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified and in good standing would have a Material
Adverse Effect on Target. Target has delivered a true and correct copy of the
Amended and Restated Certificate of Incorporation, as amended (the "Certificate
of Incorporation"), and Bylaws, as amended, or other charter documents, as
applicable, of Target and each of its subsidiaries, each as amended to-date, to
legal counsel for Acquiror. Neither Target nor any of its subsidiaries is in
violation of any of the provisions of its Certificate of Incorporation or Bylaws
or equivalent organiza tional documents. Target is the owner of all
outstanding shares of capital stock of each of its two subsidiaries and all such
shares are duly authorized, validly issued, fully paid and nonassessable. All
of the outstanding shares of capital stock of each such subsidiary are owned by
Target free and clear of all liens, charges, claims or encumbrances or rights of
others. There are no outstanding subscrip tions, options, warrants, puts,
calls, rights, exchangeable or convertible securities or other commit ments or
agreements of any character relating to the issued or unissued capital stock or
other securities of any such subsidiary, or otherwise obligating Target or any
such subsidiary to issue, transfer, sell, purchase, redeem or otherwise acquire
any such securities. Except as disclosed in the Target SEC Documents (as
defined in Section 2.4), Target does not directly or indirectly own any equity
or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
-7-
<PAGE>
2.2 Capital Structure. The authorized capital stock of Target
-----------------
consists of 18,000,000 shares of Common Stock, $.01 par value, and 3,000,000
shares of Preferred Stock, $.01 par value, of which there were issued and
outstanding as of the close of business on November 11, 1996, 8,088,644 shares
of Common Stock and no shares of Preferred Stock. Since the close of business
on November 11, 1996, no shares of Target capital stock have been issued except
pursuant to the exercise of options outstanding as of November 11, 1996 under
the Target Stock Option Plans. As of the close of business on November 12,
1996, there were no other outstanding commitments to issue any shares of capital
stock or voting securities of Target other than pursuant to the Option
Agreement, the exercise of options outstanding as of such date under the Target
Stock Option Plans, pursuant to the Target ESPP or pursuant to the Warrants (as
defined below). All outstanding shares of Target Common Stock are duly
authorized, validly issued, fully paid and non-assessable and are not subject to
preemptive rights or rights of first refusal created by statute, the Certificate
of Incorporation or Bylaws of Target or any agreement to which Target is a party
or by which it is bound. As of the close of business on November 12, 1996,
Target has reserved (i) 1,426,687 shares of Common Stock for issuance to
employees, consultants and directors pursuant to the Target Stock Option Plans,
net of exercises, under which, as of the close of business on November 11, 1996,
options were outstanding for an aggregate of 1,304,697 shares, and no shares
were subject to outstanding stock purchase rights, (ii) 285,000 shares of Common
Stock for issuance to employees pursuant to the Target ESPP, of which, as of the
close of business on November 11, 1996, 6,898 shares had been issued, and (iii)
27,852 shares of Common Stock for issuance upon the exercise of warrants to
purchase Target Common Stock (the "Warrants") of which no shares have been
issued. When issued in accordance with the terms of the Target Stock Option
Plans, the Target ESPP and the Warrants, the Target Common Stock so issued will
be duly authorized, validly issued, fully paid and non-assessable and will not
be subject to preemptive rights or right of first refusal created by statute,
the Certificate of Incorporation or Bylaws of Target or any agreement to which
Target is a party or by which it is bound. Except as expressly permitted by the
terms of this Agreement, since November 11, 1996, Target has not (i) issued or
granted additional options under the Target Stock Option Plans, or (ii) accepted
contributions to or enrollments in the Target ESPP. Except for the rights
created pursuant to this Agreement, the Option Agreement, the Target Stock
Option Plans, the Target ESPP and the Warrants, there are no other options,
warrants, calls, rights, commitments or agreements of any character to which
Target is a party or by which it is bound obligating Target to issue, deliver,
sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased
or redeemed, any shares of capital stock of Target or obligating Target to
grant, extend, accelerate the vesting of, change the price of, or otherwise
amend or enter into any such option, warrant, call, right, commitment or
agreement. There are no contracts, commitments or agreements relating to
voting, purchase or sale of Target's capital stock (i) between or among Target
and any of its stockholders and (ii) to Target's knowledge, between or among any
of Target's stockholders, except for the voting agreement described in Section
5.19. Except as set forth in the Target Disclosure Letter, there are no
registration rights with respect to any equity security of any class of Target
or with respect to any equity security of any class of any of its subsidiaries.
The terms of the Target Stock Option Plans permit the assumption or substitution
of options to purchase Acquiror Common Stock as provided in this Agreement,
without the consent or approval of the holders of such securities, the Target
stockholders, or otherwise and without any acceleration of the exercise schedule
or vesting provisions in effect for those options, other than as disclosed in
the Target Disclosure Letter. The current
-8-
<PAGE>
"Purchase Period" (as defined in the Target ESPP) commenced under the Target
ESPP on July 1, 1996 and will end as provided in Section 5.11(b) of this
Agreement, and except for the purchase rights granted on such commencement date
to participants in the current Purchase Period, there are no other purchase
rights or options outstanding under the Target ESPP. True and complete copies
of all agreements and instruments relating to or issued under the Target Stock
Option Plans. Target ESPP have been made available to legal counsel for
Acquiror and such agreements and instruments have not been amended, modified or
supplemented, and there are no agreements to amend, modify or supplement such
agreements or instruments in any case from the form made available to Acquiror.
Schedule 2.2 of the Disclosure Letter lists the name of each holder of stock
- ------------
options and warrants, the number of shares of Common Stock subject to such
options and warrants, and the exercise price for such options and warrants. Each
of the options listed on Schedule 2.2 of the Disclosure Letter has a term of
------------
ten years.
2.3 Authority.
---------
(a) Target has all requisite corporate power and authority to enter
into this Agreement and the Option Agreement and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Option Agreement and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Target, subject only to the approval of the Merger by Target's
stockholders as contemplated by Section 6.1(a) and the filing and recordation of
the Certificate of Merger pursuant to Delaware Law. Each of this Agreement and
the Option Agreement has been duly executed and delivered by Target and
constitutes the valid and binding obligation of Target enforceable against
Target in accordance with its terms, except as enforceability may be limited by
bankruptcy and other laws affecting the rights and remedies of creditors
generally and, general principles of equity. The execution and delivery of this
Agreement and the Option Agreement by Target does not, and the consummation of
the transactions contemplated hereby and thereby will not (i) conflict with, or
result in any violation of any provision of the Certificate of Incorporation or
Bylaws of Target or any of its subsidiaries, as amended, or (ii) subject to
obtaining the approval of Target's stockholders of the Merger as contemplated in
Section 5.2 and compliance with the requirements set forth in Section 2.3(b)
below, result in any breach of or constitute a default under (with or without
notice or lapse of time, or both) or give rise to a right of termination,
cancellation or acceleration of any material obligation or loss of any material
benefit under any material mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Target
or any of its subsidiaries or any of their properties or assets, except where
such conflict, violation, default, termination, cancellation or acceleration
with respect to the foregoing provisions of (ii) would not have had and would
not reasonably be expected to have a Material Adverse Effect on Target.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other federal, state, local, foreign or other governmental authority or
instrumentality ("Governmental Entity") is required by or, to the knowledge of
Target, with respect to, Target or any of its subsidiaries in connection with
the execution and delivery of this Agreement, the Option Agreement, or the
consummation of the
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<PAGE>
transactions contemplated hereby and thereby, except for (i) the filing of the
Certificate of Merger as provided in Section 1.2, (ii) the filing with the
Securities and Exchange Commission (the "SEC") and the National Association of
Securities Dealers, Inc. (the "NASD") of the Proxy Statement (as defined in
Section 2.22) (iii) the filing of a Current Report on Form 8-K with the SEC,
(iv) relating to the Target Stockholders Meeting (as defined in Section 2.22),
(iv) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities
laws and the securities laws of any foreign country; (v) such filings as may be
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended ("HSR") or the competition regulations of any other foreign governmental
authority; and (vi) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Target and would not prevent, or materially alter or delay any of the
transactions contemplated by this Agreement or the Option Agreement.
2.4 SEC Documents: Financial Statements. Target has filed all forms,
-----------------------------------
reports, documents and other items required to be filed with the SEC since
October 25, 1995, and has made available to Acquiror such forms, reports,
documents and items in the form filed with the SEC, and, prior to the Effective
Time, will have furnished to Acquiror copies of any additional forms, reports,
documents and other items filed with the SEC prior to the Effective Time. All
such required forms, reports, document and other items (including those that
Target may file subsequent to the date hereof) are referred to herein
collectively as the "Target SEC Documents." In addition, Target has made
available to Acquiror all exhibits to the Target SEC Documents filed prior to
the date hereof, and will promptly make available to Acquiror all exhibits to
any additional Target SEC Documents filed prior to the Effective Time. All
documents required to be filed as exhibits to the Target SEC Documents have been
so filed, and all material contracts so filed as exhibits are in full force and
effect, except those which have expired in accordance with their terms, and
neither Target nor any of its subsidiaries is in default thereunder, except
where any such default has not resulted in and is not reasonably expected to
result in any Material Adverse Effect on Target. As of their respective filing
dates, the Target SEC Documents complied in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Securities Act of 1933, as amended (the "Securities Act"), and
none of the Target SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading, except to the extent corrected by a
subsequently filed Target SEC Document. The financial statements of Target,
including the notes thereto, included in the Target SEC Docu ments (the "Target
Financial Statements") were complete and correct in all material respects as of
their respective dates, complied as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto as of their respective dates, and have been
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a basis consistent throughout the periods indicated and consistent
with each other (except as may be indicated in the notes thereto or, in the case
of unaudited statements included in Quarterly Reports on Form 10-Q, as permitted
by Form 10-Q of the SEC). The Target Financial Statements fairly present the
consolidated financial condition and operating results of Target and its
subsidiaries at the dates and during the periods indicated therein (subject, in
the case of unaudited statements, to normal, recurring period-end adjustments)
in all material respects. There has been no
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<PAGE>
material change in Target accounting policies except as described in the notes
to the Target Financial Statements.
2.5 Absence of Certain Changes. Since September 30, 1996 (the "Target
--------------------------
Balance Sheet Date"), Target has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that would result in a
Material Adverse Effect to Target; (ii) any acquisition, sale or transfer of any
material asset of Target or any of its subsidiaries other than in the ordinary
course of business and consistent with past practice; (iii) any material change
in accounting methods or practices (including any change in depreciation or
amortization policies or rates) by Target or any material revaluation by Target
of any of its or any of its subsidiaries' assets, except as required by
concurrent changes in GAAP; (iv) any declaration, setting aside, or payment of a
dividend or other distribution with respect to the shares of Target, or any
direct or indirect redemption, purchase or other acquisition by Target of any of
its shares of capital stock; (v) any material contract entered into by Target or
any of its subsidiaries, other than in the ordinary course of business and as
provided to Acquiror, or any material amendment or termination of, or default
under, any material contract to which Target or any of its subsidiaries is a
party or by which it is bound which would result in a Material Adverse Effect on
Target; or (vi) any negotiation or agreement by Target or any of its
subsidiaries to do any of the things described in the preceding clauses (i)
through (v) (other than negotiations with Acquiror and its representatives
regarding the transactions contemplated by this Agreement).
2.6 Absence of Undisclosed Liabilities. Target has no material
----------------------------------
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
unaudited balance sheet for the quarter ended September 30, 1996, which has been
provided to Acquiror (the "Target Balance Sheet"), (ii) those not required to be
set forth in the Target Balance Sheet under GAAP, (iii) those incurred in the
ordinary course of business since the Target Balance Sheet Date and consistent
with past practice; and (iv) those incurred in connection with the execution of
this Agreement.
2.7 Litigation. There is no private or governmental action, suit,
----------
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Target or any of its
subsidiaries, threatened against Target or any of its subsidiaries or any of
their respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, would have a
Material Adverse Effect on Target. There is no judgment, decree or order against
Target or any of its subsidiaries, or, to the knowledge of Target and its
subsidiaries, any of their respective directors or officers (in their capacities
as such), that would prevent, enjoin, materially alter or materially delay any
of the transactions contemplated by this Agreement, or that would have a
Material Adverse Effect on Target.
2.8 Restrictions on Business Activities. There is no agreement (other
-----------------------------------
than any exclusive distribution agreements identified in Schedule 2.8 of the
------------
Disclosure Letter), judgment, injunction, order or decree binding upon Target or
any of its subsidiaries which has the effect of prohibiting or materially
impairing any current or future business practice of Target or any of its
subsidiaries, any
-11-
<PAGE>
acquisition of property by Target or any of its subsidiaries or the conduct of
business by Target or any of its subsidiaries as currently conducted by Target
or any of its subsidiaries.
2.9 Compliance; Governmental Authorization.
--------------------------------------
(a) Neither Target nor any of its subsidiaries is in conflict with, or
in default or violation of any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Target or any of its subsidiaries is a party or by which Target or any
of its subsidiaries or its or any of their respective properties is bound or
affected, except for any conflicts, defaults or violations which would have a
Material Adverse Effect on Target. No investigation or review by any
governmental or regulatory body or authority is pending or threatened against
Target or its subsidiaries, nor has any governmental or regulatory body or
authority indicated an intention to conduct the same, other than, in each such
case, those the outcome of which would not have a Material Adverse Effect on
Target.
(b) Target and each of its subsidiaries have obtained each federal,
state, county, local or foreign governmental consent, license, permit, grant, or
other authorization of a Govern mental Entity which are material to the
operations of the business of Target and its subsidiaries taken as a whole
(collectively called "Target Authorizations"), and all of such Target
Authorizations are in full force and effect, except where the failure to obtain
or have any of such Target Authorizations would not have a Material Adverse
Effect on Target.
2.10 Title to Property. Target and its subsidiaries have good and
-----------------
valid title to, or in the case of leased properties and assets, valid leasehold
interests in, all of its material tangible properties and assets, real, personal
and mixed, used in its business, free and clear of all mortgages, liens,
pledges, charges or encumbrances of any kind or character, except (i) for liens
for taxes not yet due and payable, (ii) for such imperfections of title, liens
and easements as do not and will not materially detract from or interfere with
the use of the properties subject thereto or affected thereby, or otherwise
materially impair business operations involving such properties, (iii) as
reflected on the Target Balance Sheet or (iv) for those which would not have a
Material Adverse Effect on Target. To Target's knowledge, the plants, property
and equipment of Target and its subsidiaries that are used in the operations of
their businesses are in good operating condition and repair in all material
respects. All properties used in the operations of Target and its subsidiaries
are reflected in the Target Balance Sheet to the extent GAAP requires the same
to be reflected. Schedule 2.10 of the Disclosure Letter identifies each
-------------
material parcel of real property owned or leased by Target or any of its
subsidiaries.
2.11 Intellectual Property.
---------------------
(a) Target and its subsidiaries own, or are licensed or otherwise
possess legally enforceable rights to use all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, technology, know-how,
trade secrets, inventory, ideas, algorithms, processes, computer software
programs or applications (in both source code and object code form), and
tangible or intangible proprietary information or material ("Intellectual
Property") that are used in the business
-12-
<PAGE>
of Target and its subsidiaries as currently conducted or as proposed to be
conducted by Target and its subsidiaries, except to the extent that the failure
to have such rights have not had and would not reasonably be expected to have a
Material Adverse Effect on Target.
(b) Schedule 2.11 of the Disclosure Letter lists (i) all patents and
-------------
patent applications and all registered and unregistered trademarks, trade names
and service marks, registered and unregistered copyrights, and maskworks, which
Target considers to be material to its business and included in the Intellectual
Property, including the jurisdictions in which each such Intellectual Property
right has been issued or registered or in which any application for such
issuance and registration has been filed, (ii) all material licenses,
sublicenses and other agreements as to which Target is a party and pursuant to
which any person is authorized to use any Intellectual Property (excluding
object-code end-user licenses granted to end-users in the ordinary course of
business), and (iii) all material licenses, sublicenses and other agreements as
to which Target is a party and pursuant to which Target is authorized to use any
third party patents, trademarks or copyrights, including software ("Third Party
Intellectual Property Rights") which are incorporated in, are, or form a part of
any Target product that is material to its business.
(c) There is no unauthorized use, disclosure, infringement or
misappropriation of any Intellectual Property rights of Target or any of its
subsidiaries, any trade secret material to Target or any of its subsidiaries, or
any Intellectual Property right of any third party to the extent licensed by or
through Target or any of its subsidiaries, by any third party, including any
employee or former employee of Target or any of its subsidiaries. Neither
Target nor any of its subsidiaries has entered into any agreement to indemnify
any other person against any charge of infringement of any Intellectual
Property, other than indemnification provisions contained in purchase orders or
customer agreements arising in the ordinary course of business.
(d) Target is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Intellectual Property or Third Party Intellectual Property Rights, the
breach of which would have a Material Adverse Effect on Target.
(e) All patents, registered trademarks, service marks and copyrights
held by Target are valid and subsisting. Target (i) is not a party to any suit,
action or proceeding which involves a claim of infringement of any patents,
trademarks, service marks, copyrights or violation of any trade secret or other
proprietary right of any third party and (ii) has not brought any action, suit
or proceeding for infringement of Intellectual Property or breach of any license
or agreement involving Intellectual Property against any third party. The
manufacture, marketing, licensing or sale of Target's products does not infringe
any patent, trademark, service mark, copyright, trade secret or other
proprietary right of any third party, except where such infringement would not
have a Material Adverse Effect on Target.
(f) Target has a policy, which it has consistently enforced, to secure
valid written assignments from all consultants and employees who contribute or
have contributed to the creation or
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<PAGE>
development of Intellectual Property of the rights to such contributions that
Target does not already own by operation of law.
(g) Target believes it has taken all reasonable and appropriate steps
to protect and preserve the confidentiality of all Intellectual Property not
otherwise protected by patents, or patent applications or copyright
("Confidential Information"). To Target's knowledge, all use, disclosure or
appropriation of Confidential Information owned by Target by or to a third party
has been pursuant to the terms of a written agreement between Target and such
third party. To Target's knowledge, all use, disclosure or appropriation of
Confidential Information not owned by Target has been pursuant to the terms of a
written agreement between Target and the owner of such Confidential Information,
or is otherwise lawful.
2.12 Environmental Matters. Except in all cases as, in the aggregate,
---------------------
have not had and would not have a Material Adverse Effect on Target, Target and
each of its subsidiaries (i) have obtained all applicable permits, licenses and
other authorizations that are required under Federal, state or local laws
relating to pollution or protection of the environment, including laws relating
to emissions, discharges, releases or threatened releases of pollutants,
contaminants or hazardous or toxic materials or wastes into ambient air, surface
water, ground water or land or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants or hazardous or toxic materials or wastes
by Target or its subsidiaries (or their respective agents); (ii) are in
compliance with all material terms and conditions of such required permits,
licenses and authorizations, and also are in compliance with all other material
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in such laws or contained in any
regulation, code, plan, order, decree, judgment, notice or demand letter issued,
entered, promulgated or approved thereunder; (iii) as of the date hereof, are
not aware of and have not received notice of any event, condition, circumstance,
activity, practice, incident, action or plan that is reasonably likely to
interfere with or prevent continued compliance or that would give rise to any
common law or statutory liability, or otherwise form the basis of any claim,
action, suit or proceeding, based on or resulting from Target's or any of its
subsidiaries (or any of their respective agents) manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling, or the
emission, discharge or release into the environment of any pollutant,
contaminant or hazardous or toxic material or waste; (iv) has not disposed of
any pollutants, contaminants or hazardous or toxic materials or wastes into the
soil or groundwater at any properties owned or leased by Target, either now or
in the past, or at any other property that would result in any assessment or
remedial action; and (v) have taken all actions necessary under applicable
requirements of Federal, state or local laws, rules or regulations to register
any products or materials required to be registered by Target or its
subsidiaries (or any of their respective agents) thereunder.
2.13 Taxes. Except as disclosed on Schedule 2.13 of the Disclosure
----- -------------
Letter and except to the extent the failure to do so would not have a Material
Adverse Effect, Target and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which Target or any of
its subsidiaries is or has been a member have timely filed all Tax Returns
required to be filed by it, have paid all Taxes shown thereon to be due (or
Target has paid on its behalf) and have provided adequate accruals in accordance
with GAAP in its financial statements for any unpaid Taxes
-14-
<PAGE>
that are imposed on Target or its subsidiaries. Except as disclosed on Schedule
--------
2.13 of the Disclosure Letter, the most recent financial statements contained in
- ----
the Target SEC Documents reflect an adequate reserve, in accordance with GAAP,
for all Taxes payable by Target and its subsidiaries through the date of such
financial statements. Except as disclosed in the Target Disclosure Letter, (i)
no material claim for Taxes has become a lien against the property of Target or
any of its subsidiaries or is being asserted against Target or any of its
subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit
of any Tax Return of Target or any of its subsidiaries is being conducted by a
Tax authority, (iii) no extension of the statute of limitations on the
assessment of any Taxes has been granted by Target or any of its subsidiaries
and is currently in effect, and (iv) there is no agreement, contract or
arrangement to which Target or any of its subsidiaries is a party that may
result in the payment of any amount that would not be deductible by reason of
Sections 280G or 404 of the Code. Target has not been and will not be required
to include any material adjustment in Taxable income for any Tax period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions, events or
accounting methods employed prior to the Merger. Neither Target nor any of its
subsidiaries is a party to any tax sharing or tax allocation agreement nor does
Target or any of its subsidiaries owe any amount under any such agreement. For
purposes of this Agreement, the following terms have the following meanings:
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any net
income, alternative or add-on minimum tax, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
.(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any obligation to indemnify any other person. As used
herein, "Tax Return" shall mean any return, statement, report or form
(including, without limitation,) estimated Tax returns and reports, withholding
Tax returns and reports and information reports and returns required to be filed
with respect to Taxes. To the knowledge of Target, neither Target nor any of
its subsidiaries is a party to any Tax-exemption or other Tax-sparing agreement
or order of any foreign government.
2.14 Employee Benefit Plans.
----------------------
(a) Schedule 2.14 of the Disclosure Letter lists, with respect to
-------------
Target, any subsidiary of Target and any trade or business (whether or not
incorporated) which is treated as a single employer with Target (an "ERISA
Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code,
(i) all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) whether or not
such plans are subject to ERISA, (ii) each loan to a non-officer employee in
excess of $50,000, loans to officers and directors and any stock option, stock
purchase, phantom stock, stock appreciation right, (iii) all supplemental
retirement, severance, sabbatical, medical, dental, vision care, disability,
employee relocation, cafeteria benefit (Code Section 125) or dependent care
(Code Section 129), life insurance or accident
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<PAGE>
insurance, bonus, pension, profit sharing, savings, deferred compensation or
incentive plans, programs or arrangements which are not employee benefit plans
as otherwise covered under clause (i) above, (iv) other fringe or employee
benefit plans, programs or arrangements that apply to senior management or
overseas employees of Target and that do not generally apply to all employees,
and (v) any current or former employment or executive compensation or severance
agreements (other than pursuant to the Target Stock Option Plans), written or
otherwise, as to which unsatisfied or potential obligations of Target of greater
than $100,000 exist for the benefit of, or relating to, any present or former
employee, consultant or director of Target (together, the "Target Employee
Plans").
(b) Target has furnished to Acquiror a copy of each of the Target
Employee Plans and related plan documents (including trust documents, insurance
policies or contracts) and has, with respect to each Target Employee Plan which
is subject to ERISA reporting requirements, provided copies of the Form 5500
reports filed for the last three plan years. Any Target Employee Plan intended
to be qualified under Section 401(a) of the Code has either obtained from the
Internal Revenue Service a favorable determination letter as to its qualified
status under the Code, including all amendments to the Code effected by the Tax
Reform Act of 1986 and subsequent legislation, or has applied to the Internal
Revenue Service for such a determination letter prior to the expiration of the
requisite period under applicable Treasury Regulations or Internal Revenue
Service pronounce ments in which to apply for such determination letter and to
make any amendments necessary to obtain a favorable determination. Target has
also furnished Acquiror with the most recent Internal Revenue Service
determination letter issued with respect to each such Target Employee Plan, and
nothing has occurred since the issuance of each such letter which could
reasonably be expected to cause the loss of the tax-qualified status of any
Target Employee Plan subject to Code Section 401(a).
(c) (i) Other than continued health care coverage required under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"),
none of the Target Employee Plans promises or provides retiree medical or other
retiree welfare benefits to any person; (ii) there has been no "prohibited
transaction," as such term is defined in Section 406 of ERISA and Sec tion 4975
of the Code, with respect to any Target Employee Plan, which could reasonably be
expected to have, in the aggregate, a Material Adverse Effect; (iii) each Target
Employee Plan has been administered in accordance with its terms and in
compliance with the requirements prescribed by any and all statutes, rules and
regulations (including ERISA and the Code), except as would not have, in the
aggregate, a Material Adverse Effect, and Target and each subsidiary or ERISA
Affiliate have performed all obligations required to be performed by them under,
are not in any respect in default under or violation of, and have no knowledge
of any default or violation by any other party to, any of the Target Employee
Plans, which default or violation could reasonably be expected to have a
Material Adverse Effect on Target; (iv) neither Target nor any subsidiary or
ERISA Affiliate is subject to any liability or penalty under Sections 4976
through 4980 of the Code or Title I of ERISA with respect to any of the Target
Employee Plans and which individually or in the aggregate could reasonably be
expected to have a Material Adverse Effect on Target; (v) all material
contributions required to be made by Target or any subsidiary or ERISA Affiliate
to any Target Employee Plan have been made on or before their due dates and a
reasonable amount has been accrued for contribu tions to each Target Employee
Plan for the current plan years; (vi) with respect to each Target
-16-
<PAGE>
Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the thirty (30) day notice requirement has
been waived under the regulations to Section 4043 of ERISA) nor any event
described in Section 4062, 4063 or 4041 or ERISA has occurred; and (vii) no
Target Employee Plan is covered by, and neither Target nor any subsidiary or
ERISA Affiliate has incurred or expects to incur any liability under Title IV of
ERISA or Section 412 of the Code. With respect to each Target Employee Plan
subject to ERISA as either an employee pension plan within the meaning of
Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of
Section 3(l) of ERISA, Target has prepared in good faith and timely filed all
requisite governmental reports (which were true and correct as of the date
filed) and, to Target's knowledge, Target has properly and timely filed and
distributed or posted all notices and reports to employees required to be filed,
distributed or posted with respect to each such Target Employee Plan, except in
each case to the extent that such failure to perform such action would not, in
the aggregate, have a Material Adverse Effect on Target. No suit,
administrative proceeding, action or other litigation has been brought, or to
the best knowledge of Target is threatened, against or with respect to any such
Target Employee Plan, including any audit or inquiry by the IRS or United States
Department of Labor. Neither Target nor any Target subsidiary or other ERISA
Affiliate is a party to, or has made any contribution to or otherwise incurred
any obligation under, any "multiemployer plan" as defined in Section 3(37) of
ERISA.
(d) With respect to each Target Employee Plan, Target and each of its
United States subsidiaries have complied with (i) the applicable health care
continuation and notice provi sions of COBRA and the proposed regulations
thereunder and (ii) the applicable requirements of the Family Leave Act of 1993
and the regulations thereunder, except to the extent that such failure to comply
would not, in the aggregate, have a Material Adverse Effect on Target.
(e) Except as disclosed in the Target Disclosure Letter the
consummation of the transactions contemplated by this Agreement will not (i)
entitle any current or former employee or other service provider of Target, any
Target subsidiary or any other ERISA Affiliate to severance benefits or any
other payment, except as expressly provided in this Agreement, or (ii)
accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or service provider.
(f) There has been no amendment to, written interpretation or
announcement (whether or not written) by Target, any Target subsidiary or other
ERISA Affiliate relating to, or change in participation or coverage under, any
Target Employee Plan which would materially increase the expense of maintaining
such Plan above the level of expense incurred with respect to that Plan for the
most recent fiscal year included in Target's financial statements.
2.15 Certain Agreements Affected by the Merger. Except as set forth
-----------------------------------------
in Schedule 2.15 or pursuant to this Agreement, neither the execution and
-------------
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of Target or any of its subsidiaries, (ii) materially
increase
-17-
<PAGE>
any benefits otherwise payable by Target or (iii) result in the acceleration of
the time of payment or vesting of any such benefits.
2.16 Employee Matters. Target and each of its subsidiaries are in
----------------
compliance in all respects with all currently applicable laws and regulations
respecting employment, discrimination in employ ment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices, and is not engaged in any unfair labor practice, except where the
failure to be in compliance or the engagement in such unfair labor practices
would not have a Material Adverse Effect on Target. There are no pending claims
against Target or any of its subsidiaries under any workers compensation plan or
policy or for long term disability which would have a Material Adverse Effect on
Target. Neither Target nor any of its subsidiaries has any obligations under
COBRA with respect to any former employees or qualifying beneficiaries
thereunder, except for obligations that would not have a Material Adverse Effect
on Target. There are no controversies pending or, to the knowledge of Target or
any of its subsidiaries, threatened, between Target or any of. its subsidiaries
and any of their respective employees, which controversies would have a Material
Adverse Effect on Target. Neither Target nor any of its subsidiaries is a party
to any collective bargaining agreement or other labor union contract nor does
Target nor any of its subsidiaries know of any activities or proceedings of any
labor union to organize any such employees.
2.17 Interested Party Transactions. Except as disclosed in the
-----------------------------
Target SEC Documents, neither Target nor any of its subsidiaries is indebted to
any director, officer, employee or agent of Target or any of its subsidiaries
(except for amounts due as normal salaries and bonuses and in reimbursement of
ordinary expenses), and no such person is indebted to Target or any of its
subsidiaries, and there have been no other transactions of the type required to
be disclosed pursuant to Items 402 and 404 of Regulation S-K under the
Securities Act and the Exchange Act since June 30, 1996.
2.18 Insurance. Target and each of its subsidiaries have policies of
---------
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of Target and its
subsidiaries. There is no material claim pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and Target and its subsidiaries are
otherwise in compliance in all material respects with the terms of such policies
and bonds. Target has no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
2.19 Compliance With Laws. Each of Target and its subsidiaries has
--------------------
complied with, is not in violation of, and has not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
would not have a Material Adverse Effect on Target.
2.20 Pooling of interests. To the knowledge of Target, based on
--------------------
consultation with its independent accountants, neither Target, nor any of its
subsidiaries, nor any of their respective
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<PAGE>
directors, officers or stockholders has taken any action that would prevent
Acquiror from accounting for the Merger as a pooling of interests.
2.21 Brokers' and Finders' Fees. Except for payment obligations to
--------------------------
Robertson Stephens & Company disclosed to Acquiror, Target has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or investment bankers' fees or any similar charges
in connection with this Agreement or any transaction contemplated hereby.
2.22 Registration Statement; Proxy Statement/Prospectus. The
--------------------------------------------------
information supplied by Target 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 Acquiror 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 light of the circumstances under which
they were made, not misleading. The information supplied by Target for
inclusion in the proxy statement/prospectus to be sent to the stockholders of
Target in connection with the meeting of Target's stockholders to consider the
Merger (the "Target Stockholders Meeting") and to the stockholders of Acquiror
in connection with the meeting of Acquiror's stockholders to consider the Merger
(the "Acquiror Stockholders Meeting") (such proxy statement/prospectus as
amended or supplemented is referred to herein as the "Proxy Statement") shall
not, on the date the Proxy Statement is first mailed to Target's stockholders
and Acquiror's stockholders, at the time of the Target Stockholders Meeting, at
the time of the Acquiror 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 Target Stockholders Meeting or the Acquiror
Stockholder Meeting which has become false or misleading. If at any time prior
to the Effective Time any event or information should be discovered by Target
which should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Target shall promptly inform Acquiror and
Merger Sub. Notwithstanding the foregoing, Target makes no representation,
warranty or covenant with respect to any information supplied by Acquiror or
Merger Sub which is contained in any of the foregoing documents.
2.23 Opinion of Financial Advisor. Target has been advised orally
----------------------------
(to be subsequently confirmed in writing) by its financial advisor, Robertson,
Stephens & Company, that in such advisor's opinion, as of the date hereof, the
consideration to be received by the stockholders of Target is fair, from a
financial point of view, to the stockholders of Target.
2.24 Vote Required. The affirmative vote of the holders of a
-------------
majority of the shares of Target Common Stock outstanding on the record date set
for the Target Stockholders Meeting is the only vote of the holders of any of
Target's capital stock necessary to approve this Agreement and the transactions
contemplated hereby.
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<PAGE>
2.25 Board Approval. The Board of Directors of Target has, prior to
--------------
the date hereof, unanimously (i) approved this Agreement and the Merger, (ii)
determined that the Merger is in the best interests of the stockholders of
Target and is on terms that are fair to such stockholders and (iii) determined
to recommend that the stockholders of Target approve this Agreement and
consummation of the Merger.
2.26 Section 203 of the DGCL Not Applicable. The Board of Directors
--------------------------------------
of Target has taken all actions so that the restrictions contained in Section
203 of the Delaware Law applicable to a "business combination" (as defined in
Section 203) will not apply to the execution, delivery or performance of this
Agreement or the Option Agreement or the consummation of the Merger or the other
transactions contemplated by this Agreement or by the Option Agreement.
2.27 Minute Books. The minute books of Target and its subsidiaries
------------
made available to legal counsel for Acquiror contain a complete and accurate
summary of all meetings of directors and stockholders or actions by written
consent since the time of incorporation of Target and the respective
subsidiaries through the date of this Agreement, and reflect all transactions
referred to in such minutes accurately in all material respects.
2.28 Representations Complete. None of the representations or
------------------------
warranties made by Target herein or in any Letter hereto, including the Target
Disclosure Letter, or certificate furnished by Target pursuant to this
Agreement, or the Target SEC Documents, when all such documents are read
together in their entirety, contains or will contain at the Effective Time any
untrue statement of a material fact, or omits or will omit at the Effective Time
to state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
---------------------------------------------------------
Except as disclosed in a document of even date herewith and delivered
by Acquiror to Target prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Acquiror
Disclosure Letter"), Acquiror and Merger Sub represent and warrant to Target as
follows:
3.1 Organization, Standing and Power. Each of Acquiror and its
--------------------------------
subsidiaries, including Merger Sub, is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of Acquiror and its subsidiaries has the corporate power to
own its properties and to carry on its business as now being conducted and as
proposed to be conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified and in
good standing would have a Material Adverse Effect on Acquiror. Acquiror has
delivered a true and correct copy of the Certificate of Incorporation and Bylaws
or other charter documents, as applicable, of Acquiror to legal counsel for
Target. Neither Acquiror nor any of its subsidiaries is in violation of any of
the provisions of its Certificate of Incorporation or Bylaws or
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<PAGE>
equivalent organizational documents. Acquiror is the owner of all outstanding
shares of capital stock of each of its subsidiaries and all such shares are duly
authorized, validly issued, fully paid and nonassessable. All of the
outstanding shares of capital stock of each such subsidiary are owned by
Acquiror free and clear of all liens, charges, claims or encumbrances or rights
of others. There are no outstanding subscriptions, options, warrants, puts,
calls, rights, exchangeable or convertible securities or other commitments or
agreements of any character relating to the issued or unissued capital stock or
other securities of any such subsidiary, or otherwise obligating Acquiror or any
such subsidiary to issue, transfer, sell, purchase, redeem or otherwise acquire
any such securities. Except as disclosed in the Acquiror SEC Documents (as
defined in Section 3.4), Acquiror does not directly or indirectly own any equity
or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
3.2 Capital Structure. The authorized capital stock of Acquiror
-----------------
consists of 75,000,000 shares of Common Stock, $.01 par value and no shares of
Preferred Stock of which there were issued and outstanding as of the close of
business on November 11, 1996, 40,159,798 shares of Common Stock and no shares
of Preferred Stock. Since the close of business on November 11, 1996, no shares
of Acquiror capital stock have been issued except pursuant to the exercise of
options outstanding as of November 11, 1996 under the Acquiror Stock Option
Plans (as defined below). As of the close of business on November 12, 1996,
there were no other outstanding commitments to issue any shares of capital stock
or voting securities of Acquiror other than pursuant to the exercise of options
outstanding as of that date under the 1983 Incentive Stock Option Plans, the
1986 Stock Option Plan, the Stock Option Plan for Directors, the 1993 Incentive
Stock Option Plan, and the 1994 Stock Option Plan, and pursuant to the 1994
Employee Stock Purchase Plan (collectively, the "Acquiror Stock Option Plans").
The authorized capital stock of Merger Sub consists of 1,000 shares of Common
Stock, $.001 par value, all of which are issued and outstanding and are held by
Acquiror. All outstanding shares of Acquiror and Merger Sub have been duly
authorized, validly issued, fully paid and are nonassessable and free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
upon the holders thereof. As of the close of business on November 12, 1996,
Acquiror has reserved 6,545,604 shares of Common Stock for issuance to
employees, directors and independent contractors pursuant to the Acquiror Stock
Option Plans, net of exercises, cancellations, repurchases and expiration of
options of which, as of the close of business on November 11, 1996, 4,965,519
shares were subject to outstanding, unexercised options and 1,580,085 shares
remained available for future grant. Other than pursuant to this Agreement and
the Acquiror 1994 Employee Stock Purchase Plan, there are no other options,
warrants, calls, rights, commitments or agreements of any character to which
Acquiror or Merger Sub is a party or by which either of them is bound obligating
Acquiror or Merger Sub to issue, deliver, sell, repurchase or redeem, or cause
to be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of Acquiror or Merger Sub or obligating Acquiror or Merger Sub to
grant, extend or enter into any such option, warrant, call, right, commitment or
agreement. The shares of Acquiror Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid, and non-assessable.
3.3 Authority.
---------
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<PAGE>
(a) Acquiror and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and Merger Sub, and
the approval of the shareholders of Acquiror is not required for Acquiror to
enter into this Agreement and consummate the Merger. This Agreement has been
duly executed and delivered by Acquiror and Merger Sub and constitutes the valid
and binding obligations of Acquiror and Merger Sub, enforce able against each
in accordance with its terms, except as enforceability may be limited by
bankruptcy and other laws affecting the rights and remedies of creditors
generally, and general principles of equity. The execution and delivery of this
Agreement do not, and the consummation of the trans actions contemplated hereby
will not, (i) conflict with, or result in any violation of any provision of the
Certificate of Incorporation or Bylaws of Acquiror or any of its subsidiaries,
as amended, or (ii) subject to obtaining the approval of Acquiror's
stockholders of the Merger as contemplated in Section 5.2 and compliance with
the requirements set forth in Section 3.3(b) below, result in any breach of or
constitute a default under (with or without notice or lapse of time, or both) or
give rise to a right of termination, cancellation or acceleration of any
material obligation or loss of any material benefit under any material mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Acquiror or any of its subsidiaries or their properties
or assets, except where such conflict, violation, default, termination,
cancellation or acceleration with respect to the foregoing provisions of (ii)
would not have had and would not reasonably be expected to have a Material
Adverse Effect on Acquiror.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required by or, to the
knowledge of Acquiror with respect to, Acquiror or any of its subsidiaries in
connection with the execution and delivery of this Agreement by Acquiror and
Merger Sub or the consummation by Acquiror and Merger Sub of the transactions
contemplated hereby, except for (i) the filing of the Certificate of Merger as
provided in Section 1.2, (ii) the filing with the SEC and NASD of the
Registration Statement, (iii) the filing of a Form 8-K with the SEC and NASD
within 15 days after the Closing Date, (iv) any filings as may be required under
applicable state securities laws and the securities laws of any foreign country,
(v) such filings as may be required under HSR or the competition regulations of
any other foreign governmental authority, (vi) the filing with the Nasdaq
National Market of a Notification Form for Listing of Additional Shares with
respect to the shares of Acquiror Common Stock issuable upon conversion of the
Target Common Stock in the Merger and upon exercise of the options under the
Target Stock Option Plans assumed by Acquiror, and (vii) such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not have a Material Adverse Effect on Acquiror and would not prevent
or materially alter or delay any of the transactions contemplated by this
Agreement.
3.4 SEC Documents: Financial Statements. Acquiror has made available
-----------------------------------
to Target a true and complete copy of each statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act), definitive proxy statement, and other filing filed with the SEC
by Acquiror since June 30, 1994, and, prior to the Effective Time, Acquiror will
have
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furnished Target with true and complete copies of any additional documents filed
with the SEC by Acquiror prior to the Effective Time (collectively, the
"Acquiror SEC Documents"). In addition, Acquiror has made available to Target
all exhibits to the Acquiror SEC Documents filed prior to the-date hereof, and
will promptly make available to Target all exhibits to any additional Acquiror
SEC Documents filed prior to the Effective Time. All documents required to be
filed as exhibits to the Target SEC Documents have been so filed, and all
material contracts so filed as exhibits are in full force and effect, except
those which have expired in accordance with their terms, and neither Acquiror
nor any of its subsidiaries is in default thereunder, except where such default
has not resulted in and is not reasonably expected to result in any Material
Adverse Effect on Acquiror. As of their respective filing dates, the Acquiror
SEC Documents complied in all material respects with the requirements of the
Exchange Act and the Securities Act, and none of the Acquiror SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading, except to the extent corrected by a subsequently filed Acquiror SEC
Document. The financial statements of Acquiror, including the notes thereto,
included in the Acquiror SEC Documents (the "Acquiror Financial Statements")
were complete and correct in all material respects as of their respective dates,
complied as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto as of their respective dates, and have been prepared in
accordance with GAAP applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Q, as permitted by Form 10-Q of the SEC). The Acquiror
Financial Statements fairly present the consolidated financial condition and
operating results of Acquiror and its subsidiaries at the dates and during the
periods indicated therein (subject, in the case of unaudited statements, to
normal, recurring year-end adjustments) in all material respects. There has
been no material change in Acquiror accounting policies except as described in
the notes to the Acquiror Financial Statements.
3.5 Absence of Certain Changes. Since September 30, 1996 (the
--------------------------
"Acquiror Balance Sheet Date"), Acquiror has conducted its business in the
ordinary course consistent with past practice and there has not occurred: (i)
any change, event or condition (whether or not covered by insurance) that would
result in a Material Adverse Effect to Acquiror; (ii) any acquisition, sale or
transfer of any material asset of Acquiror or any of its subsidiaries other than
in the ordinary course of business and consistent with past practice; (iii) any
material change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Acquiror or any material
revaluation by Acquiror of any of its or any of its subsidiaries' assets; (iv)
any declaration, setting aside, or payment of a dividend or other distribution
with respect to the shares of Acquiror, or any direct or indirect redemption,
purchase or other acquisition by Acquiror of any of its shares of capital stock;
(v) any material contract entered into by Acquiror, other than in the ordinary
course of business and as provided to Target, or any material amendment or
termination of, or default under, any material contract to which Acquiror or any
of its subsidiaries is a party or by which it is bound which would result in a
Material Adverse Effect on Acquiror; or (vi) any negotiation or agreement by
Acquiror or any of its subsidiaries to do any of the things described in the
preceding clauses (i) through (v) (other than negotiations with Target and its
representatives regarding the transactions contemplated by this Agreement).
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<PAGE>
3.6 Absence of Undisclosed Liabilities. Acquiror has no material
----------------------------------
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
unaudited balance sheet for the quarter ended September 30, 1996, which has been
provided to Target (the "Acquiror Balance Sheet"), (ii) those not required to be
set forth in the Acquiror Balance Sheet under GAAP, and (iii) those incurred in
the ordinary course of business since the Acquiror Balance Sheet Date and
consistent with past practice.
3.7 Litigation. There is no private or governmental action, suit,
----------
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Acquiror or any of its
subsidiaries, threatened against Acquiror or any of its subsidiaries or any of
their respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, would have a
Material Adverse Effect on Acquiror. There is no judgment, decree or order
against Acquiror or any of its subsidiaries or, to the knowledge of Acquiror or
any of its subsidiaries, any of their respective directors or officers (in their
capacities as such) that would prevent, enjoin, materially alter or materially
delay any of the transactions contemplated by this Agreement, or that would.
have a Material Adverse Effect on Acquiror.
3.8 Restrictions on Business Activities. There is no material
-----------------------------------
agreement, judgment, injunction, order or decree binding upon Acquiror or any of
its subsidiaries which has the effect of prohibiting or materially impairing any
current or future business practice of Acquiror or any of its subsidiaries, any
acquisition of property by Acquiror or any of its subsidiaries or the conduct of
business by Acquiror or any of its subsidiaries as currently conducted or as
proposed to be conducted by Acquiror or any of its subsidiaries.
3.9 Governmental Authorization. Acquiror and each of its
--------------------------
subsidiaries have obtained each federal, state, county, local or foreign
governmental consent, license, permit, grant, or other authorization of a
Governmental Entity which are material (collectively called "Acquiror Authori
zations"), and all of such Acquiror Authorizations are in full force and effect,
except where the failure to obtain or have any of such Acquiror Authorizations
would not have a Material Adverse Effect on Acquiror.
3.10 Compliance With Laws. Each of Acquiror and its subsidiaries has
--------------------
complied with, are not in violation of, and has not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
would not have a Material Adverse Effect on Acquiror.
3.11 Pooling of Interests. To the knowledge of Acquiror, based on
--------------------
consultation with its independent accountants, neither Acquiror nor any of its
subsidiaries nor any of their respective directors, officers or stockholders has
taken any action that would prevent Acquiror from accounting for the Merger as a
pooling of interests.
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<PAGE>
3.12 Broker's and Finders' Fees. Except for payment obligations to
--------------------------
Hambrecht & Quist disclosed to Target, Acquiror has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.13 Registration Statement: Proxy Statement/Prospectus. The
--------------------------------------------------
information supplied by Acquiror 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 Acquiror for inclusion in the Proxy Statement shall not, on the date
the Proxy Statement is first mailed to Target's stockholders, to Acquiror's
stockholders at the time of the Target Stockholders Meeting, at the time of the
Acquiror 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 Target Stockholders Meeting or the Acquiror 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 Acquiror or Merger Sub
which should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Acquiror or Merger Sub will promptly inform
Target. Notwithstanding the foregoing, Acquiror and Merger Sub make no
representation, warranty or covenant with respect to any information supplied by
Target which is contained in any of the foregoing documents.
3.14 Board Approval. The Boards of Directors of Acquiror and Merger
--------------
Sub have prior to the date hereof unanimously (i) approved this Agreement and
the Merger, (ii) determined that the Merger is in the best interests of their
respective stockholders and is on terms that are fair to such stockholders and
(iii) determined to recommend that the stockholders of Acquiror and of Merger
Sub approve this Agreement and the consummation of the Merger.
3.15 Opinion of Financial Advisor. Acquiror has been advised orally
----------------------------
(to be subsequently confirmed in writing) by its financial advisor, Hambrecht &
Quist, that in such advisor's opinion as of the date hereof, the consideration
to be paid by Acquiror is fair to Acquiror from a financial point of view.
3.16 Intellectual Property.
---------------------
(a) Acquiror and its subsidiaries own, or are licensed or otherwise
possess legally enforceable rights to use all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, technology, know-how,
trade secrets, inventory, ideas, algorithms, processes, computer software
programs or applications (in both source code and object code form), and
tangible or intangible proprietary information or material ("Intellectual
Property") that are used in the business of Acquiror and its subsidiaries as
currently conducted or as proposed to be conducted by Acquiror
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<PAGE>
and its subsidiaries, except to the extent that the failure to have such rights
have not had and would not reasonably be expected to have a Material Adverse
Effect on Acquiror.
(b) There is no unauthorized use, disclosure, infringement or
misappropriation of any Intellectual Property rights of Acquiror or any of its
subsidiaries, any trade secret material to Acquiror or any of its subsidiaries,
or any Intellectual Property right of any third party to the extent licensed by
or through Acquiror or any of its subsidiaries, by any third party, including
any employee or former employee of Acquiror or any of its subsidiaries. Neither
Acquiror nor any of its subsidiaries has entered into any agreement to indemnify
any other person against any charge of infringement of any Intellectual
Property, other than indemnification provisions contained in purchase orders or
customer agreements arising in the ordinary course of business.
(c) Acquiror is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Intellectual Property or Third Party Intellectual Property Rights, the
breach of which would have a Material Adverse Effect on Acquiror.
(d) All patents, registered trademarks, service marks and copyrights
held by Acquiror are valid and subsisting. Acquiror (i) is not a party to any
suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other proprietary right of any third party and (ii) has not brought any
action, suit or proceeding for infringement of Intellectual Property or breach
of any license or agreement involving Intellectual Property against any third
party. The manufacture, marketing, licensing or sale of Acquiror's products
does not infringe any patent, trademark, service mark, copyright, trade secret
or other proprietary right of any third party, except where such infringement
would not have a Material Adverse Effect on Acquiror.
(e) Acquiror has a policy, which it has consistently enforced, to
secure valid written assignments from all consultants and employees who
contribute or have contributed to the creation or development of Intellectual
Property of the rights to such contributions that Acquiror does not already own
by operation of law.
(f) Acquiror believes it has taken all reasonable and appropriate
steps to protect and preserve the confidentiality of all Intellectual Property
not otherwise protected by patents, or patent applications or copyright
("Confidential Information"). To Acquiror's knowledge, all use, disclosure or
appropriation of Confidential Information owned by Acquiror by or to a third
party has been pursuant to the terms of a written agreement between Acquiror and
such third party. To Acquiror's knowledge, all use, disclosure or appropriation
of Confidential Information not owned by Acquiror has been pursuant to the terms
of a written agreement between Acquiror and the owner of such Confidential
Information, or is otherwise lawful.
3.17 Taxes. Except as disclosed in the Acquiror Disclosure Letter
-----
and except to the extent the failure to do so would not have a Material Adverse
Effect, Acquiror and each of its subsidiaries, and any consolidated, combined,
unitary or aggregate group for Tax purposes of which Acquiror or
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<PAGE>
any of its subsidiaries is or has been a member have timely filed all Tax
Returns required to be filed by it, have paid all Taxes shown thereon to be due
(or Acquiror has paid on its behalf) and have provided adequate accruals in
accordance with GAAP in its financial statements for any unpaid Taxes that are
imposed on Acquiror or its subsidiaries. The most recent financial statements
contained in the Acquiror SEC Documents reflect an adequate accrual, in
accordance with GAAP, for all Taxes payable by Acquiror and its subsidiaries
through the date of such financial statements. Except as disclosed in the
Acquiror Disclosure Letter, (i) no material claim for Taxes has become a lien
against the property of Acquiror or any of its subsidiaries or is being asserted
against Acquiror or any of its subsidiaries other than liens for Taxes not yet
due and payable, (ii) no audit of any Tax Return of Acquiror or any of its
subsidiaries is being conducted by a Tax authority, (iii) no extension of the
statute of limitations on the assessment of any Taxes has been granted by
Acquiror or any of its subsidiaries and is currently in effect, and (iv) there
is no agreement, contract or arrangement to which Acquiror or any of its
subsidiaries is a party that may result in the payment of any amount that would
not be deductible by reason of Sections 280G or 404 of the Code. Acquiror has
not been and will not be required to include any material adjustment in Taxable
income for any Tax period (or portion thereof) pursuant to Section 481 or 263A
of the Code or any comparable provision under state or foreign Tax laws as a
result of transactions, events or accounting methods employed prior to the
Merger. Neither Acquiror nor any of its subsidiaries is a party to any tax
sharing or tax allocation agreement nor does Acquiror or any of its subsidiaries
owe any amount under any such agreement. For purposes of this Agreement, the
following terms have the following meanings: "Tax" (and, with correlative
meaning, "Taxes" and "Taxable") means (i) any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, environmental or windfall
profit tax, custom, duty or other tax, governmental fee or other like assessment
or charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any Governmental Entity (a "Tax
authority") responsible for the imposition of any such tax (domestic or
foreign), (ii) any liability for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated, consolidated,
combined or unitary group for any Taxable period and .(iii) any liability for
the payment of any amounts of the type described in (i) or (ii) as a result of
any obligation to indemnify any other person. As used herein, "Tax Return"
shall mean any return, statement, report or form (including, without
limitation,) estimated Tax returns and reports, withholding Tax returns and
reports and information reports and returns required to be filed with respect to
Taxes. To the knowledge of Acquiror, neither Acquiror nor any of its
subsidiaries is a party to any Tax-exemption or other Tax-sparing agreement or
order of any foreign government.
3.18 Representations Complete. None of the representations or
------------------------
warranties made by Acquiror or Merger Sub herein or in any Letter hereto,
including the Acquiror Disclosure Letter, or certificate furnished by Acquiror
or Merger Sub pursuant to this Agreement, or the Acquiror SEC Documents, when
all such documents are read together in their entirety, contains or will contain
at the Effective Time any untrue statement of a material fact, or omits or will
omit at the Effective Time to state any material fact necessary in order to make
the statements contained herein or therein in the light of the circumstances
under which made, not misleading.
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ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
-----------------------------------
4.1 Conduct of Business of Target and Acquiror. During the period
------------------------------------------
from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, each of Target and Acquiror
agrees (except to the extent expressly contemplated by this Agreement or as
consented to in writing by the other), to carry on its and its subsidiaries'
business in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted, to pay and to cause its subsidiaries to pay
debts and Taxes when due subject to good faith disputes over such debts or
taxes, to pay or perform other obligations when due, and to use all reasonable
efforts consistent with past practice and policies to preserve intact its and
its subsidiaries' present business organi zations, use its commercially
reasonable efforts consistent with past practice to keep available the services
of its and its subsidiaries' present officers and key employees and to preserve
its and its subsidiaries' relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it or its
subsidiaries, it being the parties' intent that Target's and its subsidiaries'
goodwill and ongoing businesses shall be unimpaired at the Effective Time. Each
of Target and Acquiror agrees to use its best efforts to promptly notify the
other of any event or occurrence not in the ordinary course of its or its
subsidiaries' business, and of any event which would have a Material Adverse
Effect. Without limiting the foregoing, except as expressly contem plated by
this Agreement, neither Target nor Acquiror shall do, cause or permit any of the
following, or allow, cause or permit any of its subsidiaries to do, cause or
permit any of the following, without the prior written consent of the other:
(a) Charter Documents. Cause or permit any amendments to its
-----------------
Certificate of Incorporation or Bylaws;
(b) Dividends; Changes in Capital Stock. Except as set forth in the
-----------------------------------
Acquiror Disclosure Letter, declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or repurchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except from
former employees, directors and consultants in accordance with agreements
providing for the repurchase of shares in connection with any termination of
service to it or its subsidiaries;
(c) Stock Option Plans, Etc. Except as set forth in the Target
-----------------------
Disclosure Letter, accelerate, amend or change the period of exercisability or
vesting of options or other rights granted under its employee stock plans or
director stock plans or authorize cash payments in exchange for any options or
other rights granted under any of such plans;
(d) Pooling. Take any action, which, to the knowledge of such party
-------
would-prevent Acquiror from accounting for the Merger as a pooling of interests;
or
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<PAGE>
(e) Other. Intentionally take, or agree in writing or otherwise
-----
to take, any of the actions described in Sections 4.1(a) through (d) above, or
any action which would make any of its representations or warranties contained
in this Agreement untrue or incorrect or prevent it from performing or cause it
not to perform its covenants hereunder.
4.2 Conduct of Business of Target. During the period from the date
-----------------------------
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, except as expressly contemplated by this
Agreement or consented to in writing by Acquiror, Target shall not do, cause or
permit any of the following, or allow, cause or permit any of its subsidiaries
to do, cause or permit any of the following, without the prior written consent
of Acquiror, which consent shall not be unreasonably withheld:
(a) Material Contracts. Enter into any partnership arrangements,
------------------
joint develop ment agreements, strategic alliances, or other material contracts
other than in the ordinary course of business consistent with past practice, or
violate, amend or otherwise modify or waive any material contract which
violation, amendment, modification or waiver would have a Material Adverse
Effect;
(b) Issuance of Securities. Issue, deliver or sell or authorize or
----------------------
propose the issuance, delivery or sale of, or purchase or propose the purchase
of, any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agree ments or
commitments of any character obligating it to issue any such shares or other
convertible securities, other than the issuance of shares of its Common Stock
pursuant to the exercise of stock options, warrants or other rights therefor
outstanding as of November 11, 1996; provided, however, that Target may, in the
-------- -------
ordinary course of business consistent with past practice, grant options for the
purchase of Target Common Stock under the Target Option Plans (not to exceed an
aggregate of 50,000 options to purchase shares of Target Common Stock granted
after November 11, 1996);
(c) Intellectual Property. Transfer to any person or entity any
---------------------
rights to its Intellectual Property other than in the ordinary course of
business consistent with past practice;
(d) Exclusive Rights. Enter into or amend any agreements pursuant to
----------------
which any other party is granted exclusive marketing or distribution rights with
respect to any of its products or technology;
(e) Dispositions. Sell, lease, license or otherwise dispose of or
------------
encumber any of its properties or assets which are material, individually or in
the aggregate, to its and its subsidiaries' business, taken as a whole, except
in the ordinary course of business consistent with past practice;
(f) Indebtedness. Incur any indebtedness for borrowed money or
------------
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others, except in the ordinary course of
business consistent with past practice;
(g) Leases. Enter into any operating lease, except in the ordinary
------
course of business consistent with past practice;
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<PAGE>
(h) Payment of Obligations. Pay, discharge or satisfy any material
----------------------
claim, liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of business,
other than the payment, discharge or satisfaction of liabilities reflected or
reserved against in the Target Financial Statements;
(i) Capital Expenditures. Make any material capital expenditures,
--------------------
capital additions or capital improvements except in the ordinary course of
business and consistent with past practice;
(j) Insurance. Materially reduce the amount of any material insurance
---------
coverage provided by existing insurance policies;
(k) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend
------------------------------------------------
any material employee benefit or stock purchase or option plan, or hire any new
officer or director level employee, pay any special bonus or special
remuneration to any employee or director, or increase the salaries or wage rates
of its employees, except in the ordinary course of business consistent with past
practice;
(l) Severance Arrangements. Grant any severance or termination pay to
----------------------
any director or officer or to any other employee except (A) payments made
pursuant to standard written agreements outstanding on the date hereof or (B)
grants which are made in the ordinary course of business in accordance with its
standard past practice;
(m) Lawsuits. Commence a lawsuit other than (i) for the routine
--------
collection of bills, (ii) in such cases where it in good faith determines that
failure to commence suit would result in the material impairment of a valuable
aspect of its business, provided that it consults with Acquiror prior to the
filing of such a suit, or (iii) for a breach of this Agreement;
(n) Acquisitions. Acquire or agree to acquire by merging or
------------
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to its and its subsidiaries' business, taken as a whole, or acquire
or agree to acquire any equity securities of any corporation, partnership,
association or business organization;
(o) Taxes. Other than in the ordinary course of business, make or
-----
change any material election in respect of Taxes, adopt or change any accounting
method in respect of Taxes to the extent material to Target or its subsidiaries,
enter into any material closing agreement, settle any material claim or
assessment in respect of Taxes, or consent to any extension or waiver of the
limitation period applicable to any material claim or assessment in respect of
Taxes;
(p) Notices. Target shall give all notices and other information
-------
required to be given to the employees of Target, any collective bargaining unit
representing any group of employees of Target, and any applicable government
authority under the WARN Act, the National Labor
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Relations Act, the Code, COBRA, and other applicable law in connection with the
transactions provided for in this Agreement;
(q) Revaluation. Revalue any of its assets, including without
-----------
limitation writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business; or
(r) Other. Intentionally take or agree in writing or otherwise to
-----
take, any of the actions described in Sections 4.2(a) through (q) above, or any
action which would make any of its representations or warranties contained in
this Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.3 Solicitation. From the date of this Agreement until the earlier
------------
of the Effective Time or the termination of this Agreement pursuant to Article
VII, Target and its subsidiaries will not, directly or indirectly through their
officers, directors, employees, agents or otherwise, (i) solicit, initiate or
encourage any Takeover Proposal (defined below) or (ii) engage in negotiations
with, or disclose any nonpublic information relating to Target or any of it
subsidiaries to, or afford access to the properties, books or records of Target
or any of its subsidiaries to, any person that has indicated to Target that it
may be considering making, or that has made, a Takeover Proposal; provided,
--------
nothing herein shall prohibit Target's Board of Directors from taking and
disclosing to Target's stockholders a position with respect to a tender offer
pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act.
Notwithstanding the immediately preceding sentence, if an unsolicited Takeover
Proposal, or an unsolicited written expression of interest that Target
reasonably expects to lead to a Takeover Proposal, shall be received by the
Board of Directors of Target, then, to the extent the Board of Directors of
Target believes in good faith (after consultation with its financial advisor)
(i) that such Takeover Proposal would, if consummated, result in a transaction
that appears to be more favorable to Target's stockholders from a financial
point of view than the transaction contemplated by the Agreement and (ii) after
reasonable inquiry by Target, that the third party making such Takeover Proposal
is financially capable of consummating such Takeover Proposal (any Takeover
Proposal meeting such conditions being referred to in this Agreement as a
"Superior Proposal") and the Board of Directors of Target determines in good
faith after consultation with outside legal counsel that it is necessary for the
Board of Directors of Target to comply with its fiduciary duties to stockholders
under applicable law, Target and its officers, directors, employees, investment
bankers, financial advisors, attorneys, accountants and other representatives
retained by it may furnish in connection therewith information and take such
other actions as are consistent with the fiduciary obligations of Target's Board
of Directors, and such actions shall not be considered a breach of this Section
4.3 or any other provisions of this Agreement, provided that (A) upon each such
--------
determination Target notifies Acquiror of such determination by the Target Board
of Directors and provides Acquiror with a true and complete copy of the Superior
Proposal received from such third party, if the Superior Proposal is in writing,
or a written summary of all material terms and conditions thereof, if it is not
in writing, (B) Target provides Acquiror (no later than the time that such
documents are provided to such third party) with all documents containing or
referring to non-public information of Target that are supplied to such third
party, to the extent not previously supplied by Target to Acquiror and (C)
Target provides such non-public information to any such third party pursuant to
a non-disclosure
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agreement at least as restrictive as to confidential information as the
Confidentiality Agreement (as defined in Section 5.4). Target shall not, and
shall not permit any of its officers, directors, employees (acting on behalf of
Target) or other representatives to agree to or endorse any Takeover Proposal
unless Target shall have terminated this Agreement pursuant to Section 7.1(e)
and paid Acquiror all amounts payable to Acquiror pursuant to Section 7.3(b).
Notwithstanding anything in this Agreement to the contrary, Target shall not
accept or recommend to its stockholders, or enter into any agreement concerning,
a Superior Proposal for a period of not less than 48 hours after Acquiror's
receipt of a true and complete copy of such Superior Proposal, if the Superior
Proposal is in writing, or a written summary of all material terms and
conditions thereof, if it is not in writing. Target will promptly notify
Acquiror after receipt of any Takeover Proposal or any notice that any person is
considering making a Takeover Proposal or any request for non-public information
relating to Target or any of its subsidiaries or for access to the properties,
books or records of Target or any of its subsidiaries by any person that has
indicated to Target that it may be considering making, or that has made, a
Takeover Proposal and will keep Acquiror fully informed of the status and
details of any such Takeover Proposal notice, request or any correspondence or
communications related thereto and shall provide Acquiror with a true and
complete copy of such Takeover Proposal notice or request or correspondence or
communications related thereto, if it is in writing, or a complete written
summary thereof, if it is not in writing. For purposes of this Agreement,
"Takeover Proposal" means any offer or proposal for, or any indication of
interest in, a merger or other business combination involving Target or the
acquisition of 20% or more of the outstanding shares of capital stock of Target,
or the sale or transfer of any material assets (excluding the sale or
disposition of assets in the ordinary course of business) of Target, other than,
(i) the transactions contemplated by this Agreement and (ii) transactions by
persons disclosing their beneficial ownership of shares of Target's Common Stock
on Schedule 13G under the Exchange Act.
ARTICLE V
ADDITIONAL AGREEMENTS
---------------------
5.1 Proxy Statement/Prospectus; Registration Statement. As promptly
--------------------------------------------------
as practicable after the execution of this Agreement, Target and Acquiror shall
prepare, and file with the SEC, prelimi nary proxy materials relating to the
approval of the Merger and the transactions contemplated hereby by the
stockholders of Target and the stockholders of Acquiror and, as promptly as
practicable following receipt of SEC comments thereon, Acquiror shall file with
the SEC a Registration Statement on Form S-4 (or such other or successor form as
shall be appropriate), which complies in form with applicable SEC requirements
and shall use all reasonable efforts to cause the Registration Statement to
become effective as soon thereafter as practicable; provided, however, that
Acquiror shall have no obligation to agree to account for the Merger as a
"purchase" in order to cause the Registration Statement to become effective.
Each of Acquiror and Target will notify the other promptly of the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff or
any other government officials for amendments or supplements to the Registration
Statement or any other filing or for additional information and will supply the
other with copies of all correspondence between such company or any of its
representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Registration
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<PAGE>
Statement or other filing. The Registration Statement and the other filings
shall comply in all material respects with all applicable requirements of law.
Whenever any event occurs which is required to be set forth in an amendment or
supplement to the Registration Statement or any other filing, Acquiror or
Target, as the case may be, shall promptly inform the other of such occurrence
and cooperate in filing with the SEC or its staff or any other government
officials, and/or mailing to stockholders of Acquiror, such amendment or
supplement. Subject to the provisions of Section 4.3, the Proxy Statement shall
include the recommendation of the Board of Directors of Target in favor of the
Merger; provided that such recommendation may not be included or may be
withdrawn if previously included if Target's Board of Directors believes in good
faith that a Superior Proposal has been made or, upon written advice of its
outside legal counsel, shall determine that to include such recommenda tion or
not withdraw such recommendation if previously included would constitute a
breach of the Board's fiduciary duty under applicable law. The Proxy Statement
shall include the recommendation of the Board of Directors of Acquiror in favor
of the Merger; provided that such recommendation may not be included or may be
withdrawn if previously included if Acquiror's Board of Directors determines in
good faith, upon written advice of its outside legal counsel, that such Board's
fiduciary duties under applicable law require it to do so.
5.2 Meeting of Stockholders. Promptly after the date hereof, Target
-----------------------
and Acquiror shall each take all action necessary in accordance with Delaware
Law and their respective Certificates of Incorporation and Bylaws to convene the
Target Shareholders Meeting and the Acquiror Stock holders Meeting,
respectively, to be held as promptly as practicable, and in any event within 45
days after the declaration of effectiveness of the Registration Statement, for
the purpose of voting upon this Agreement. Target and Acquiror shall consult
with each other and use their commercially reasonable efforts to hold their
respective stockholders meetings on the same day. Promptly after the date
hereof, Target and Acquiror shall each use its commercially reasonable efforts
to solicit from its stockholders proxies in favor of the approval of this
Agreement and the approval of the issuance of shares of Acquiror Common Stock
pursuant to the terms of the Merger, as the case may be, and will take all other
action necessary or advisable to secure the vote or consent of their respective
stock holders required by the rules of the National Association of Securities
Dealers, Inc, or the Delaware General Corporation Law, except to the extent that
the Board of Directors of such party determines that doing so would cause the
Board of Directors to breach its fiduciary duties under applicable law.
5.3 Access to Information.
---------------------
(a) Target shall afford Acquiror and its accountants, counsel and
other representa tives, reasonable access during normal business hours during
the period prior to the earlier of the Effective Time or the termination of this
Agreement under Article VII to (i) all of Target's and its subsidiaries'
properties, books, contracts, commitments and records, and (ii) all other
information concerning the business, properties and personnel of Target and its
subsidiaries as Acquiror may reasonably request. Target agrees to provide to
Acquiror and its accountants, counsel and other representatives copies of
internal financial statements promptly upon request. Acquiror shall afford
Target and its accountants, counsel and other representatives, reasonable access
during normal business hours during the period prior to the earlier of the
Effective Time or the termination of this Agreement under Article VII to (i) all
of Acquiror's and its subsidiaries' properties, books, contracts,
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commitments and records, and (ii) all other information concerning the business,
properties and personnel of Acquiror and its subsidiaries as Target may
reasonably request. Acquiror agrees to provide to Target and its accountants,
counsel and other representatives copies of internal financial statements
promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof
until the earlier of the Effective Time or the termination of this Agreement
under Article VII, each of Acquiror and Target shall confer on a regular and
frequent basis with one or more representatives of the other party to report
matters of materiality and the general status of ongoing operations.
(c) No information or knowledge obtained in any. investigation
pursuant to this Section 5.3 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.
5.4 Confidentiality. The parties acknowledge that each of Acquiror
---------------
and Target have previously executed a Mutual Confidentiality and Standstill
Agreement, dated November 6, 1996 (the "Confidentiality Agreement"), which
Confidentiality Agreement shall continue in full force and effect in accordance
with its terms, except as is necessary to comply with the terms of this
Agreement.
5.5 Public Disclosure. Unless otherwise permitted by this Agreement,
-----------------
Acquiror and Target shall consult with each other before issuing any press
release or otherwise making any public statement (whether or not in response to
an inquiry) regarding the terms of this Agreement and the transactions
contemplated hereby, and neither shall issue any such press release or make any
such statement without the prior approval of the other (which approval shall not
be unreasonably withheld), except as may be required by law, or in exercise of
the fiduciary duties of the Board of Directors, or by obligations pursuant to
any listing agreement with any national securities exchange or with the NASD.
5.6 Consents; Cooperation.
---------------------
(a) Each of Acquiror and Target shall promptly apply for or otherwise
seek, and use its best efforts to obtain, all consents and approvals required to
be obtained by it for the consummation of the Merger, including those required
under HSR, and shall use its reasonable efforts to obtain all necessary
consents, waivers and approvals under any of its material contracts in
connection with the Merger for the assignment thereof or otherwise, except where
the failure to obtain such consents under material contracts would not have a
Material Adverse Effect on Target. The parties hereto will consult and cooperate
with one another, and consider in good faith the views of one another, in
connection with any analyses, appearances, presentations, memoranda, briefs,
arguments, opinions and proposals made or submitted by or on behalf of any party
hereto in connection with proceedings under or relating to HSR or any other
federal, state or foreign antitrust or fair trade law.
(b) Each of Acquiror and Target shall use all reasonable efforts to
resolve such objections, if any, as may be asserted by any Governmental Entity
with respect to the transactions
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<PAGE>
contemplated by this Agreement under HSR, the Sherman Act, as amended, the
Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any
other Federal, state or foreign statutes, rules, regulations, orders or decrees
that are designed to prohibit, restrict or regulate actions having the purpose
or effect of monopolization or restraint of trade (collectively, "Antitrust
Laws"). In connection therewith, if any administrative or judicial action or
proceeding is instituted (or threatened to be instituted) challenging any
transaction contemplated by this Agreement as violative of any Antitrust Law,
each of Acquiror and Target shall cooperate and use all best efforts vigorously
to contest and resist any such action or proceeding and to have vacated, lifted,
reversed, or over turned any decree, judgment, injunction or other order,
whether temporary, preliminary or permanent (each an "Order"), that is in effect
and that prohibits, prevents, or restricts consummation of the Merger or any
such other transactions, unless by mutual agreement Acquiror and Target decide
that litigation is not in their respective best interests. Notwithstanding the
provisions of the immediately preceding sentence, it is expressly understood and
agreed that Acquiror shall have no obligation to litigate or contest any
administrative or judicial action or proceeding or any Order beyond the earlier
of (i) April 15, 1997, or (ii) the date of a ruling preliminarily enjoining the
Merger issued by a court of competent jurisdiction. Each of Acquiror and Target
shall use all reasonable efforts to take such action as may be required to cause
the expiration of the notice periods under the HSR or other Antitrust Laws with
respect to such transactions as promptly as possible after the execution of this
Agreement.
(c) Notwithstanding anything to the contrary in Section 5.6(a) or (b),
(i) neither Acquiror nor any of it subsidiaries shall be required to divest any
of their respective businesses, product lines or assets, or to take or agree to
take any other action or agree to any limitation, that could reasonably be
expected to have a Material Adverse Effect on Acquiror or of Acquiror combined
with the Surviving Corporation after the Effective Time or (ii) neither Target
nor its subsidiaries shall be required to divest any of their respective
businesses, product lines or assets, or to take or agree to take any other
action or agree to any limitation, that could reasonably be expected to have a
Material Adverse Effect on Target.
5.7 Pooling Accounting. Acquiror and Target shall each use its best
------------------
efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. Each of Acquiror and Target shall use
its best efforts to cause its "Affiliates" (as defined in Section 5.8) not to
take any action that would prevent Acquiror from accounting for the business
combination to be effected by the merger as a pooling of interest.
5.8 Affiliate Agreements.
--------------------
(a) Schedule 5.8(a) of the Disclosure Letter sets forth those persons
---------------
who may be deemed "Affiliates" of Target within the meaning of Rule 145
promulgated under the Securities Act ("Rule 145"). Target shall provide
Acquiror such information and documents as Acquiror shall reasonably request for
purposes of reviewing such list. Target shall use its best efforts to deliver
or cause to be delivered to Acquiror, promptly after the execution of this
Agreement (and in each case at least thirty (30) days prior to the Effective
Time) from each of the Affiliates of Target, an executed Affiliate Agreement in
the form attached hereto as Exhibit B-1. Acquiror and Merger Sub shall be
--------------
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<PAGE>
entitled to place appropriate legends ' on the certificates evidencing any
Acquiror Common Stock to be received by such Affiliates of Target pursuant to
the terms of this Agreement, and to issue appropriate stop transfer instructions
to the transfer agent for Acquiror Common Stock, consistent with the terms of
such Affiliates Agreements.
(b) Schedule 5.8(b) of the Disclosure Letter sets forth those persons
---------------
who may be deemed "Affiliates" of Acquiror within the meaning of Rule 145.
Acquiror shall provide Target such information and documents as Target shall
reasonably request for purposes of reviewing such list. Acquiror shall use its
best efforts to deliver or cause to be delivered to Target, concurrently with
the execution of this Agreement (and in each case at least thirty (30) days
prior to the Effective Time) from each of the Affiliates of Acquiror, an
executed Affiliate Agreement in the form attached hereto as Exhibit B-2.
-----------
5.9 Legal Requirements. Each of Acquiror, Merger Sub and Target
------------------
will, and will cause their respective subsidiaries to, take all reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on them with respect to the consummation of the transactions
contemplated by this Agreement and will promptly cooperate with and furnish
information to any party hereto necessary in connection with any such
requirements imposed upon such other party in connection with the consummation
of the transactions contemplated by this Agreement and will take all reasonable
actions necessary to obtain (and will cooperate with the other parties hereto in
obtaining) any consent, approval, order or authorization of, or any
registration, declaration or filing with, any Governmental Entity or other
person, required to be obtained or made in connection with the taking of any
action contemplated by this Agreement. Each of Acquiror and Target further
agrees to notify the other promptly of the receipt of any comments from any
government officials for amendments or supplements to any filing or for
additional information and will supply the other with copies of all
correspondence between such company or any of its representatives, on the one
hand, and the government officials, on the other hand, with respect to such
filing. All filings shall comply in all material respects with all applicable
requirements of law. Whenever any event occurs which is required to be set
forth in an amendment or supplement to any such filing, Acquiror or Target, as
the case may be, shall promptly inform the other of such occurrence and
cooperate in filing with the government officials.
5.10 Blue Sky Laws. Acquiror shall take such steps as may be
-------------
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of the Acquiror Common Stock in connection
with the Merger. Target shall use its best efforts to assist Acquiror as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of Acquiror Common Stock in
connection with the Merger.
5.11 Employee Benefit Plans.
----------------------
(a) At the Effective Time, each outstanding option to purchase shares
of Target Common Stock under the Target Stock Option Plans, whether vested or
unvested, will be assumed by Acquiror. Schedule 5.11 of the Disclosure Letter
-------------
hereto sets forth a true and complete list as of the
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date hereof of all holders of outstanding options under the Target Stock Option
Plans, including the number of shares of Target capital stock subject to each
such option, the exercise or vesting schedule, the exercise price per share and
the term of each such option. On the Closing Date, Target shall deliver to
Acquiror an updated Schedule 5.11 of the Disclosure Letter hereto current as of
-------------
such date. Each such option so assumed by Acquiror under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the Target Stock Option Plans and the documents governing the outstanding
options under those Plans, immediately prior to the Effective Time, except that
(i) such option will be exercisable for that number of whole shares of Acquiror
Common Stock equal to the product of the number of shares of Target Common Stock
that were issuable upon exercise of such option immediately prior to the
Effective Time multiplied by the Exchange Ratio and rounded down to the nearest
whole number of shares of Acquiror Common Stock, and (ii) the per share exercise
price for the shares of Acquiror Common Stock issuable upon exercise of such
assumed option will be equal to the quotient determined by dividing the exercise
price per share of Target Common Stock at which such option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded up to the
nearest whole cent. Consistent with the terms of the Target Stock Option Plans
and the documents governing the outstanding options under those Plans and except
as set forth in the Target Disclosure Letter, the Merger will not terminate any
of the outstanding options under such Plans or accelerate the exercisability or
vesting of such options or the shares of Acquiror Common Stock which will be
subject to those options upon the Acquiror's assumption of the options in the
Merger. It is the intention of the parties that the options so assumed by
Acquiror qualify following the Effective Time as incentive stock options as
defined in Section 422 of the Code to the extent such options qualified as
incentive stock options as of the Effective Time. As soon as reasonably
practical but in no event more than 30 days after the Effective Time, Acquiror
will issue to each person who, immediately prior to the Effective Time was a
holder of an outstanding option under the Target Stock Option Plans a document
in form and substance satisfactory to Target evidencing the foregoing assumption
of such option by Acquiror.
(b) Outstanding purchase rights under the Target ESPP shall be assumed
by Acquiror at the Effective Time. Schedule 5.11(b) of the Disclosure Letter
----------------
hereto sets forth a true and complete list as of the date hereof of all holders
of outstanding purchase rights under the Target ESPP, including payroll
deduction amounts elected by each holder and the price per share of Target Stock
at the beginning of the current offering period. On the Closing Date, Target
shall deliver to Acquiror an updated Schedule 5.11(b) of the Disclosure Letter
----------------
current as of such date. Each such purchase right so assumed by Acquiror under
this Agreement shall continue to have, and be subject to, the same terms and
conditions set forth in the Target ESPP and the documents governing the
outstanding purchase rights under the Target ESPP, immediately prior to the
Effective Time, except that the purchase price of shares of Acquiror Common
Stock and the number of shares of Acquiror Common Stock to be issued upon the
exercise of such purchase right shall be adjusted in accordance with the
Exchange Ratio. The assumed outstanding purchase rights under the Target ESPP
shall be exercised immediately prior to the start date of the first offering
period under the Acquiror Employee Stock Purchase Plan occurring after the
Effective Time, and each participant in the Target ESPP shall accordingly be
issued shares of Acquiror Common Stock at that time. The Target ESPP, and all
outstanding purchase rights thereunder, shall terminate with such exercise date,
and no purchase rights shall be subsequently granted or exercised under the
Target ESPP. Target employees who
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meet the eligibility requirements for participation in the Acquiror Employee
Stock Purchase Plan shall be eligible to begin payroll deductions under that
plan as of the start date of the first offering period thereunder after the
Effective Time.
5.12 [Intentionally left blank.]
5.13 Form S-8. Acquiror agrees to file, no later than five (5)
--------
business days after the Closing Date, a registration statement on Form S-8
covering the shares of Acquiror Common Stock issuable pursuant to outstanding
options and purchase rights under the Target Stock Option Plans and Target ESPP
assumed by Acquiror. Target shall cooperate with and assist Acquiror in the
prepara tion of such registration statement.
5.14 Indemnification.
---------------
(a) After the Effective Time, Acquiror will, and will cause the
Surviving Corpora tion to, indemnify and hold harmless the present and former
officers, directors, employees and agents of Target (the "Indemnified Parties")
in respect of acts or omissions occurring on or prior to the Effective Time to
the extent permitted by law and to the extent provided under Target's
Certificate of Incorporation and Bylaws or any indemnification agreement with
Target officers and directors to which Target is a party, in each case in effect
on the date hereof; provided that such indemnification shall be subject to any
--------
limitation imposed from time to time under applicable law. Without limitation
of the foregoing, in the event any such Indemnified Party is or becomes involved
in any capacity in any action, proceeding or investigation in connection with
any matter relating to this Agreement or the transactions contemplated hereby
occurring on or prior to the Effective Time, Acquiror shall, or shall cause the
Surviving Corporation to, pay as incurred such Indemnified Party's reasonable
legal and other expenses (including the cost of any investigation and
preparation) incurred in connection therewith.
(b) For six years after the Effective Time, Acquiror will either
(i) at all times maintain at least $5,000,000 in cash, marketable securities and
unrestricted lines of credit to be available to indemnify the Indemnified
Parties in accordance with Section 5.14(a) above (but such amount shall not be
construed as a limitation of any such indemnification), or (ii) cause the
Surviving Corporation to use its best efforts to provide officers' and
directors' liability insurance in respect of acts or omissions occurring on or
prior to the Effective Time covering each such person currently covered by
Target's officers' and directors' liability insurance policy on terms
substantially similar to those of such policy in effect on the date hereof,
provided that in satisfying its obligation under this Section, Acquiror shall
not be obligated to cause the Surviving Corporation to pay premiums in excess of
150% of the amount per annum Target paid in its last full fiscal year, which
amount has been disclosed to Acquiror and if the Surviving Corporation is unable
to obtain the insurance required by this Section 5.14, it shall obtain as much
comparable insurance as possible for an annual premium equal to such maximum
amount.
(c) To the extent there is any claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time) against an
Indemnified Party that arises out of or
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<PAGE>
pertains to any action or omission in his or her capacity as a director,
officer, employee, fiduciary or agent of Target occurring prior to the Effective
Time, or arises out of or pertains to the transactions contemplated by this
Agreement for a period of six years after the Effective Time (whether arising
before or after the Effective Time), such Indemnified Party shall be entitled to
be represented by counsel and following the Effective Time (i) any counsel
retained by the Indemnified Parties shall be reasonably satisfactory to the
Surviving Corporation and Acquiror, (ii) the Surviving Corporation and Acquiror
shall pay the reasonable fees and expenses of such counsel, promptly after
statements therefor are received and (iii) the Surviving Corporation and
Acquiror will cooperate in the defense of any such matter; provided, however,
-------- -------
that neither the Surviving Corporation nor Acquiror shall be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld); and provided further, that, in the event that any claim
----------------
or claims for indemnification are asserted or made within such six-year period,
all rights to indemnification in respect of any such claim or claims shall
continue until the disposition of any and all such claims. The Indemnified
Parties as a group shall be entitled to reimbursement for only one law firm (in
addition to local counsel) to represent them with respect to any single action
unless there is, under applicable standards of professional conduct, a conflict
on any significant issue between the positions of any two or more Indemnified
Parties.
(d) The provisions of this Section 5.14 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and representatives.
5.15 Option Agreement. Concurrently with the execution of this
----------------
Agreement, Target shall deliver to Acquiror an executed Option Agreement in the
form of Exhibit C attached hereto. Target agrees to fully perform its
---------
obligations under the Option Agreement.
5.16 Listing of Additional Shares. Prior to the Effective Time,
----------------------------
Acquiror shall file with the Nasdaq National Market a Notification Form for
Listing of Additional Shares with respect to the shares referred to in Section
6.1(f).
5.17 Nasdaq Quotation. Target and Acquiror agree to continue the
----------------
quotation of Target Common Stock and Acquiror Common Stock, respectively, on the
Nasdaq National Market during the term of the Agreement so that, to the extent
necessary, appraisal rights will not be available to stockholders of Target
under Section 262 of the Delaware Law.
5.18 Pooling Letters.
---------------
(a) Target shall use all reasonable efforts to cause to be delivered
to Acquiror a letter of Target's independent auditors, dated on or prior to the
date of this Agreement and confirmed in writing two business days before the
date of the Proxy Statement to the effect that Target qualifies as an entity
that may be a party to a business combination for which the pooling-of-interest
method of accounting would be available and in a form reasonably satisfactory to
Acquiror and customary in scope and substance for letters delivered by
independent public accountants in connection with transactions of this type.
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(b) Acquiror shall use all reasonable efforts to cause to be
delivered to Target a letter of Acquiror's independent auditors, dated on or
prior to the date of this Agreement and confirmed in writing two business days
before the date of the Proxy Statement regarding concurrence with Acquiror's
management's conclusion regarding appropriateness of pooling-of-interest
accounting treatment for the Merger under APB Opinion No. 16 if consummated in
accordance with this Agreement and in a form reasonably satisfactory to Target
and customary in scope and substance for letters delivered by independent public
accountants in connection with transactions of this type.
5.19 Participation Agreement. Target shall use its best efforts, on
-----------------------
behalf of Acquiror and pursuant to the request of Acquiror, to cause each Target
stockholder named in Schedule 5.19 of the Disclosure Letter to execute and
-------------
deliver to Acquiror a Participation Agreement in substantially the form of
Exhibit D attached hereto concurrently with the execution of this Agreement (and
- ---------
in each case no later than the date prior to the time that the preliminary proxy
materials are filed with the SEC pursuant to Section 5.1). Target shall use its
commercially reasonable efforts to provide to Acquiror, as promptly as
practicable following the date hereof, a letter correctly stating on Schedule
--------
5.19 of the Disclosure Letter the number of shares of Target Common Stock
- ----
beneficially owned by each person listed.
5.20 Employment and Noncompetition Agreements. Prior to the
----------------------------------------
Effective Time, Acquiror shall enter into an Employment and Noncompetition
Agreement (i) in the form of Exhibit E-1 attached hereto with each of the
-----------
individuals named on Schedule 5.20(a) of the Disclosure Letter and (ii) in the
----------------
form of Exhibit E-2 attached hereto with each of the individuals named on
-----------
Schedule 5.20(b) of the Disclosure Letter; provided, however, that this covenant
- ---------------- -------- -------
shall not be deemed to have been breached as a result of any individual named on
Schedule 5.20(a) or Schedule 5.20(b) of the Disclosure Letter failing to enter
- ---------------- ----------------
into any such agreement.
5.21 Amendment to Registration Rights. Target shall use its
--------------------------------
commercially reasonably efforts to obtain such amendments to registration rights
agreements to which it is a party as may be requested by Acquiror.
5.22 FIRPTA. Acquiror and Target shall use commercially reasonable
------
efforts to timely comply with the notice requirements of Income Tax Regulations,
Section 1.897-2(h).
5.23 Best Efforts and Further Assurances. Each of the parties to
-----------------------------------
this Agreement shall use its best efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby.
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ARTICLE VI
CONDITIONS TO THE MERGER
------------------------
6.1 Conditions to Obligations of Each Party to Effect the Merger.
------------------------------------------------------------
The respective obligations of each party to this Agreement to consummate and
effect the Merger shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, by agreement of all the parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have
--------------------
been approved and adopted by the requisite vote of the stockholders of Target
and the stockholders of Acquiror (as described in Section 2.24) under Delaware
Law and under NASD Rule 4460(i).
(b) Registration Statement Effective. The SEC shall have declared the
--------------------------------
Regis tration Statement effective. No stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose, and no similar proceeding respect of the Proxy
Statement, shall have been initiated or threatened to either party by the SEC.
(c) No Injunctions or Restraints: Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal or prevents or
prohibits the Merger. In the event an injunction or other order shall have been
issued, each party agrees to use its reasonable diligent efforts to have such
injunction or other order lifted.
(d) Governmental Approval. All material authorizations, consents,
---------------------
orders or approvals of, or declarations or filings with, or expiration of
waiting periods imposed by, any Governmental Entity necessary for the
consummation of the transactions contemplated by this Agreement and the
Certificate of Merger shall have been filed, expired or been obtained, other
than those that, individually or in the aggregate, the failure to be filed,
expired or obtained would not, in the reasonable opinion of Acquiror after
consultation with Target, have a Material Adverse Effect on Target or Acquiror.
(e) Tax Opinion. Acquiror and Target shall have received
-----------
substantially identical written opinions of Wilson Sonsini Goodrich & Rosati,
P.C., legal counsel to Acquiror, and Testa, Hurwitz & Thibeault, LLP, legal
counsel to Target, respectively, in form and substance reasonably satisfactory
to them, and shall be to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, and such
opinions shall not have been withdrawn. In rendering such opinions, counsel
shall be entitled to rely upon, among other things, reasonable
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assumptions as well as representations of Acquiror, Merger Sub and Target and
certain stockholders of Target.
(f) Listing of Additional Shares. The filing with the Nasdaq National
----------------------------
Market of a Notification Form for listing of Additional Shares with respect to
the shares of Acquiror Common Stock issuable upon conversion of the Target
Common Stock in the Merger and upon exercise of the options under the Target
Stock Option Plans assumed by Acquiror shall have been made.
(g) Letter from Accountants. Prior to the Effective Time, each of
-----------------------
Acquiror and Target shall have received a confirming letter from each of Ernst &
Young LLP, independent auditors, and Arthur Andersen LLP, independent auditors,
as described in Section 5.18.
6.2 Additional Conditions to Obligations of Target. The obligations
----------------------------------------------
of Target to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Target:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Acquiror and Merger Sub contained in this Agreement shall be true
and correct as of the Effective Time, with the same force and effect as if made
on and as of the Effective Time, except for such inaccuracies as individually or
in the aggregate that would not have a Material Adverse Effect on Acquiror, and
Target shall have received a certificate to such effect signed on behalf of
Acquiror by the President and Chief Financial Officer of Acquiror.
(b) Agreements and Covenants. Acquiror and Merger Sub shall have
------------------------
performed or complied in all material respects with all covenants, obligations,
conditions and agreements required by this Agreement to be performed or complied
with by them on or prior to the Effective Time; and, Target shall have received
a certificate to such effect signed by the President and Chief Financial Officer
of Acquiror.
(c) Legal Opinion. Target shall have received a legal opinion from
-------------
Wilson, Sonsini, Goodrich & Rosati, P.C., counsel to Acquiror, substantially in
the form of Exhibit F hereto.
---------
(d) No Material Adverse Effect. There shall not have occurred any
--------------------------
Material Adverse Effect with respect to Acquiror.
(e) Third Party Consents. Target shall have been furnished with
--------------------
evidence satisfactory to it of the consent or approval of those persons whose
consent or approval shall be required in connection with the Merger under any
material contract of Acquiror or any of its subsidiaries or otherwise, except
where the failure to obtain such consent or approval would not have a Material
Adverse Effect on Acquiror.
(f) Injunctions or Restraints on Conduct of Business. No temporary
------------------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdic tion or other legal or regulatory restraint
provision limiting or restricting Acquiror's business
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<PAGE>
following the Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic or
foreign, seeking the foregoing be pending except where the existence of any of
the foregoing items would not have a Material Adverse Effect on Acquiror.
(g) Appointment to Board of Acquiror. Ronald Nordin shall have been
--------------------------------
appointed to the Board of Directors of Acquiror, contingent upon the
consummation of the Merger.
6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub.
------------------------------------------------------------------
The obliga tions of Acquiror and Merger Sub to consummate and effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, by
Acquiror:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Target contained in this Agreement shall be true and correct as of
the Effective Time, with the same force and effect as if made on and as of the
Effective Time, except, for such inaccuracies as individually or in the
aggregate that would not have a Material Adverse Effect on Target; and, Acquiror
and Merger Sub shall have received a certificate to such effect signed on behalf
of Target by the President and Chief Financial Officer of Target.
(b) Agreements and Covenants. Target shall have performed or complied
------------------------
in all material respects with all agreements, covenants, obligations and
conditions required by this Agreement to be performed or complied with by it on
or prior to the Effective Time, and the Acquiror and Merger Sub shall have
received a certificate to such effect signed by the President and Chief
Financial Officer of Target.
(c) Legal Opinion. Acquiror shall have received a legal opinion from
-------------
Testa, Hurwitz & Thibeault, LLP, legal counsel to Target, in substantially the
form of Exhibit G.
---------
(d) Third Party Consents. Acquiror shall have been furnished with
--------------------
evidence satisfactory to it of the consent or approval of those persons whose
consent or approval shall be required in connection with the Merger under any
material contract of Target or any of its subsidiaries or otherwise, except
where the failure to obtain such consent or approval would not have a Material
Adverse Effect on Target.
(e) Injunctions or Restraints on Conduct of Business. No temporary
------------------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdic tion or other legal or regulatory restraint
provision limiting or restricting Acquiror's conduct or operation of the
business of Target and its subsidiaries, following the Merger shall be in
effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental Entity, domestic or foreign, seeking the
foregoing be pending, except where the existence of any of the foregoing items
would not have a Material Adverse Effect on Target.
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(f) No Material Adverse Effect. There shall not have occurred any
--------------------------
Material Adverse Effect with respect to Target.
(g) Affiliate Agreements. Acquiror shall have received from each of
--------------------
the Affiliates of Target an executed Affiliate Agreement in substantially the
form attached hereto as Exhibit B-1.
-----------
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
7.1 Termination. At any time prior to the Effective Time, whether before or
-----------
after approval of the matters presented in connection with the Merger by the
stockholders of Target and by the stockholders of Acquiror, this Agreement may
be terminated:
(a) by mutual written consent duly authorized by the Board of
Directors of Acquiror and Target;
(b) by either Acquiror or Target, if, without fault of the terminating
party, the Closing shall not have occurred on or before April 15, 1997
(provided, a later date may be agreed upon in writing by the parties hereto, and
--------
provided further that the right to terminate this Agreement under this Section
- -------- -------
7.1(b) shall not be available to any party whose action or failure to act has
been the cause of or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement);
(c) by Acquiror, (i) upon a breach of any representation, warranty,
covenant or agreement on the part of Target set forth in this Agreement, or if
any representation or warranty of Target shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
would not be satisfied as of the time of such breach or as of the time such
represen tation or warranty shall have become untrue, provided that if such
--------
inaccuracy in Target's represen tations and warranties or breach by Target is
curable by Target through the exercise of its commer cially reasonable efforts
within ten business days of receipt by Target of written notice thereof,
Acquiror may not terminate this Agreement under this Section 7.1(c)(i) during
such ten business day period, so long as Target continues to exercise such
commercially reasonable efforts, and provided further that the right to
-------- -------
terminate this Agreement by Acquiror under this Section 7.1(c)(i) shall not be
available to Acquiror where Acquiror is at that time in willful breach of this
Agreement; (ii) if the Board of Directors of Target shall have withdrawn or
modified its recommendation of this Agreement or the Merger in a manner adverse
to Acquiror or shall have resolved to do any of the foregoing, provided that the
--------
right to terminate this Agreement by Acquiror under this Section 7.1(c)(ii)
shall not be available to Acquiror where Acquiror is at that time in willful
breach of this Agreement, or (iii) for any reason Target fails to call and hold
the Target Stockholders Meeting by April 15, 1997 and Target is at that time in
willful breach of this Agreement, provided that the right to terminate this
--------
Agreement by Acquiror under this Section 7.1(c)(iii) shall not be available to
Acquiror where Acquiror is at that time in willful breach of this Agreement;
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<PAGE>
(d) by Target (i) upon a breach of any representation, warranty,
covenant or agreement on the part of Acquiror set forth in this Agreement, or if
any representation or warranty of Acquiror shall have become untrue, in either
case such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
would not be satisfied as of the time of such breach or as of the time such
represen tation or warranty shall have become untrue, provided that if such
--------
inaccuracy in Acquiror's represen tations and warranties or breach by Acquiror
is curable by Acquiror through the exercise of its commercially reasonable
efforts within ten business days of receipt by Acquiror of written notice
thereof, Target may not terminate this Agreement under this Section 7.1(d)(i)
during such ten business day period, so long as Acquiror continues to exercise
such commercially reasonable efforts, and provided further that the right to
-------- -------
terminate this Agreement by Target under this Sec tion 7.1(d)(i) shall not be
available to Target where Target is at that time in willful breach of this
Agreement; (ii) if the Board of Directors of Acquiror shall have withdrawn or
modified its recommendation of this Agreement or the Merger in a manner adverse
to Target or shall have resolved to do any of the foregoing, provided that the
---------
right to terminate this Agreement by Target under this Section 7.1(d)(ii) shall
not be available to Target where Target is at that time in willful breach of
this Agreement, or (iii) for any reason Acquiror fails to call and hold the
Acquiror Stockholders Meeting by April 15, 1997 and Acquiror is at that time in
willful breach of this Agreement, provided that the right to terminate this
--------
Agreement by Target under this Section 7.1(d)(iii) shall not be available to
Target where Target is at that time in willful breach of this Agreement;
(e) by Target if a Trigger Event (as defined in Section 7.3(f)) or
Takeover Proposal (as defined in Section 7.3(g)) shall have occurred and the
Board of Directors of Target in connection therewith, after consultation with
its legal counsel, withdraws or modifies its approval and recommendation of this
Agreement and the transactions contemplated hereby after, in the case of the
termination by Target, determining that to cause Target to proceed with the
transactions contem plated hereby would not be consistent with the Board of
Directors' fiduciary duty to the stockholders of Target;
(f) by Acquiror, if following a Trigger Event or Takeover Proposal,
the Board of Directors of Target shall withdraw or modify its recommendation of
this Agreement and the transactions contemplated hereby;
(g) by either Acquiror or Target, if there shall have occurred any
Material Adverse Effect with respect to the other party since the date of this
Agreement;
(h) by either Acquiror or Target if (i) any permanent injunction or
other order of a court or other competent authority preventing the consummation
of the Merger shall have become final and nonappealable or (ii) any required
approval of the stockholders of Target or the stockholders of Acquiror shall not
have been obtained by reason of the failure to obtain the required vote upon a
vote held at a duly held meeting of stockholders or at any adjournment thereof;
or
(i) by Target, in the event (i) of the acquisition, by any person or
group of persons (other than persons or groups of persons who (A) acquired
shares of Acquiror Common Stock
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pursuant to any merger of Acquiror in which Acquiror was the surviving
corporation and stock holders of Acquiror represent less than 70% of the
outstanding shares of the surviving corporation following such transaction or
any acquisition by Acquiror of all or substantially all of the capital stock or
assets of another person or (B) disclose their beneficial ownership of shares of
Acquiror Common Stock on Schedule 13G under the Exchange Act), of beneficial
ownership of 30% or more of the outstanding shares of Acquiror Common Stock (the
terms "person," "group " and "beneficial ownership" having the meanings ascribed
thereto in Section 13(d) of the Exchange Act and the regulations promulgated
thereunder), (ii) the Board of Directors of Acquiror accepts or publicly
recommends acceptance of an offer from a third party to acquire 50% or more of
the outstanding shares of Acquiror Common Stock or of Acquiror's consolidated
assets; or (iii) Acquiror acquires or agrees to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof and such acquisition requires
the approval of the stock holders of Acquiror in accordance with Delaware Law
or NASD Rule 4460(i).
7.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 7.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Acquiror, Merger
Sub or Target or their respective officers, directors, stockholders or
affiliates, except to the extent that such termination results from the willful
breach by a party hereto of any of its representations, warranties or covenants
set forth in this Agreement; provided that, the provisions of Section 5.4
--------
(Confidentiality), Section 7.3 (Expenses and Termination Fees) and this Section
7.2 shall remain in full force and effect and survive any termination of this
Agreement.
7.3 Expenses and Termination Fees.
-----------------------------
(a) Subject to Sections 7.3(b), 7.3(c), 7.3(d) and 7.3(e), whether or
not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby (including, without
limitation, the fees and expenses of its advisers, accountants and legal
counsel) shall be paid by the party incurring such expense, except that expenses
incurred in connection with printing the Proxy Materials and the Registration
Statement, registration and filing fees incurred in connection with the
Registration Statement, the Proxy Materials and the listing of additional shares
pursuant to Section 6.1(f) and fees, costs and expenses associated with
compliance with applicable state securities laws in connection with the Merger
shall be shared equally by Target and Acquiror.
(b) In the event that (i) Target shall terminate this Agreement
pursuant to Section 7.1(e), (ii) either Acquiror or Target shall terminate this
Agreement pursuant to Section 7.1(h)(ii) following a failure of the stockholders
of Target to approve this Agreement and, prior to the time of the meeting of
Target's stockholders, there shall have been (A) a Trigger Event or (B) a
Takeover Proposal, (iii) Acquiror shall terminate this Agreement pursuant to
Section 7.1(c)(iii) and, prior thereto, there shall have been (A) a Trigger
Event or (B) a Takeover Proposal, or (iv) Acquiror shall terminate this
Agreement pursuant to Section 7.1(f), then Target shall immediately reimburse
Acquiror for up to $1,000,000 of out-of-pocket costs and expenses incurred by
Acquiror in connection with this Agreement and the transactions contemplated
hereby (including,
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<PAGE>
without limitation, the fees and expenses of its advisors, accountants and legal
counsel), and, in addition Target shall promptly pay to Acquiror the sum of
$6,000,000.
(c) In the event that Target shall terminate this Agreement pursuant
to Section 7.1(d)(ii), 7.1(d)(iii) or, following a failure of the stockholders
of Acquiror to approve this Agreement, pursuant to 7.1(h)(ii), then Acquiror
shall immediately reimburse Target for up to $1,000,000 of out-of-pocket costs
and expenses incurred by Target in connection with this Agree ment and the
transactions contemplated hereby (including, without limitation, the fees and
expenses of its advisors, accountants and legal counsel), and, in addition
Acquiror shall promptly pay to Target the sum of $20,000,000.
(d) In the event that Acquiror shall terminate this Agreement pursuant
to Section 7.1(c) or, following a failure of the stockholders of Target to
approve this Agreement, pursuant to 7.1(h)(ii), Target shall promptly reimburse
Acquiror for up to $1,000,000 of out-of-pocket costs and expenses incurred by
Acquiror in connection with this Agreement and the trans actions contemplated
hereby (including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel).
(e) In the event that Target shall terminate this Agreement pursuant
to Sec tion 7.1(d)(i), Acquiror shall promptly reimburse Target for up to
$1,000,000 of out-of-pocket costs and expenses incurred by Acquiror in
connection with this Agreement and the transactions contem plated hereby
(including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel).
(f) As used herein, a "Trigger Event" shall occur if any Person (other
than a person disclosing its beneficial ownership of shares of Target's Common
Stock on Schedule 13G under the Exchange Act) acquires securities representing
20% or more, or commences a tender or exchange offer following the successful
consummation of which the offeror and its affiliate would beneficially own
securities representing 20% or more, of the voting power of Target.
(g) As used in Section 7.3(b), "Takeover Proposal" shall occur if
there is an offer or proposal for, or any indication of interest in (where such
indication of interest has been disclosed publicly), a merger or other business
combination involving Target or the acquisition of 20% or more of the
outstanding shares of capital stock of Target or the sale or transfer of any
material assets (excluding the sale or disposition of assets in the ordinary
course of business) of Target, or any of its subsidiaries, other than
transactions contemplated by this Agreement and transactions by persons
disclosing their beneficial ownership of shares of Target's Common Stock on
Schedule 13G under the Exchange Act.
(h) Payment of any of the amounts described in Section 7.3(b), 7.3(c),
7.3(d) or 7.3(e) shall not be in lieu of damages in the event of breach of this
Agreement.
7.4 Amendment. The boards of directors of the parties hereto may cause
---------
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf of each of the
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<PAGE>
parties hereto; provided that an amendment made subsequent to adoption of the
Agreement by the stockholders of Target or Merger Sub shall not (i) alter or
change the amount or kind of considera tion to be received on conversion of the
Target Common Stock, (ii) alter or change any term of the Certificate of
Incorporation of the Surviving Corporation to be effected by the Merger, or
(iii) alter or change any of the terms and conditions of the Agreement if such
alteration-or change would adversely affect the holders of Target Common Stock
or Merger Sub Common Stock.
7.5 Extension; Waiver. At any time prior to the Effective Time any
-----------------
party hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compli ance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
------------------
8.1 Non-Survival at Effective Time. The representations, warranties
------------------------------
and agreements set forth in this Agreement shall terminate at the Effective
Time, except that the agreements set forth in Article 1, Section 5.4
(Confidentiality) 5.7 (Pooling Accounting), 5.8 (Affiliates), 5.12 (Employee
Benefit Plans), 5.14 (Form S-8), 5.15 (Indemnification), 5.21 (Best Efforts and
Further Assurances), 7.3 (Expenses and Termination Fees), 7.4 (Amendment), and
this Article VIII shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to Acquiror or Merger Sub, to:
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Attention: President
Facsimile No.: (408) 970-0715
Telephone No.: (408) 496-3600
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
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<PAGE>
Palo Alto, California 94304-1050
Attention: Frank Currie, Esq.
Facsimile No.: (415) 493-6811
Telephone No.: (415) 493-9300
(b) if to Target, to:
SQA, Inc.
One Burlington Woods
Burlington, Massachusetts 01803
Attention: President
Facsimile No.: (617) 229-3783
Telephone No.: (617) 229-3500
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attention: William J. Schnoor, Jr., Esq.
Facsimile No.: (617) 248-7100
Telephone No.: (617) 248-7000
8.3 Interpretation. When a reference is made in this Agreement to
--------------
Exhibits or Schedules, such reference shall be to an Exhibit or Schedule to this
Agreement unless otherwise indicated. The words "include," "includes" and
"including," when used herein shall be deemed in each case to be followed by the
words "without limitation." The phrase "made available" in this Agreement shall
mean that the information referred to has been made available if requested by
the party to whom such information is to be made available. The phrases "the
date of this Agreement", "the date hereof", and terms of similar import, unless
the context otherwise requires, shall be deemed to refer to November 12, 1996.
The table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Nonassignability; Parties in Interest. This
-------------------------------------------------------
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the Target Disclosure Letter and the Acquiror
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Disclosure Letter (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, except for the Confidentiality Agreement, which shall
continue in full force and effect, and shall survive any termination of this
Agreement or the Closing, in accordance with its terms; (b) are not intended to
confer upon any other person any rights or remedies hereunder, except as set
forth in Sections 1.6(a)-(c) and (f), 1.8-1.10, 5.11, 5.13 and 5.14; and (c)
shall not be assigned by operation of law or otherwise except as otherwise
specifically provided.
8.6 Severability. In the event that any provision of this Agreement, or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforce able, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
8.7 Remedies Cumulative. Except as otherwise provided herein, any and
-------------------
all remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby, or by law or equity
upon such party, and the exercise by a party of any one remedy will not preclude
the exercise of any other remedy.
8.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law. Each of
the parties hereto irrevocably consents to the exclusive jurisdiction of the
state or federal courts located in the State of Delaware in connection with any
matter based upon or arising out of this Agreement or the matters contemplated
herein, agrees that process may be served upon them in any manner authorized by
the laws of the State of California for such persons and waives and covenants
not to assert or plead any objection which they might otherwise have to such
jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
-50-
<PAGE>
IN WITNESS WHEREOF, Target, Acquiror and Merger Sub have caused this
Agreement tor be executed and delivered by their respective officers thereunto
duly authorized, all as of the date first written above.
RATIONAL SOFTWARE CORPORATION
By: /s/ Paul D. Levy
------------------------------------------
Name: Paul D. Levy
--------------------------------------
Title: Chairman and Chief Executive Officer
-------------------------------------
SUNSHINE ACQUISITION
By: /s/ Paul. D. Levy
------------------------------------------
Name: Paul D. Levy
--------------------------------------
Title: President
-------------------------------------
SQA, Inc.
By: /s/ Ronald H. Nordin
------------------------------------------
Name: Ronald H. Nordin
--------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
-51-
<PAGE>
EXHIBIT A
---------
CERTIFICATE OF MERGER
MERGING
SUNSHINE ACQUISITION CORPORATION
WITH AND INTO
TARGET
_______________________
Pursuant to Section 251 of the General Corporation Law of
the State of Delaware
___________________________
Sunshine Acquisition Corporation, a Delaware corporation ("Merger
Sub"), and SQA, Inc., a Delaware corporation ("Target"), DO HEREBY CERTIFY AS
FOLLOWS:
FIRST: That Merger Sub was incorporated on November 8, 1996, pursuant
to the Delaware General Corporation Law (the "Delaware Law"), and that Target
was incorporated on __________, ____, pursuant to the Delaware Law.
SECOND: That an Agreement and Plan of Reorganization (the
"Reorganization Agreement"), dated as of November ___, 1996, as amended, among
Acquiror, a California corporation, Merger Sub and Target, setting forth the
terms and conditions of the merger of Merger Sub with and into Target (the
"Merger"), has been approved, adopted, certified, executed and acknowledged by
each of the constituent corporations in accordance with Section 251 of the
Delaware Law.
THIRD: That the name of the surviving corporation (the "Surviving
Corporation") shall be _______________.
FOURTH: That pursuant to the Reorganization Agreement, the Restated
Certificate of Incorporation of the Surviving Corporation is amended to read in
its entirety as set forth in Exhibit A hereto.
---------
FIFTH: That an executed copy of the Reorganization Agreement is on
file at the principal place of business of the Surviving Corporation at the
following address:
<PAGE>
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, CA 95051
SIXTH: That a copy of the Reorganization Agreement will be furnished
by the Surviving Corporation, on request and without cost, to any stockholder of
any constituent corporation.
SEVENTH: That the Merger shall become effective upon the filing of
this Certificate of Merger with the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, each of Merger Sub and Target has caused this
Certificate of Merger to be executed in its corporate name this ___ day of
________, 199__.
SUNSHINE ACQUISITION CORPORATION
By:________________________________________
_________, President and Chief Executive
Officer
ATTEST:
_________________________
________, Secretary
SQA, INC.
By:________________________________________
________, President and Chief Executive
Officer
ATTEST:
_________________________
________, Secretary
-2-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - THE MERGER........................................... 2
1.1 The Merger........................................... 2
1.2 Closing: Effective Time.............................. 2
1.3 Effect of the Merger................................. 2
1.4 Certificate of Incorporation: Bylaws................. 2
1.5 Directors and Officers............................... 3
1.6 Effect on Capital Stock.............................. 3
1.7 Dissenting Shares.................................... 4
1.8 Surrender of Certificates............................ 4
1.9 No Further Ownership Rights in Target Common Stock... 6
1.10 Lost, Stolen or Destroyed Certificates............... 6
1.11 Tax and Accounting Consequences...................... 6
1.12 Taking of Necessary Action; Further Action........... 6
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF TARGET............ 6
2.1 Organization; Standing and Power.................... 7
2.2 Capital Structure................................... 8
2.3 Authority........................................... 9
2.4 SEC Documents: Financial Statements................. 10
2.5 Absence of Certain Changes.......................... 11
2.6 Absence of Undisclosed Liabilities.................. 11
2.7 Litigation.......................................... 11
2.8 Restrictions on Business Activities................. 11
2.9 Compliance; Governmental Authorization.............. 12
2.10 Title to Property................................... 12
2.11 Intellectual Property............................... 12
2.12 Environmental Matters............................... 14
2.13 Taxes............................................... 14
2.14 Employee Benefit Plans.............................. 15
2.15 Certain Agreements Affected by the Merger........... 17
2.16 Employee Matters.................................... 17
2.17 Interested Party Transactions....................... 18
2.18 Insurance........................................... 18
2.19 Compliance With Laws................................ 18
2.20 Pooling of interests................................ 18
2.21 Brokers' and Finders' Fees.......................... 18
2.22 Registration Statement; Proxy Statement/Prospectus.. 19
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.23 Opinion of Financial Advisor........................ 19
2.24 Vote Required....................................... 19
2.25 Board Approval...................................... 19
2.26 Section 203 of the DGCL Not Applicable.............. 20
2.27 Minute Books........................................ 20
2.28 Representations Complete............................ 20
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND
MERGER SUB....................................................... 20
3.1 Organization, Standing and Power.................... 20
3.2 Capital Structure................................... 21
3.3 Authority........................................... 21
3.4 SEC Documents: Financial Statements................. 22
3.5 Absence of Certain Changes.......................... 23
3.6 Absence of Undisclosed Liabilities.................. 24
3.7 Litigation.......................................... 24
3.8 Restrictions on Business Activities................. 24
3.9 Governmental Authorization.......................... 24
3.10 Compliance With Laws................................ 24
3.11 Pooling of Interests................................ 24
3.12 Broker's and Finders' Fees.......................... 25
3.13 Registration Statement: Proxy Statement/Prospectus.. 25
3.14 Board Approval...................................... 25
3.15 Opinion of Financial Advisor........................ 25
3.16 Intellectual Property............................... 25
3.17 Taxes............................................... 26
3.18 Representations Complete............................ 27
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME................. 28
4.1 Conduct of Business of Target and Acquiror.......... 28
4.2 Conduct of Business of Target....................... 29
4.3 Solicitation........................................ 31
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE V - ADDITIONAL AGREEMENTS.................................................. 32
5.1 Proxy Statement/Prospectus; Registration Statement.................... 32
5.2 Meeting of Stockholders............................................... 33
5.3 Access to Information................................................. 33
5.4 Confidentiality....................................................... 34
5.5 Public Disclosure..................................................... 34
5.6 Consents; Cooperation................................................. 34
5.7 Pooling Accounting.................................................... 35
5.8 Affiliate Agreements.................................................. 35
5.9 Legal Requirements.................................................... 36
5.10 Blue Sky Laws......................................................... 36
5.11 Employee Benefit Plans................................................ 36
5.12 [Intentionally left blank]............................................ 38
5.13 Form S-8.............................................................. 38
5.14 Indemnification....................................................... 38
5.15 Option Agreement...................................................... 39
5.16 Listing of Additional Shares.......................................... 39
5.17 Nasdaq Quotation...................................................... 39
5.18 Pooling Letters....................................................... 39
5.19 Participation Agreement............................................... 40
5.20 Employment and Noncompetition Agreements.............................. 40
5.21 Amendment to Registration Rights...................................... 40
5.22 FIRPTA................................................................ 40
5.23 Best Efforts and Further Assurances................................... 40
ARTICLE VI - CONDITIONS TO THE MERGER.............................................. 40
6.1 Conditions to Obligations of Each Party to Effect the Merger.......... 40
6.2 Additional Conditions to Obligations of Target........................ 42
6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub... 43
ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER.................................... 44
7.1 Termination........................................................... 44
7.2 Effect of Termination................................................. 46
7.3 Expenses and Termination Fees......................................... 46
7.4 Amendment............................................................. 47
7.5 Extension; Waiver..................................................... 48
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VIII - GENERAL PROVISIONS.................................................. 48
8.1 Non-Survival at Effective Time........................................ 48
8.2 Notices............................................................... 48
8.3 Interpretation........................................................ 49
8.4 Counterparts.......................................................... 49
8.5 Entire Agreement; Nonassignability; Parties in Interest............... 49
8.6 Severability.......................................................... 50
8.7 Remedies Cumulative................................................... 50
8.8 Governing Law......................................................... 50
8.9 Rules of Construction................................................. 50
</TABLE>
iv
<PAGE>
EXHIBIT 2
PARTICIPATION AGREEMENT
This Participation Agreement dated as of November __, 1996 (the
"Agreement") by and among Rational Software Corporation, a Delaware corporation
---------
("Acquiror"), Sunshine Acquisition Corporation, a Delaware corporation and a
--------
wholly-owned subsidiary of Acquiror ("Merger Sub"), and the stockholders who are
----------
signatories hereto (the "Major Stockholders") of SQA, Inc., a Delaware
------------------
corporation ("Target"). Capitalized terms not defined herein have the meanings
------
assigned to them in the Agreement and Plan of Reorganization (the "Merger
------
Agreement") dated the date hereof by and among Acquiror, Merger Sub and Target.
- ---------
WITNESSETH:
WHEREAS, pursuant to the Merger Agreement, Acquiror, Merger Sub and Target
have agreed to merge (the "Merger") Merger Sub with and into Target on the terms
------
and conditions set forth therein; and
WHEREAS, to induce Acquiror to enter into the Merger Agreement, each of the
Major Stockholders, as a principal stockholder of Target, has agreed to enter
into this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
COVENANTS
1.1. Covenants and Agreements. Each of the Major Stockholders hereby
------------------------
covenants and agrees with Acquiror and Merger Sub as follows:
1.1(a) Cooperation. It shall cooperate fully with Target, Acquiror
-----------
and Merger Sub in furnishing any information or performing any action reasonably
requested by any such party, which information or action is necessary or
appropriate for the speedy and successful consummation of the transactions
contemplated by the Merger Agreement or is necessary or appropriate for the
corporate purposes of Acquiror.
1.1(b) Publicity. Except as otherwise required by applicable law or
---------
stock exchange or securities market regulations, it shall not issue any press
release without obtaining the prior approval of Acquiror to the contents and the
manner of presentation and publication thereof.
1.1(c) Restriction on Sales of Target Common Stock and Acquiror
--------------------------------------------------------
Common Stock. It agrees to comply with the restrictions on transfer of shares
- ------------
of Target Common Stock or Acquiror Common Stock set forth in that certain
Affiliate Agreement of even date herewith.
<PAGE>
1.1(d) Other Negotiations. It agrees to comply with the provisions
------------------
of Section 4.3 (Solicitation) of the Merger Agreement.
1.1(e) Agreement to Vote Shares. At every meeting of the
------------------------
stockholders of Target held on or prior to the Expiration Date, and at every
adjournment thereof, and on every action or approval by written consent of the
stockholders of Target, it shall vote all shares of Target capital stock owned
by it: (i) in favor of approval and adoption of the Merger Agreement and the
Merger and any matter that could reasonably be expected to facilitate the Merger
and (ii) against approval of any proposal made in opposition to or competition
with consummation of the Merger (an "Opposing Proposal").
-----------------
1.1(f) Agreement to Grant Proxy. It shall execute and deliver to
------------------------
Acquiror within five days of Acquiror's written request therefor a valid and
binding irrevocable proxy in any form reasonably proposed by Acquiror granting
Acquiror (or its designees) the authority to vote its shares of capital stock of
Target in accordance with and subject to the limitations of Section 1.1(e),
which shall expire on the date the Merger Agreement terminates.
1.1(g) No Proxy Solicitations. Except as required by law, including
----------------------
actions which it determines upon the written advice of legal counsel are
required pursuant to its fiduciary duties as a Director (as defined below) under
applicable law, it shall not, and will not permit any person under its control
to: (i) solicit proxies or become a "participant" in a "solicitation" (as such
terms are defined in Regulation 14A under the Exchange Act) with respect to an
Opposing Proposal; or (ii) initiate a stockholders' vote or action by consent of
Target stockholders with respect to an Opposing Proposal.
1.1(h) Obligations as Director and/or Officer. If at any time prior
--------------------------------------
to the expiration of this Agreement, the Major Stockholder or a representative
of the Major Stockholder is a member of the Board of Directors of Target
("Director") or an officer of Target, nothing in this Agreement shall limit or
restrict the Director or officer in acting in his capacity as a Director or
officer, as the case may be, of Target and exercising his fiduciary duties and
responsibilities, it being agreed and understood that this Agreement shall apply
to the Major Stockholder solely in its capacity as a stockholder and shall not
apply to the Director's or officer's actions, judgments or decisions as a
Director or officer of Target.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of Major Stockholders. Each of the
----------------------------------------------------
Major Stockholders hereby represents and warrants to Acquiror and Merger Sub as
follows:
-2-
<PAGE>
2.1(a) Existence and Power. If the Major Stockholder is a
-------------------
corporation, partnership, limited liability company or trust, it is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization.
2.1(b) Authorization; Binding Agreement. The execution, delivery and
--------------------------------
performance by the Major Stockholder, if it is a corporation, partnership,
limited liability company or trust, of this Agreement are within its corporate,
partnership, limited liability company or trust power and authority and have
been duly authorized by all necessary corporate, partnership, limited liability
company or trust action on the part of the Major Stockholder. This Agreement
has been duly executed and delivered by the Major Stockholder and constitutes a
valid and binding agreement of the Major Stockholder, enforceable against the
Major Stockholder in accordance with its terms.
2.1(c) Governmental Authorization. The execution, delivery and
--------------------------
performance by it of this Agreement does not require any action on its part by
or in respect of, or declaration, filing or registration with, any Governmental
Entity other than any filings that may be required pursuant to Section 13(d) of
the Securities Exchange Act of 1934, as amended.
2.1(d) Non-Contravention. The execution, delivery and performance by
-----------------
it of this Agreement does not and will not (i) if it is a corporation,
partnership, limited liability company or trust, contravene or conflict with its
organizational documents, or (ii) contravene or conflict with or constitute a
violation of any provision of any law, regulation, judgment, injunction, order
or decree binding upon or applicable to it.
2.1(e) Litigation. There is no action, suit, investigation or
----------
proceeding (or any basis therefor) pending against or, to the knowledge of the
Major Stockholder, threatened against or affecting, the Major Stockholder or any
of its respective properties before any court or arbitrator or any governmental
body, agency, official or authority that in any manner challenges or seeks to
prevent, enjoin, alter or materially delay the transactions contemplated by this
Agreement or the Merger Agreement.
2.1(f) Finders' Fees. There is no investment banker, broker,
-------------
finder or other intermediary that has been retained by or is authorized to act
on behalf of the Major Stockholder who might be entitled to any fee or
commission from Acquiror, Target or any of their affiliates upon consummation of
the transactions contemplated by this Agreement or the Merger Agreement.
2.1(g) Ownership of Stock. The Major Stockholder is the record and
------------------
beneficial owner of the shares of Target Common Stock set forth in the Affiliate
Agreement, and owns all such shares free and clear of any and all liens,
pledges, charges, security interests, restrictions or encumbrances of any kind
or any rights of first refusal (other than in favor of Target), voting trusts,
proxies or other arrangements or understandings, whether written or oral, and
the Major Stockholder has the sole and exclusive right and power to exercise all
voting rights and other rights with respect to such shares.
-3-
<PAGE>
ARTICLE III
MISCELLANEOUS
3.1 Survival; Termination.
---------------------
(a) All representations and warranties in this Agreement shall expire
upon the Closing. Any investigation or other examination that may have been
made or may be made at any time by or on behalf of the party to whom
representations and warranties are made shall not limit, diminish or in any way
affect the representations and warranties in this Agreement, and the parties may
rely on the representations and warranties in this Agreement irrespective of any
information obtained by them by any investigation, examination or otherwise.
(b) The covenants contained in Sections 1.1(a), 1.1(b), 1.1(d),
1.1(e), 1.1(f) and 1.1(g), (but not any liability for any breach thereof) shall
terminate at the Effective Time. All other covenants contained in this
Agreement shall survive the Merger.
(c) This Agreement shall terminate in all respects upon termination of
the Merger Agreement (but not any liability for any breach hereof).
3.2 Specific Performance. Each of the parties to this Agreement hereby
--------------------
acknowledges that the other party will have no adequate remedy at law if it
fails to perform any of its obligations under this Agreement. In such event,
each of the parties agrees that the other party shall have the right, in
addition to any other rights it may have (whether at law or in equity), to
specific performance of this Agreement.
3.3 [Intentionally Left Blank].
3.4 Parties in Interest. All the terms and provisions of this Agreement
-------------------
shall be binding upon, shall inure to the benefit of and shall be enforceable by
the respective successors and permitted assigns of the parties hereto. Nothing
expressed or implied in this Agreement is intended or shall be construed to
confer upon or give any person, firm or corporation other than the parties
hereto, their permitted successors or assigns, and their respective stockholders
any rights or remedies under or by reason of this Agreement or any transaction
contemplated hereby.
3.5 Entire Agreement. This Agreement and the Merger Agreement (together
----------------
with the Exhibits and Schedules thereto and the other documents delivered
pursuant thereto) constitute the entire agreement between the parties and
supersede all prior agreements and understandings, both written and oral,
between the parties, or any of them, with respect to the subject matter hereof.
3.6 Amendment or Modification. At any time before or after the adoption
-------------------------
of the Agreement by the stockholders of Target or the approval of the proposals
contained in the Proxy Statement by the stockholders of Acquiror and Target,
this Agreement may be amended or
-4-
<PAGE>
supplemented by additional agreements, articles or certificates, in writing, as
may be determined by the parties hereto to be necessary, desirable or expedient
to further the purposes of this Agreement, or to clarify the intention of the
parties hereto, or to add to or to modify the covenants, terms or conditions
hereof or to effect or facilitate any governmental approval or acceptance of the
Merger or of this Agreement or to effect or facilitate the filing or recording
of the Agreement or the consummation of any of the transactions contemplated
hereby or thereby.
3.7 No Waiver. The failure of any party hereto to enforce at any time any
---------
of the provisions of this Agreement shall in no way be construed to be a waiver
of any such provision, nor in any way to affect the validity of this Agreement
or any part hereof or the right of such party thereafter to enforce each and
every such provision. No waiver of any breach of or non-compliance with this
Agreement shall be held to be a waiver of any other or subsequent breach or non-
compliance.
3.8 Assignability. This Agreement shall not be assignable by the Major
-------------
Stockholder, on the one hand, or Acquiror or Merger Sub, on the other hand,
without the prior written consent of Acquiror or Merger Sub, on the one hand, or
the Major Stockholder, on the other hand.
3.9 Headings and Interpretation. The headings contained in this Agreement
---------------------------
are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement. Terms such as "herein," "hereof,"
"hereinafter" refer to this Agreement as a whole and not to the particular
sentence or paragraph where they appear, unless the context otherwise requires.
Unless the context otherwise requires, (i) terms used in the plural include the
singular, and vice versa, (ii) words in the masculine gender include the
feminine, and vice versa, and (iii) the word "it" includes references to natural
persons.
3.10 Notices. All notices, requests, claims, demands and other
-------
communications under this Agreement shall be in writing and shall be deemed to
have been duly given when received at the addresses set forth in the Merger
Agreement, in the case of Acquiror, Merger Sub, and the books and records of
Target, in the case of the Major Stockholder, or to such other address as any
party may have furnished to the others in writing in accordance herewith, except
that notices of change of address shall only be effective upon receipt.
3.11 Law Governing. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Delaware, without giving
effect to the principles of conflicts of law thereof. Each of the parties
hereto irrevocably consents to the exclusive jurisdiction of the courts located
within the State of Delaware in connection with any matter based upon or arising
out of this Agreement or the matters contemplated herein, agrees that process
may be served upon them in any manner authorized by the laws of the State of
Delaware for such persons and waives and covenants not to assert or plead any
objection which they might otherwise have to such jurisdiction and such process.
-5-
<PAGE>
3.12 Invalidity of Provisions. Each of the provisions contained in
------------------------
this Agreement is distinct and severable and a declaration of invalidity or
unenforceability of any such provision or part thereof by a court of competent
jurisdiction shall not affect the validity or enforceability of any other
provision hereof.
3.13 Counterparts. This Agreement may be executed simultaneously in one or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
[Remainder of page intentionally left blank]
-6-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties on the date first above written.
RATIONAL SOFTWARE CORPORATION
By:_______________________________________________
Name:
Title:
SUNSHINE ACQUISITION CORPORATION
By:_______________________________________________
Name:
Title:
MAJOR STOCKHOLDER
__________________________________________________
(print name of stockholder above)
By:_______________________________________________
Name:
Title:
(if applicable)
-7-
<PAGE>
EXHIBIT 3
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of November 12, 1996 (the "Agreement")
---------
is entered into by and between Rational Software Corporation, a Delaware
corporation ("Acquiror"), and SQA, Inc., a Delaware corporation ("Target").
-------- ------
RECITALS
--------
WHEREAS, concurrently with the execution and delivery of this Agreement,
Acquiror, Target and Sunshine Acquisition Corporation, a Delaware corporation
and a wholly owned subsidiary of Acquiror ("Sub"), are entering into an
---
Agreement and Plan of Reorganization (the "Merger Agreement"), which provides
----------------
that, among other things, upon the terms and subject to the conditions thereof,
Sub will be merged with and into Target (the "Merger") with Target continuing as
------
the surviving corporation and as a wholly owned subsidiary of Acquiror; and
WHEREAS, as a condition to Acquiror's and Sub's willingness to enter into
the Merger Agreement, Acquiror has requested that Target agree, and Target has
so agreed, to grant to Acquiror an option to acquire shares of Target's Common
Stock upon the terms and subject to the conditions set forth herein;
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
---------------
Target hereby grants to Acquiror an irrevocable option (the "Option") to
------
acquire 1,213,296 shares (the "Option Shares") of the Common Stock, par value
-------------
$.01 per share, of Target ("Target Shares") in the manner set forth below by
-------------
paying cash a price of $35.26 per share (the Exercise Price"). Capitalized
--------------
terms used in this Agreement but not defined herein shall have the meanings
ascribed thereto in the Merger Agreement.
2. EXERCISE OF OPTION
------------------
The Option may be exercised by Acquiror, in full (but not in part), at any
time, (i) upon the termination of the Merger Agreement upon the occurrence of
any of the events described in Section 7.3(b)of the Merger Agreement, or (ii)
upon the termination of the Merger Agreement upon the occurrence of any of the
events described in Section 7.1(c)(ii) of the Merger Agreement if, in the case
of this clause (ii), (x) prior to such event, there shall have been a Trigger
Event or Takeover Proposal or (y) within 180 days after such event, there shall
be a Trigger Event or a Takeover Proposal (any of such events described in
clause (i) or (ii) being referred to herein as an "Exercise Event"). In the
--------------
<PAGE>
event Acquiror wishes to exercise the Option, Acquiror shall deliver to Target a
written notice (an "Exercise Notice") specifying Acquiror's intention to
---------------
exercise the Option. The closing of a purchase of Option Shares (the "Closing")
-------
shall occur on a date and at a time designated by Acquiror in an Exercise Notice
delivered at least five business days prior to the date of such Closing, which
Closing shall be held at the offices of counsel to Target. The Option shall
terminate upon the earliest of (i) the Effective Time, (ii) 180 days following
the termination of the Merger Agreement pursuant to Article VII thereof, if an
Exercise Event shall have occurred on or prior to the date of such termination
(or, if later, ten days following the event described in clause (ii)(y) above),
and (iii) the date on which the Merger Agreement is terminated pursuant to
Article VII thereof if an Exercise Event shall not have occurred on or prior to
such date; provided, however, with respect to the preceding clause (ii) of this
-------- -------
sentence, that if, at the expiration of the period specified therein, the Option
cannot be exercised by reason of any applicable judgment, decree, order, laws or
regulation, or because the waiting period related to the issuance of the Option
Shares under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), if applicable, shall not have expired or been
-------
terminated, then the Option shall not terminate until the tenth business day
after such impediment to exercise shall have been removed or shall have become
final and not subject to appeal. Notwithstanding the foregoing, the Option may
not be exercised if Acquiror is in breach in any material respect of any of its
covenants or agreements contained in the Merger Agreement, or more than one year
after the Exercise Event.
3. CONDITIONS TO CLOSING
---------------------
The obligation of Target to issue Option Shares to Acquiror hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired or
been terminated; (b) all consents, approvals, orders or authorizations of, or
registrations, declarations or filings with, any Federal, state, local or
foreign administrative agency or commission or other Federal, state, local or
foreign governmental authority or instrumentality, if any, required in
connection with the issuance of the Option Shares hereunder shall have been
obtained or made, as the case may be; and (c) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting or
otherwise restraining such issuance shall be in effect.
4. CLOSING
-------
At any Closing, (a) Target shall deliver to Acquiror a single certificate
in definitive form representing the number of Target Shares designated by
Acquiror in its Exercise Notice, such certificate to be registered in the name
of Acquiror and to bear the legend set forth in Section 9 hereof, and (b)
Acquiror shall pay to Target the aggregate purchase price for the Target Shares
so designated and being purchased by delivery of a certified check or bank
check.
5. REPRESENTATIONS AND WARRANTIES OF TARGET
----------------------------------------
Target represents and warrants to Acquiror that (a) Target is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate
-2-
<PAGE>
power and authority to enter into this Agreement and to carry out its
obligations hereunder; (b) the execution and delivery of this Agreement by
Target and consummation by Target of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Target and
no other corporate proceedings on the part of Target are necessary to authorize
this Agreement or any of the transactions contemplated hereby; (c) this
Agreement has been duly executed and delivered by Target and constitutes a
legal, valid and binding obligation of Target and, assuming this Agreement
constitutes a legal, valid and binding obligation of Acquiror, is enforceable
against Target in accordance with its terms, except as enforceability may be
limited by bankruptcy and other laws affecting the rights and remedies of
creditors generally and general principles of equity; (d) except for any filings
as may be required under the HSR Act or filings required for companies quoted on
the NASDAQ National Market, Target has taken all necessary corporate and other
action to authorize and reserve for issuance and to permit it to issue upon
exercise of the Option, and at all times from the date hereof until the
termination of the Option will have reserved for issuance, a sufficient number
of unissued Target Shares for Acquiror to exercise the Option in full and will
take all necessary corporate or other action to authorize and reserve for
issuance all additional Target Shares or other securities which may be issuable
pursuant to Section 8 upon exercise of the Option, all of which, upon their
issuance and delivery in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable; (e) upon delivery of the Target
Shares and any other securities to Acquiror upon exercise of the Option,
Acquiror will acquire such Target Shares or other securities free and clear of
all material claims, liens, charges, encumbrances and security interests of any
kind or nature whatsoever, excluding those imposed by Acquiror; (f) the
execution and delivery of this Agreement by Target do not, and the performance
of this Agreement by Target will not, (i) violate the Certificate of
Incorporation or Bylaws of Target, (ii) conflict with or violate any order
applicable to Target or any of its subsidiaries or by which they or any of their
property is bound or affected or (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give rise to any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the property or assets of Target or any of its
subsidiaries pursuant to, any contract or agreement to which Target or any of
its subsidiaries is a party or by which Target or any of its subsidiaries or any
of their property is bound or affected, except, in the case of clauses (ii) and
(iii) above, for violations, conflicts, breaches, defaults, rights of
termination, amendment, acceleration or cancellation, liens or encumbrances
which would not, individually or in the aggregate, have a Material Adverse
Effect on Target; and (g) the execution and delivery of this Agreement by Target
do not, and the performance of this Agreement by Target will not, require any
consent, approval, authorization or permit of, or filing with, or notification
to, any Governmental Entity except pursuant to the HSR Act or for companies
quoted on the NASDAQ National Market, if applicable.
6. REPRESENTATIONS AND WARRANTIES OF ACQUIROR
------------------------------------------
Acquiror represents and warrants to Target that (a) Acquiror is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder; (b) the
execution and delivery of this Agreement by Acquiror and the consummation by
Acquiror of the transactions contemplated hereby have been duly authorized by
all necessary
-3-
<PAGE>
corporate action on the part of Acquiror and no other corporate proceedings on
the part of Acquiror are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed and
delivered by Acquiror and constitutes a legal, valid and binding obligation of
Acquiror and, assuming this Agreement constitutes a legal, valid and binding
obligation of Target, is enforceable against Acquiror in accordance with its
terms, except as enforceability may be limited by bankruptcy and other laws
affecting the rights and remedies of creditors generally and general principles
of equity; (d) the execution and delivery of this Agreement by Acquiror do not,
and the performance of this Agreement by Acquiror will not, (i) violate the
Certificate of Incorporation or Bylaws of Acquiror, (ii) conflict with or
violate any order applicable to Acquiror or any of its subsidiaries or by which
they or any of their property is bound or affected or (iii) result in any breach
of or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give rise to any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or encumbrance on any of the property or assets of Acquiror or any of its
subsidiaries pursuant to, any contract or agreement to which Acquiror or any of
its subsidiaries is a party or by which Acquiror or any of its subsidiaries or
any of their property is bound or affected, except, in the case of clauses (ii)
and (iii) above, for violations, conflicts, breaches, defaults, rights of
termination, amendment, acceleration or cancellation, liens or encumbrances
which would not, individually or in the aggregate, have a Material Adverse
Effect on Acquiror; (e) the execution and delivery of this Agreement by Acquiror
does not, and the performance of this Agreement by Acquiror will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity except pursuant to the HSR Act, if
applicable; and (f) any Target Shares acquired upon exercise of the Option will
not be acquired by Acquiror with a view to the public distribution thereof and
Acquiror will not sell or otherwise dispose of such shares in violation of
applicable law or this Agreement.
7. [Intentionally Left Blank]
8. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
-----------------------------------------
In the event of any change in the Target Shares by reason of stock
dividends, split-ups, mergers (other than the Merger), recapitalizations,
combinations, exchanges of shares and the like, the type and number of shares or
securities subject to the Option and the Exercise Price shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that Acquiror shall receive, upon exercise of the Option,
the number and class of shares or other securities or property that Acquiror
would have received in respect of the Target Shares if the Option had been
exercised immediately prior to such event or the record date therefor, as
applicable.
9. RESTRICTIVE LEGENDS
-------------------
Each certificate representing Option Shares issued to Acquiror hereunder,
shall include a legend in substantially the following form:
-4-
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF NOVEMBER
12, 1996, A COPY OF WHICH MAY BE OBTAINED FROM SQA, INC.
10. NASDAQ NATIONAL MARKET LISTING AND HSR FILING
---------------------------------------------
Target, upon the request of Acquiror, shall promptly file an application to
list the Target Shares to be acquired upon exercise of the Option for quotation
on the Nasdaq National Market and shall use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date hereof, each of
the parties hereto shall promptly file with the Federal Trade Commission and the
Antitrust Division of the United States Department of Justice all required
premerger notification and report forms and other documents and exhibits
required to be filed under the HSR Act, if any, to permit the acquisition of the
Target Shares subject to the Option at the earliest possible date.
11. BINDING EFFECT
--------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon any
person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions of
Section 7 shall, upon consummation of such sale, be free of the restrictions
imposed with respect to such shares by this Agreement and any transferee of such
shares shall not be entitled to the rights of such party. Certificates
representing shares sold in a registered public offering pursuant to Section 7
shall not be required to bear the legend set forth in Section 9.
12. SPECIFIC PERFORMANCE
--------------------
The parties recognize and agree that if for any reason any of the
provisions of this Agreement are not performed in accordance with their specific
terms or are otherwise breached, immediate and irreparable harm or injury would
be caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be brought
in equity to enforce the provisions of the Agreement, neither party will allege,
and each party hereby waives the defense, that there is an adequate remedy at
law.
-5-
<PAGE>
13. ENTIRE AGREEMENT
----------------
This Agreement and the Merger Agreement (including the Exhibits and
Schedules thereto) constitute the entire agreement between the parties with
respect to the subject matter hereof and supersede all other prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter hereof.
14. FURTHER ASSURANCES
------------------
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
15. VALIDITY
--------
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall negotiate
in good faith and shall execute and deliver an amendment to this Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision.
16. NOTICES
-------
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by commercial delivery service,
or sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers for
a party as shall be specified by like notice):
(1) if to Acquiror, to:
Rational Software Corporation
2800 San Tomas
Expressway
Santa Clara, CA 95051
Attention: President
Telephone No.: (408) 496-3600
Telecopy No.: (408) 970-0715
-6-
<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Frank Currie, Esq.
Telephone No.: (415) 493-9300
Telecopy No.: (415) 493-6811
(2) if to Target, to:
SQA, Inc.
One Burlington Woods
Burlington, Massachusetts 01803
Attention: President
Telephone No.: (617) 229-3500
Telecopy No.: (617) 229-3783
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower, 125 High Street
Boston, Massachusetts 02110
Attention: William J. Schnoor, Jr. Esq.
Telephone No.: (617) 248-7000
Telecopy No.: (617) 248-7100
17. GOVERNING LAW
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be performed
entirely within such State.
18. COUNTERPARTS
------------
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
19. EXPENSES
--------
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions contemplated
by this Agreement shall be paid by the party incurring such expenses.
-7-
<PAGE>
20. AMENDMENTS; WAIVER
------------------
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
21. ASSIGNMENT
----------
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that Acquiror may assign its rights and obligations
hereunder to Sub.
[Remainder of Page Intentionally Blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
RATIONAL SOFTWARE CORPORATION
By:_______________________________________________
Name:
Title:
SQA, INC.
By:______________________________________________
Name:
Title:
-9-
<PAGE>
EXHIBIT 4
AFFILIATE AGREEMENT
November__, 1996
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Ladies and Gentlemen:
Pursuant to the terms of the Agreement and Plan of Reorganization dated as
of November __, 1996 (the "Agreement"), among Rational Software Corporation, a
Delaware corporation ("Acquiror"), Sunshine Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of Acquiror ("Merger Sub"),
and SQA, Inc., a Delaware corporation ("Target"), Acquiror will enter into a
business combination with Target through the merger of Merger Sub with and
into Target (the "Merger"), with Target continuing as the surviving
corporation and as a wholly-owned subsidiary of Acquiror.
The undersigned has been advised that, as of the date hereof, the
undersigned may be deemed to be an "affiliate" of Acquiror, as the term
"affiliate" is used in and for purposes of Accounting Series Releases 130 and
135, as amended, and Staff Accounting Bulletins 65 and 76 of the Commission.
The undersigned understands that the representations, warranties and
covenants set forth herein will be relied upon by Acquiror, other stockholders
of Acquiror, Target, stockholders of Target and their respective counsel and
accountants.
The undersigned represents and warrants to and agrees with Acquiror that:
1. The undersigned has full power to execute and deliver this Affiliate
Agreement and to make the representations and warranties herein and to perform
its obligations hereunder.
2. The undersigned has carefully read this letter and the Agreement and
discussed its requirements and other applicable limitations upon its ability
to sell, transfer or otherwise dispose of Target Common Stock and Acquiror
Common Stock to the extent the undersigned felt necessary, with its counsel or
counsel for Acquiror.
3. The undersigned shall not make any sale, transfer or other disposition
of Acquiror Common Stock in violation of the Act or the Rules and Regulations.
<PAGE>
4. The undersigned agrees with Acquiror that the undersigned will not
sell, exchange, transfer, pledge, dispose or otherwise reduce his risk
relative to any shares of Acquiror Common Stock or other equity securities of
Acquiror owned by the undersigned during the period commencing on the date
hereof and ending at such time as financial results covering at least 30 days
of combined operations of Target and Acquiror have been published by Acquiror,
in the form of a quarterly earnings report, an effective registration
statement filed with the Commission, a report to the Commission on Form 10-K,
10-Q or 8-K, or any other public filing or announcement which includes the
combined results of operations, so as to interfere with Acquiror accounting
for the Merger as a pooling of interests. Acquiror, at its discretion, may
cause stop transfer orders to be placed with its transfer agent with respect
to the certificates representing the undersigned's shares of Acquiror Common
Stock.
5. Acquiror agrees to publish, as promptly as practicable following the
Merger, financial results covering at least 30 days of combined operations of
Target and Acquiror in the form of a quarterly earnings report, an effective
registration statement filed with the Commission, a report to the Commission
on Form 10-K, 10-Q or 8-K, or any other public filing or announcement that
includes the combined results of operations of Acquiror and Target; provided,
--------
however, that Acquiror shall be under no obligation to publish any such
-------
financial information other than with respect to a fiscal quarter of Acquiror.
6. The undersigned represents and warrants to Acquiror that the
undersigned is the beneficial owner of the shares of Acquiror Common Stock and
options to purchase Acquiror Common Stock indicated below (the "Acquiror
Securities"). Except for Acquiror Securities, the undersigned does not
beneficially own any shares of Acquiror Common Stock or any other equity
security of Acquiror or any options, warrants or other rights to acquire any
equity securities of Acquiror.
7. This Agreement may not be amended or waived other than by a writing
signed by both the undersigned and Acquiror.
[Remainder of this Page Intentionally Left Blank]
2
<PAGE>
NUMBER OF SHARES OF ACQUIROR COMMON STOCK
BENEFICIALLY OWNED BY THE UNDERSIGNED:
_______________
NUMBER OF SHARES OF ACQUIROR COMMON STOCK
SUBJECT TO OPTIONS BENEFICIALLY OWNED BY THE UNDERSIGNED:
________________
Very truly yours,
______________________________________
(print name of stockholder above)
By: _________________________________
Name:
Title:
(if applicable)
Accepted this ____ day of
November, 1996, by
Rational Software Corporation
By: ______________________________
Name:
Title:
3
<PAGE>
EXHIBIT 5
AFFILIATE AGREEMENT
November __, 1996
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Ladies and Gentlemen:
Pursuant to the terms of the Agreement and Plan of Reorganization dated
as of November __, 1996 (the "Agreement"), among Rational Software
Corporation, a Delaware corporation ("Acquiror"), Sunshine Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of Acquiror
("Merger Sub"), and SQA, Inc., a Delaware corporation ("Target"), Acquiror
will enter into a business combination with Target through the merger of
Merger Sub with and into Target (the "Merger"), with Target continuing as the
surviving corporation and as a wholly-owned subsidiary of Acquiror. Subject
to the terms and conditions of the Agreement, at the Effective Time (as
defined in the Agreement), all of the issued and outstanding shares of the
common stock, $.____ par value per share, of Target (the "Target Common
Stock") will be converted into the right to receive shares of the common
stock, $.01 par value per share, of Acquiror (the "Acquiror Common Stock"), on
the basis described in the Agreement.
The undersigned has been advised that as of the date hereof the
undersigned may be deemed to be an "affiliate" of Target, as the term
"affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule 145
of the Rules and Regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933,
as amended (the "Act"), and/or (ii) used in and for purposes of Accounting
Series Releases 130 and 135, as amended, and Staff Accounting Bulletins 65 and
76 of the Commission.
The undersigned understands that the representations, warranties and
covenants set forth herein will be relied upon by Acquiror, stockholders of
Acquiror, Target, other stockholders of Target and their respective counsel
and accountants.
The undersigned represents and warrants to and agrees with Acquiror that:
1. The undersigned has full power to execute and deliver this Affiliate
Agreement and to make the representations and warranties herein and to perform
its obligations hereunder.
2. The undersigned has carefully read this letter and the Agreement and
discussed its requirements and other applicable limitations upon its ability
to sell, transfer or otherwise dispose
<PAGE>
of Target Common Stock and Acquiror Common Stock to the extent the undersigned
felt necessary, with its counsel or counsel for Target.
3. The undersigned shall not make any sale, transfer or other
disposition of Acquiror Common Stock in violation of the Act or the Rules and
Regulations.
4. The undersigned has been advised that the issuance of shares of
Acquiror Common Stock to the undersigned in connection with the Merger has
been or will be registered with the Commission under the Act on a Registration
Statement on Form S-4. However, the undersigned has also been advised that,
since the undersigned may be deemed to have been an affiliate of Target and
the distribution by the undersigned of any Acquiror Common Stock has not been
registered, and is not exempt, under the Act, the undersigned may not sell,
transfer or otherwise dispose of Acquiror Common Stock issued to the
undersigned in the Merger unless (i) such sale, transfer or other disposition
has been registered under the Act, (ii) such sale, transfer or other
disposition is made in conformity with the requirements of Rule 145
promulgated by the Commission under the Act, or (iii) in the opinion of
counsel reasonably acceptable to Acquiror, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
5. Acquiror is under no obligation to register the sale, transfer or
other disposition of Acquiror Common Stock by the undersigned or on its behalf
under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available.
6. Stop transfer instructions will be given to Acquiror's transfer
agent with respect to the Acquiror Common Stock and that there will be placed
on the certificates for the Acquiror Common Stock issued to the undersigned,
or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED
IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SHARES REPRESENTED BY
THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE
WITH THE TERMS OF AN AGREEMENT DATED NOVEMBER __, 1996
BETWEEN THE REGISTERED HOLDER HEREOF AND RATIONAL SOFTWARE
CORPORATION, A COPY OF WHICH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICES OF RATIONAL SOFTWARE CORPORATION."
7. Unless the transfer by the undersigned of its Acquiror Common Stock has
been registered under the Act or is a sale made in conformity with the
provisions of Rule 145, Acquiror
2
<PAGE>
reserves the right to place the following legend on the certificates issued
any transferee of the undersigned:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE
ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933."
8. The legends set forth in paragraphs 6 and 7 above shall be removed
by delivery of substitute certificates without such legend if the undersigned
shall have delivered to Acquiror a copy of a letter from the staff of the
Commission, or an opinion of counsel in form and substance reasonably
satisfactory to Acquiror, to the effect that such legend is not required for
purposes of the Act.
9. The undersigned is the beneficial owner of (i.e. has sole or shared
voting or investment power with respect to) all the shares of Target Common
Stock and options to purchase Target Common Stock indicated on the last page
hereof (the "Target Securities"). Except for Target Securities, the
undersigned does not beneficially own any shares of Target Common Stock or any
other equity securities of Target or any options, warrants or other rights to
acquire any equity securities of Target.
10. The undersigned agrees that during the period commencing on the date
hereof and ending at such time as financial results covering at least 30 days
of combined operations of Target and Acquiror have been published by Acquiror,
in the form of a quarterly earnings report, an effective registration
statement filed with the Commission, a report to the Commission on Form 10-K,
10-Q or 8-K, or any other public filing or announcement which includes the
combined results of operations, it will not engage, in any sale, exchange,
transfer, pledge, disposition of or grant of any option, the establishment of
any "short" or put-equivalent position with respect to, or the entry into any
similar transaction intended to reduce the risk of the undersigned's risk of
ownership of or investment in, any of the following:
(a) any shares of Acquiror Common Stock which the undersigned may
acquire in connection with the Merger, or any securities which may be
paid as a dividend or
3
<PAGE>
otherwise distributed thereon or with respect thereto or issued or
delivered in exchange or substitution therefor (all such shares and other
securities being referred to herein, collectively, as "Restricted
Securities"), or any option, right or other interest with respect to any
Restricted Securities;
(b) any Target Securities; or
(c) any shares of Target Common Stock or other Target equity
securities which the undersigned purchases or otherwise acquires after
the execution of this Affiliate Agreement,
so as to interfere with Acquiror accounting for the Merger as a pooling of
interests.
11. Acquiror agrees to publish, as promptly as practicable following the
Merger, financial results covering at least 30 days of combined operations of
Target and Acquiror in the form of a quarterly earnings report, an effective
registration statement filed with the Commission, a report to the Commission
on Form 10-K, 10-Q or 8-K, or any other public filing or announcement that
includes the combined results of operations of Acquiror and Target; provided,
--------
however, that Acquiror shall be under no obligation to publish any such
-------
financial information other than with respect to a fiscal quarter of Acquiror.
12. This Agreement may not be amended or waived other than by a writing
signed by both the undersigned and Acquiror.
13. In the event they were to become available, the undersigned will not
exercise dissenters' rights in connection with the Merger.
14. The undersigned has no plan or intention to engage in a direct or
indirect sale, exchange, redemption, disposition or conveyance or any
transaction that would have the effect of reducing in any way the
undersigned's risk of ownership including, but not limited to, distributions
by a partnership to its partners and by a corporation to its stockholders, of
the shares of Acquiror Common Stock to be received by the undersigned in the
Merger. The undersigned acknowledges that he is giving this representation
and covenant to enable Testa, Hurwitz & Thibeault, LLP and Wilson Sonsini
Goodrich & Rosati to opine that the Merger constitutes a reorganization within
the meaning of Section 368 of the Code and further recognizes that significant
adverse tax consequences might result if such representation is not true. The
undersigned understands and agrees that, in connection with the Merger, the
undersigned will be required to restate the foregoing representation on or
about the Effective Time of the Merger.
4
<PAGE>
NUMBER OF SHARES OF TARGET COMMON STOCK
BENEFICIALLY OWNED BY THE UNDERSIGNED:
________________
NUMBER OF SHARES OF TARGET COMMON STOCK
SUBJECT TO OPTIONS
BENEFICIALLY OWNED BY THE UNDERSIGNED:
________________
Very truly yours,
_________________________________________
(print name of stockholder above)
By: ___________________________________
Name:
Title:
(if applicable)
Accepted this __ day of
November, 1996, by
RATIONAL SOFTWARE CORPORATION
By: ______________________________
Name:
Title:
5
