<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
Date of Report (Date of earliest event reported) April 7, 1997
-------------------------
RATIONAL SOFTWARE CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-12167 54-1217099
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(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
2800 San Tomas Expressway, Santa Clara, California 94051-0951
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 496-3600
-------------------------
(Not Applicable)
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events
On April 7, 1997, Rational Software Corporation, a Delaware corporation
("Rational") and Pure Atria Corporation, a Delaware corporation ("Pure Atria")
entered into an Agreement and Plan of Reorganization (the "Merger Agreement")
among Rational, Wings Merger Corporation, a Delaware corporation and a wholly-
owned subsidiary of Rational, and Pure Atria. A copy of the press release
issued by Rational regarding the Merger Agreement is filed herewith as Exhibit
99.1 and incorporated by reference herein. A copy of the Merger Agreement is
filed herewith as Exhibit 2.1 and incorporated by reference herein. Further
agreements, contemplated by the Merger Agreement, including the Voting
Agreement dated April 7, 1997 by and among Rational and certain Pure Atria
stockholders, the Voting Agreement dated April 7, 1997, by and among Pure
Atria and certain Rational stockholders, the Stock Option Agreement dated
April 7, 1997 by and between Pure Atria and Rational (granting Rational an
option to purchase Pure Atria stock), the Stock Option Agreement dated April
7, 1997, by and between Pure Atria and Rational (granting Pure Atria an option
to purchase Rational stock), the form of Affiliate Agreement dated April 7,
1997 by and among Rational, Pure Atria and certain Rational stockholders, and
the form of Affiliate Agreement dated April 7, 1997 by and among Rational,
Pure Atria and certain Pure Atria stockholders are filed herewith as Exhibits
99.2, 99.3, 99.4, 99.5, 99.6 and 99.7, respectively, and incorporated by
reference herein.
Item 7. Financial Statements and Exhibits
(c)
2.1 Agreement and Plan or Reorganization dated April 7, 1997 by and among
Rational Software Corporation, a Delaware corporation, Wings Merger
Corporation, a Delaware corporation and wholly-owned subsidiary of
Rational Software Corporation, and Pure Atria Corporation, a Delaware
corporation.
99.1 Press Release dated April 7, 1997
99.2 Voting Agreement dated April 7, 1997 by and among Rational Software
Corporation, a Delaware corporation, and certain stockholders of Pure
Atria Corporation, a Delaware corporation.
99.3 Voting Agreement dated April 7, 1997 by and between Pure Atria
Corporation, a Delaware corporation, and certain stockholders of
Rational Software Corporation, a Delaware corporation.
99.4 Stock Option Agreement dated April 7, 1997, by and between Pure Atria
Corporation, a Delaware corporation, and Rational Software
Corporation, a Delaware corporation (granting Rational an option to
purchase Pure Atria Common Stock).
99.5 Stock Option Agreement dated April 7, 1997 by and between Pure Atria
Corporation, a Delaware corporation, and Rational Software
Corporation, a Delaware corporation (granting Pure Atria an option to
purchase Rational Common Stock).
<PAGE>
99.6 Form of Affiliate Agreement dated April 7, 1997 by and among Rational
Software Corporation, a Delaware corporation, Pure Atria Corporation, a
Delaware corporation, and certain stockholders of Rational Software
Corporation, a Delaware corporation.
99.7 Form of Affiliate Agreement dated April 7, 1997 by and among Rational
Software Corporation, a Delaware corporation, Pure Atria Corporation, a
Delaware corporation, and certain stockholders of Pure Atria
Corporation, a Delaware corporation.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RATIONAL SOFTWARE CORPORATION
-----------------------------
(Registrant)
April 11, 1997 /s/ Timothy A. Brennan
- --------------- ----------------------------------
(Date) Timothy A. Brennan,
Vice President,
Finance and Administration
<PAGE>
EXHIBIT INDEX
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Exhibit
No. Description
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<C> <S>
2.1 Agreement and Plan or Reorganization dated April 7, 1997 by and
among Rational Software Corporation, a Delaware corporation, Wings
Merger Corporation, a Delaware corporation and wholly-owned
subsidiary of Rational Software Corporation, and Pure Atria
Corporation, a Delaware corporation.
99.1 Press Release dated April 7, 1997
99.2 Voting Agreement dated April 7, 1997 by and among Rational Software
Corporation, a Delaware corporation, and certain stockholders of
Pure Atria Corporation, a Delaware corporation.
99.3 Voting Agreement dated April 7, 1997 by and between Pure Atria
Corporation, a Delaware corporation, and certain stockholders of
Rational Software Corporation, a Delaware corporation.
99.4 Stock Option Agreement dated April 7, 1997, by and between Pure
Atria Corporation, a Delaware corporation, and Rational Software
Corporation, a Delaware corporation (granting Rational an option
to purchase Pure Atria Common Stock).
99.5 Stock Option Agreement dated April 7, 1997 by and between Pure
Atria Corporation, a Delaware corporation, and Rational Software
Corporation, a Delaware corporation (granting Pure Atria an
option to purchase Rational Common Stock).
99.6 Form of Affiliate Agreement dated April 7, 1997 by and among
Rational Software Corporation, a Delaware corporation, Pure Atria
Corporation, a Delaware corporation, and certain stockholders of
Rational Software Corporation, a Delaware corporation.
99.7 Form of Affiliate Agreement dated April 7, 1997 by and among
Rational Software Corporation, a Delaware corporation, Pure Atria
Corporation, a Delaware corporation, and certain stockholders of
Pure Atria Corporation, a Delaware corporation.
</TABLE>
<PAGE>
EXHIBIT 2.1
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
RATIONAL SOFTWARE CORPORATION
WINGS MERGER CORPORATION
AND
PURE ATRIA CORPORATION
APRIL 7, 1997
================================================================================
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ARTICLE I - THE MERGER 2
1.1 The Merger............................................................ 2
1.2 Effective Time; Closing............................................... 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............................................. 5
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............................ 7
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF TARGET........................ 7
2.1 Organization of Target................................................ 7
2.2 Target Capital Structure.............................................. 8
2.3 Obligations With Respect to Capital Stock............................. 8
2.4 Authority............................................................. 9
2.5 SEC Filings; Target Financial Statements.............................. 10
2.6 Absence of Certain Changes or Events.................................. 11
2.7 Tax................................................................... 11
2.8 Restrictions on Business Activities................................... 11
2.9 Title to Properties; Absence of Liens and Encumbrances................ 11
2.10 Intellectual Property................................................. 12
2.11 Compliance; Permits; Restrictions..................................... 13
2.12 Litigation............................................................ 13
2.13 Brokers' and Finders' Fees............................................ 13
2.14 Employee Benefit Plans................................................ 13
2.15 Employees; Labor Matters.............................................. 14
2.16 Environmental Matters................................................. 14
2.17 Agreements, Contracts and Commitments................................. 15
2.18 Change of Control Payments............................................ 16
2.19 Statements; Proxy Statement/Prospectus................................ 16
2.20 Board Approval........................................................ 17
2.21 Fairness Opinion...................................................... 17
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ARTICLE III - REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND
MERGER SUB..................................................... 17
3.1 Organization of Acquiror.............................................. 17
3.2 Acquiror and Merger Sub Capital Structure............................. 18
3.3 Obligations With Respect to Capital Stock............................. 18
3.4 Authority............................................................. 19
3.5 Section 203 of the Delaware General Corporation Law Not Applicable.... 20
3.6 SEC Filings; Acquiror Financial Statements............................ 20
3.7 Absence of Certain Changes or Events.................................. 21
3.8 Taxes and Returns..................................................... 21
3.9 Title to Properties; Absence of Liens and Encumbrances................ 22
3.10 Intellectual Property................................................. 22
3.11 Compliance; Permits; Restrictions..................................... 23
3.12 Litigation............................................................ 23
3.13 Brokers' and Finders' Fees............................................ 24
3.14 Employee Benefit Plans................................................ 24
3.15 Employees; Labor Matters.............................................. 24
3.16 Environmental Matters................................................. 25
3.17 Agreements, Contracts and Commitments................................. 25
3.18 Change of Control Payments............................................ 26
3.19 Statements; Proxy Statement/Prospectus................................ 26
3.20 Board Approval........................................................ 27
3.21 Fairness Opinion...................................................... 27
3.22 Restrictions on Business Activities................................... 27
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME............................. 27
4.1 Conduct of Business................................................... 27
4.2 Acquiror Acquisitions................................................. 30
4.3 No HSR Act Violation.................................................. 31
ARTICLE V - ADDITIONAL AGREEMENTS............................................ 31
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings;
Board Recommendations................................................. 31
5.2 Meetings of Stockholders.............................................. 32
5.3 Confidentiality; Access to Information................................ 32
5.4 No Solicitation....................................................... 33
5.5 Public Disclosure..................................................... 36
5.6 Legal Requirements.................................................... 36
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5.7 Third Party Consents.................................................. 36
5.8 Notification of Certain Matters....................................... 36
5.9 Best Efforts and Further Assurances................................... 36
5.10 Stock Options and Warrants............................................ 37
5.11 Form S-8.............................................................. 37
5.12 Indemnification and Insurance......................................... 37
5.13 Nasdaq National Market Listing........................................ 38
5.14 Acquiror Affiliate Agreement.......................................... 38
5.15 Target Affiliate Agreement............................................ 39
5.16 Acquiror Voting Agreements............................................ 39
5.17 Target Voting Agreements.............................................. 39
5.18 Regulatory Filings; Reasonable Efforts................................ 39
5.19 Increase in Authorized Shares......................................... 39
5.20 Tax-Free Reorganization............................................... 40
5.21 Nasdaq Quotation...................................................... 40
5.22 Employee Benefit Arrangements......................................... 40
5.23 [Intentionally left blank]............................................ 40
5.24 Amendment to Registration Rights...................................... 40
5.25 Pooling Accounting.................................................... 40
5.26 Option Agreement...................................................... 41
5.27 ESPP.................................................................. 41
ARTICLE VI - CONDITIONS TO THE MERGER........................................ 41
6.1 Conditions to Obligations of Each Party to Effect the Merger.......... 41
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 Notice of Termination; Effect of Termination.......................... 45
7.3 Fees and Expenses..................................................... 46
7.4 Amendment............................................................. 47
7.5 Extension; Waiver..................................................... 48
7.6 Extension of Date..................................................... 48
ARTICLE VIII - GENERAL PROVISIONS............................................ 48
8.1 Non-Survival of Representations and Warranties........................ 48
8.2 Notices............................................................... 48
8.3 Interpretation; Knowledge............................................. 49
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8.4 Counterparts.......................................................... 49
8.5 Entire Agreement; Third Party Beneficiaries........................... 49
8.6 Severability.......................................................... 50
8.7 Other Remedies; Specific Performance.................................. 50
8.8 Governing Law......................................................... 50
8.9 Rules of Construction................................................. 50
8.10 Assignment............................................................ 50
8.11 Waiver of Jury Trial.................................................. 51
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INDEX OF EXHIBITS
-----------------
Exhibit A-1 Form of Target Voting Agreement
Exhibit A-2 Form of Acquiror Voting Agreement
Exhibit B-1 Form of Target Option Agreement
Exhibit B-2 Form of Acquiror Option Agreement
Exhibit C-1 Form of Acquiror Affiliate Agreement
Exhibit C-2 Form of Target Affiliate Agreement
Exhibit D-1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
Exhibit D-2 Form of Opinion of Fenwick & West LLP
Exhibit E Form of Noncompetition Agreement
<PAGE>
EXHIBIT 2.1
-----------
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
April 7, 1997, by and among Rational Software Corporation, a Delaware
corporation ("ACQUIROR"), Wings Merger Corporation, a Delaware corporation and a
wholly owned subsidiary of Acquiror ("MERGER SUB"), and Pure Atria Corporation,
a Delaware corporation ("TARGET").
RECITALS
--------
A. The Boards of Directors of Acquiror, Merger Sub and Target 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") upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the Delaware General
Corporation Law ("DELAWARE LAW").
B. Pursuant to the Merger, among other things, the outstanding shares of
Target Common Stock, $.0001 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 (as defined in Section
1.2 below), 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. Concurrently with the execution of this Agreement, and as a condition
and inducement to Acquiror's willingness to enter into this Agreement, certain
affiliates of Target shall enter into Voting Agreements in substantially the
form attached hereto as Exhibit A-1 (the "TARGET VOTING AGREEMENTS").
-----------
Concurrently with the execution of this Agreement, and as a condition and
inducement to Target's willingness to enter into this Agreement, certain
affiliates of Acquiror shall enter into Voting Agreements in substantially the
form attached hereto as Exhibit A-2 (the "ACQUIROR VOTING AGREEMENTS").
-----------
G. Concurrently with the execution of this Agreement, and as a condition
and inducement to Acquiror to enter into this Agreement, Target shall execute
and deliver a Stock Option Agreement in favor of Acquiror in substantially the
form attached hereto as Exhibit B-1 (the "TARGET OPTION AGREEMENT").
-----------
H. Concurrently with the execution of this Agreement, and as a condition
and inducement to Target to enter into this Agreement, Acquiror shall execute
and deliver a Stock Option Agreement
<PAGE>
in favor of Target in substantially the form attached hereto as Exhibit B-2 (the
-----------
"ACQUIROR OPTION AGREEMENT").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
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 and the
applicable provisions of 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 Effective Time; Closing. Subject to the provisions of this Agreement,
-----------------------
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "CERTIFICATE OF
MERGER") (the time of such filing (or such later time as may be agreed in
writing by the parties and specified in the Certificate of Merger) being the
"EFFECTIVE TIME") as soon as practicable on or after the Closing Date (as herein
defined). Unless the context otherwise requires, the term "AGREEMENT" as used
herein refers collectively to this Agreement and Plan of Reorganization and the
Certificate of Merger. The closing of the Merger (the "CLOSING") shall take
place at the offices of Wilson Sonsini Goodrich & Rosati, P.C., at a time and
date to be specified by the parties, which shall be no later than the second
business day after the satisfaction or waiver of the conditions set forth in
Article VI, or at such other time, date and location as the parties hereto agree
in writing (the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in this Agreement 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 Merger
Sub, 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 law and such Certificate of Incorporation of the
Surviving Corporation; provided, however, that 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 the name of Target
immediately prior to the Merger.
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(b) Subject to Section 5.12, the Bylaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be, at the Effective Time, the
Bylaws of the Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
----------------------
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of Merger Sub immediately prior to the Effective Time, until their
respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, 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. 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) and
any Dissenting Shares (as defined in and to the extent provided in Section
1.7(a)) will be canceled and extinguished and automatically converted (subject
to Sections 1.6(e) and (f)) into the right to receive 0.9 (the "EXCHANGE RATIO")
shares of Acquiror Common Stock upon surrender of the certificate representing
such share of Target Common Stock in the manner provided in Section 1.8 (or in
the case of a lost, stolen or destroyed certificate, upon delivery of an
affidavit (and bond, if required) in the manner provided in Section 1.10).
(b) Cancellation of Acquiror-Owned Stock. Each share of Target Common
------------------------------------
Stock held by Target or owned by Merger Sub, Acquiror or any direct or indirect
wholly owned subsidiary of Target or of Acquiror immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof.
(c) Stock Option Plans; Employee Stock Purchase Plan. At the Effective
------------------------------------------------
Time, all options to purchase Target Common Stock then outstanding under all of
Target's stock option plans, which plans are listed on Schedule 1.6(c) of the
Target Schedules (the "TARGET STOCK OPTION PLANS") shall be assumed by Acquiror
in accordance with Section 5.10 hereof. With respect to any stock purchase
agreements entered into by the Target pursuant to any of the Target Stock Option
Plans, following the consummation of the Merger any Target repurchase rights
with respect to such stock purchase agreements shall be assigned to the Acquiror
and continue in the Acquiror's favor, subject to the terms of such agreements
and such plans. The Target shall take such actions as are necessary to
establish a "new exercise date" as such term is used in the Target's Employee
Stock Purchase Plan (the "TARGET ESPP")) in accordance with the terms of the
Target ESPP (the "NEW EXERCISE DATE") for the then current offering period (as
such term is used in the Target ESPP). The New Exercise Date shall be the last
trading day on which the Acquiror's Common Shares are traded on the Nasdaq
National Market immediately prior to the Effective Time provided, that the New
Exercise Date shall be conditioned upon the consummation of the Merger. On the
New Exercise Date, the Target shall apply the funds credited as of such date
under the Target ESPP within each participant's payroll withholdings account to
the purchase of whole shares of Target Common Stock in accordance with the terms
of the Target ESPP.
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(d) Capital Stock of Merger Sub. Each share of Common Stock, $.001,
---------------------------
of Merger Sub (the "MERGER SUB COMMON STOCK") issued and outstanding immediately
prior to the Effective Time shall be converted into one validly issued, fully
paid and nonassessable share of Common Stock, $.001, of the Surviving
Corporation. Each certificate evidencing ownership of shares of Merger Sub
Common Stock 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 appropriately the effect of any stock split, reverse stock
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 on or after the date hereof and prior to the
Effective Time.
(f) Fractional Shares. No fraction of a share of Acquiror Common
-----------------
Stock will be issued by virtue of the Merger, 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 closing price of one 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) Notwithstanding any provision of this Agreement to the contrary,
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 Section 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 or lose (through failure to perfect or otherwise) the right
to appraisal, then, as of the later of the Effective Time or the occurrence of
such event, such holder's shares shall automatically be converted into and
represent only the right to receive Acquiror Common Stock and cash in lieu of
fractional shares of Acquiror Common Stock in accordance with Section 1.6
hereof, without interest thereon, upon surrender of the certificate representing
such shares of Target Common Stock in the manner provided in Section 1.8 (or in
the case of a lost, stolen or destroyed certificate, upon delivery of an
affidavit (and bond, if required) in the manner provided in Section 1.10).
(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
-4-
<PAGE>
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 Target Common Stock or offer to
settle or settle any such demands. Any payments made in respect of Dissenting
Shares shall be made by Target or the Surviving Corporation as the case may be.
(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 limit the parties' obligations under Section 5.21 (Nasdaq
Quotation).
1.8 Surrender of Certificates.
-------------------------
(a) Exchange Agent. Acquiror shall select a bank or trust company
--------------
with assets of not less than $500 million to act as the 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 Article I, the shares of Acquiror Common Stock issuable
pursuant to Section 1.6 in exchange for outstanding shares of Target Common
Stock, and cash in an amount sufficient for payment in lieu of fractional shares
pursuant to Section 1.6(f) and any dividends or distributions which holders of
shares of Target Common Stock may be entitled pursuant to Section 1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, Acquiror
-------------------
shall cause the Exchange Agent to mail to each holder of record (as of the
Effective Time) 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 pursuant to Section 1.6, cash in lieu of any fractional
shares pursuant to Section 1.6(f) and any dividends or other distributions
pursuant to Section 1.8(d), (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to 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, cash in lieu of any fractional shares pursuant to Section 1.6(f) and any
dividends or other distributions pursuant to Section 1.8(d). Upon surrender of
Certificates for cancellation 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 holders of such Certificates shall be entitled to
receive in exchange therefor certificates representing the number of whole
shares of Acquiror Common Stock, payment in lieu of fractional shares which such
holders have the right to receive pursuant to Section 1.6(f) and any dividends
or distributions payable pursuant to Section 1.8(d), and the Certificates so
surrendered shall forthwith be canceled. Until so surrendered, outstanding
Certificates will be deemed from and after the Effective Time, for all corporate
purposes, 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(f) and any dividends or
distributions payable pursuant to Section 1.8(d).
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(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the date of this Agreement with
respect to Acquiror Common Stock with a record date after the Effective Time
will be paid to the holders of any unsurrendered Certificates with respect to
the shares of Acquiror Common Stock represented thereby until the holders of
record of such Certificates shall surrender such Certificates. Subject to
applicable law, following surrender of any such Certificates, the Exchange Agent
shall deliver to the record holders thereof, without interest, certificates
representing whole shares of Acquiror Common Stock issued in exchange therefor
along with payment in lieu of fractional shares pursuant to Section 1.6(f)
hereof and the amount of any such dividends or other distributions with a record
date after the Effective Time payable with respect to such whole shares of
Acquiror Common Stock.
(e) Transfers of Ownership. If certificates for shares of Acquiror
----------------------
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the persons
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
certificates for shares of Acquiror Common Stock in any name other than that of
the registered holder of the Certificates 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, neither the Exchange Agent, Acquiror, the Surviving Corporation nor
any party hereto shall be liable to a holder of shares of Acquiror Common Stock
or Target Common Stock 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 or other
distributions paid in respect thereof pursuant to Section 1.6(f) and 1.8(d))
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 Corporation 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 I.
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, cash for fractional shares, if any, as may be required pursuant to
Section 1.6(f) and any dividends or distributions payable pursuant to Section
1.8(d); 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, Target or the Exchange Agent with respect to the Certificates alleged
to have been lost, stolen or destroyed.
1.11 Tax and Accounting Consequences.
-------------------------------
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<PAGE>
(a) It is intended by the parties hereto that the Merger shall
constitute a reorganization within the meaning of Section 368 of the Code. The
parties hereto adopt this Agreement as a "plan of reorganization" within the
meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax
Regulations.
(b) It is intended by the parties hereto that the Merger shall 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 will take all such lawful and necessary action, so long as such
action is consistent with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
Target represents and warrants to Acquiror and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by Target to Acquiror dated as of the date hereof (the "TARGET SCHEDULES"), as
follows:
2.1 Organization of Target.
----------------------
(a) Target and each of its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation; has the corporate power and authority to own,
lease and operate its assets and property and to carry on its business as now
being conducted and as proposed to be conducted; and is duly qualified or
licensed to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary, except where the
failure to be so qualified would not have a Material Adverse Effect (as defined
below) on Target.
(b) Target has delivered to Acquiror a true and complete list of all
of Target's subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and Target's equity interest therein.
(c) Target has delivered or made available to Acquiror a true and
correct copy of the Certificate of Incorporation and Bylaws of Target and
similar governing instruments of each of its subsidiaries, each as amended to
date, and each such instrument is in full force and effect. Neither Target nor
any of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with Target, the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect that
is materially adverse to the
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<PAGE>
business, assets (including intangible assets), financial condition or results
of operations of Target and its subsidiaries taken as a whole, except (i) that a
change in the market price of the Target Common Stock shall not, in and of
itself, be deemed a "Material Adverse Effect" with respect to Target and (ii)
that a "Material Adverse Effect" with respect to Target shall not include any
adverse effect (i) on the bookings, revenues, gross margins or earnings 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 or (ii) due to employee
attrition of Target, where Target sustains the burden of reasonably
demonstrating that any such delay, reduction, cancellation, change or attrition
is primarily attributable to the transactions contemplated by this Agreement or
the pendency or announcement of the Merger. Acquiror may conclude that Material
Adverse Effect on Target has occurred only if Acquiror makes such determination
in good faith after consulting with its and Target's Chief Financial Officer or
Chief Executive Officer, auditors and other financial advisors.
2.2 Target Capital Structure. The authorized capital stock of Target
------------------------
consists of 80,000,000 shares of Common Stock, $.0001 par value, of which there
were 42,803,204 shares issued and outstanding as of the close of business on
March 14, 1997 and 2,000,000 shares of Preferred Stock, $.0001 par value, of
which no shares are issued or outstanding. Since the close of business on March
14, 1997, no shares of Target Capital Stock have been issued except pursuant to
the exercise of options outstanding as of March 14, 1997 under the Target Stock
Option Plans or pursuant to the Target ESPP. All outstanding shares of Target
Common Stock are duly authorized, validly issued, fully paid and nonassessable
and are not subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of Target or any agreement or document to which Target
is a party or by which it is bound. As of the close of business on March 14,
1997, Target had reserved (i) an aggregate of 9,760,000 shares of Target Common
Stock, net of exercises, for issuance to employees, consultants and non-employee
directors pursuant to the Target Stock Option Plans, under which, as of the
close of business on March 14, 1997, options and stock purchase rights, if any,
were outstanding for an aggregate of 7,630,000 shares, and (ii) 90,000 shares of
Common Stock, net of prior issuances, for issuance to employees pursuant to the
Target ESPP. All shares of Target Common Stock subject to issuance as aforesaid,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, would be duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights created by statute, the
Certificate of Incorporation or Bylaws of Target or any agreement or document to
which Target is a party or by which it is bound.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
-----------------------------------------
Section 2.2 and except for the Target Option Agreement, there are no equity
securities or similar ownership interests of any class of Target, or any
securities exchangeable or convertible into or exercisable for such equity
securities or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities Target owns, directly or indirectly through
one or more subsidiaries, there are no equity securities, or similar ownership
interests of any class of any subsidiary of Target, or any security exchangeable
or convertible into or exercisable for such equity securities or similar
ownership interests, issued, reserved for issuance or outstanding. Except as set
forth in Section 2.2, there are no options, warrants, equity securities or
similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which Target or any of its
subsidiaries is a party or by which it is bound obligating Target or any of its
subsidiaries to issue, deliver or sell, or
-8-
<PAGE>
cause to be issued, delivered or sold, or repurchase, redeem or otherwise
acquire, or cause the repurchase, redemption or acquisition, of any shares of
capital stock or similar ownership interests of Target or any of its
subsidiaries or obligating Target or any of its subsidiaries to grant, extend,
accelerate the vesting of or enter into any such option, warrant, equity
security, call, right, commitment or agreement. There are no registration rights
and, to the knowledge of Target, as of the date of this Agreement, there are no
voting trusts, proxies or other agreements or understandings with respect to any
equity security of any class of Target or with respect to any equity security or
similar ownership interest of any class of any of its subsidiaries, other than
the Target Voting Agreements.
2.4 Authority.
---------
(a) Target has 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 Target, subject only to the approval and
adoption of this Agreement and the approval of the Merger by Target's
stockholders and the filing and recordation of the Certificate of Merger
pursuant to Delaware Law. A vote of the holders of at least a majority of the
outstanding shares of the Target Common Stock is required for Target's
stockholders to approve and adopt this Agreement and approve the Merger. This
Agreement has been duly executed and delivered by Target and, assuming the due
authorization, execution and delivery by Acquiror and, if applicable, Merger
Sub, constitute valid and binding obligations of Target, enforceable in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy and other similar laws and general principles of equity. The
execution and delivery of this Agreement by Target does not, and the performance
of this Agreement will not, (i) conflict with or violate the Certificate of
Incorporation or Bylaws of Target or the equivalent organizational documents of
any of its subsidiaries, (ii) subject to obtaining the approval and adoption of
this Agreement and the approval of the Merger by Target's stockholders as
contemplated in Section 5.2 and compliance with the requirements set forth in
Section 2.4(b) below, conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Target or any of its subsidiaries or by which
its or any of their respective properties is bound or affected, or (iii) result
in any breach of or constitute a default (or an event that with notice or lapse
of time or both would become a default) under, or impair Target's rights or
alter the rights or obligations of any third party under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien or encumbrance on any of the properties or assets of
Target or any of its subsidiaries pursuant to, any material 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 are bound or affected, except, with respect to clause
(iii), for any such conflicts, violations, defaults or other occurrences that
would not have a Material Adverse Effect on Target. The Target Schedules list
all material consents, waivers and approvals under any of Target's or any of its
subsidiaries' agreements, contracts, licenses or leases required to be obtained
in connection with the consummation of the transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or
-9-
<PAGE>
instrumentality, foreign or domestic ("GOVERNMENTAL ENTITY"), is required by or
with respect to Target in connection with the execution and delivery of this
Agreement or the consummation of the Merger, except for (i) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, (ii)
the filing of the Proxy Statement (as defined in Section 2.19) with the
Securities and Exchange Commission ("SEC") in accordance with the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), (iii) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable federal and state securities laws and the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), and
the securities or antitrust laws of any foreign country, and (iv) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a Material Adverse Effect on Target or Acquiror
or have a material adverse effect on the ability of the parties to consummate
the Merger.
2.5 SEC Filings; Target Financial Statements.
----------------------------------------
(a) Target has filed all forms, reports and documents required to be
filed with the SEC since August 1, 1995 and has made available to Acquiror such
forms, reports and documents in the form filed with the SEC. All such required
forms, reports and documents (including those that Target may file subsequent to
the date hereof) are referred to herein as the "TARGET SEC REPORTS." As of their
respective dates, the Target SEC Reports (i) were prepared in accordance with
the requirements of the Securities Act of 1933, as amended (the "SECURITIES
ACT"), or the Exchange Act, as the case may be, and the rules and regulations of
the SEC thereunder applicable to such Target SEC Reports, and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
Target's subsidiaries is required to file any forms, reports or other documents
with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in Target SEC Reports (the "TARGET
FINANCIALS"), including any Target SEC Reports filed after the date hereof until
the Closing, (x) complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, (y) was prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited interim financial statements, as
may be permitted by the SEC on Form 10-Q under the Exchange Act) and (z) fairly
presented the consolidated financial position of Target and its subsidiaries as
at the respective dates thereof and the consolidated results of Target's
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments. The balance sheet of Target contained in Target SEC Reports as
of December 31, 1996 is hereinafter referred to as the "TARGET BALANCE SHEET."
Except as disclosed in the Target Financials, since the date of the Target
Balance Sheet neither Target nor any of its subsidiaries has any liabilities
(absolute, accrued, contingent or otherwise) of a nature required to be
disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are, individually or
in the aggregate, material to the business, results of operations or financial
condition of Target and its
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<PAGE>
subsidiaries taken as a whole, except liabilities (i) provided for in the Target
Balance Sheet, or (ii) incurred since the date of the Target Balance Sheet in
the ordinary course of business consistent with past practices.
(c) Target has heretofore furnished to Acquiror a complete and correct
copy of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Target with the SEC pursuant to
the Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the Target
------------------------------------
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Target, (ii) any material change by Target in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP, or (iii) any material revaluation by Target of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the ordinary
course of business.
2.7 Taxes and Returns. Target and each of its subsidiaries, and any
-----------------
consolidated, combined, unitary or aggregate group for Tax (as such term is
defined in Section 3.8) purposes of which Target or any of its subsidiaries is
or has been a member has timely filed all Returns (as such term is defined in
Section 3.8) required to be filed by it (other than those that are not,
individually or in the aggregate, material), has paid all Taxes shown thereon to
be due and has provided adequate accruals in all material respects in accordance
with GAAP in its financial statements for any Taxes that have not been paid,
whether or not shown as being due on any returns. In addition, (i) no material
claim for unpaid 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, (ii) no audit of any Tax Return of Target or any of its
subsidiaries is being conducted by a Tax authority (A) as of the date of this
Agreement and (B) which, as of the Closing Date, has had and could reasonably be
expected to have a Material Adverse Effect on Target and its subsidiaries, (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 (A)
as of the date of this Agreement and (B) which, as of the Closing Date, has had
and could reasonably be expected to have a Material Adverse Effect on Target and
its subsidiaries 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 pursuant to Sections 280G,
162 or 404 of the Code.
2.8 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which Target is a party or, to the knowledge of Target, otherwise binding upon
Target, which has or reasonably could be expected to have the effect of
prohibiting or impairing any business practice of Target, any acquisition of
property (tangible or intangible) by Target or the conduct of business by
Target. Without limiting the foregoing, Target has not entered into any
agreement under which Target is restricted from selling, licensing or otherwise
distributing any of its products to any class of customers, in any geographic
area, during any period of time or in any segment of the market.
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<PAGE>
2.9 Title to Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) The Target Schedules list each item of real property consisting of
over 15,000 square feet owned by Target. The Target Schedules list all real
property leases to which Target is a party and each amendment thereto. All such
current leases are in full force and effect, are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event of default (or event which with notice or
lapse of time, or both, would constitute a default) that would give rise to a
claim in an amount greater than $100,000.
(b) Target has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("LIENS"), except as reflected in
Target Financials or in the Target Schedules and except for liens for taxes not
yet due and payable and such imperfections of title and encumbrances, if any,
which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present use,
of the property subject thereto or affected thereby.
2.10 Intellectual Property.
---------------------
(a) Target and its subsidiaries either own, or have a valid license
with respect to, all patents, copyrights, trademarks, trade secrets and other
intellectual property used in, by, or necessary to, the operation or conduct of
their respective businesses as presently conducted (such intellectual property
and the rights thereto are collectively referred to herein as the "TARGET IP
RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any patent, copyright,
trademark, trade secret or other intellectual property rights licensed by, or
to, Target, will not cause the forfeiture or termination or give rise to a right
of forfeiture or termination of any Target IP Rights or materially impair the
right of Target, the Surviving Corporation or Acquiror in or to use, sell,
enforce license or otherwise exploit any Target IP Rights or portion thereof.
(c) Neither the operation of Target's nor any of its subsidiaries'
respective businesses nor the manufacture, marketing, license, sale or intended
use of any product, service or technology currently licensed, manufactured,
created, distributed, authored, used, sold or under development by Target or any
of its subsidiaries (i) violates in any material respect any license or
agreement between Target or any of its subsidiaries and any third party or (ii)
infringes any patents, copyright, trademark, trade secret or other intellectual
property right of any other party; and there is no pending or, to the knowledge
of Target, threatened claim or litigation contesting the validity, ownership or
right to use, sell, enforce, license or dispose of any Target IP Rights, nor has
Target received any written notice asserting that any Target IP Rights or the
proposed use, sale, license or disposition thereof conflicts or will conflict
with the rights of any other party, except, with respect to clauses (i) and
(ii), for violations, infringements, claims or litigation that would not have a
Material Adverse Effect on Target.
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(d) Target has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all Target IP Rights.
2.11 Compliance; Permits; Restrictions.
---------------------------------
(a) Neither Target nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or violation of (i) any law, rule,
regulation, order, judgment or decree applicable to Target or any of its
subsidiaries or by which Target or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material 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. To the knowledge of Target, no
investigation or review by any Governmental Entity is pending or threatened
against Target or any of its subsidiaries, nor has any Governmental Entity
indicated an intention to conduct the same. There is no material agreement,
judgment, injunction, order or decree binding upon Target or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of Target or any of
its subsidiaries, any acquisition of material property by Target or any of its
subsidiaries or the conduct of business by Target as currently conducted.
(b) Target and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities that are material
to the operation of the business of Target (collectively, the "TARGET PERMITS").
Target and its subsidiaries are in compliance in all material respects with the
terms of the Target Permits.
2.12 Litigation. There is no action, suit, proceeding, claim, arbitration
----------
or investigation pending, or as to which Target or any of its subsidiaries has
received any notice of assertion nor, to Target's knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation against
Target or any of its subsidiaries which reasonably would be likely to be
material to Target, or which in any manner challenges or seeks to prevent,
enjoin, alter or delay any of the transactions contemplated by this Agreement.
To the knowledge of Target, no Governmental Entity has at any time challenged or
questioned in writing the legal right of Target to manufacture, offer or sell
any of its products in the present manner or style thereof.
2.13 Brokers' and Finders' Fees. Except for fees payable to Deutsche
--------------------------
Morgan Grenfell, Inc. pursuant to an engagement letter with Target, a copy of
which has been provided to Acquiror, Target has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
2.14 Employee Benefit Plans.
----------------------
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of ERISA) maintained or contributed to by
Target or any trade or business which is under common control with Target within
the meaning of Section 414 of the Code (the "TARGET EMPLOYEE PLANS"), Target has
made available to Acquiror a true and complete copy of, to the extent
applicable, (i) such
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Target Employee Plan, (ii) the most recent annual report (Form 5500), (iii) each
trust agreement related to such Target Employee Plan, (iv) the most recent
summary plan description for each Target Employee Plan for which such a
description is required, (v) the most recent actuarial report relating to any
Target Employee Plan subject to Title IV of ERISA and (vi) the most recent IRS
determination letter issued with respect to any Target Employee Plan.
(b) Each Target Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such Target
Employee Plan is so qualified and nothing has occurred since the date of such
letter that could reasonably be expected to affect the qualified status of such
plan. Each Target Employee Plan has been operated in all material respects in
accordance with its terms and the requirements of applicable law. Neither
Target nor any ERISA Affiliate of Target has incurred or is reasonably expected
to incur any material liability under Title IV of ERISA in connection with any
Target Employee Plan.
2.15 Employees; Labor Matters. To Target's knowledge, no employee of
------------------------
Target is in violation of any term of any employment contract, patent disclosure
agreement, non-competition agreement, or any restrictive covenant to a former
employer relating to the right of any such employee to be employed by Target
because of the nature of the business conducted or presently proposed to be
conducted by Target or to the use of trade secrets or proprietary information of
others. To Target's knowledge, there are no activities or proceedings of any
labor union to organize any employees of Target or any of its subsidiaries and
there are no strikes, or material slowdowns, work stoppages or lockouts, or
threats thereof by or with respect to any employees of Target or any of its
subsidiaries. Target and its subsidiaries are and have been in compliance in
all material respects with all applicable laws regarding employment practices,
terms and conditions of employment, and wages and hours (including, without
limitation, ERISA, WARN or any similar state or local law).
2.16 Environmental Matters.
---------------------
(a) Hazardous Material. Except as reasonably would not be likely to
------------------
result in a material liability to Target, no underground storage tanks and no
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws, (a
"HAZARDOUS MATERIAL"), but excluding office and janitorial supplies, are
present, as a result of the actions of Target or any of its subsidiaries or any
affiliate of Target, or, to Target's knowledge, as a result of any actions of
any third party or otherwise, in, on or under any property, including the land
and the improvements, ground water and surface water thereof, that Target or any
of its subsidiaries has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be
------------------------------
likely to result in a material liability to Target, neither Target nor any of
its subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous
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Materials in violation of any law in effect on or before the Closing Date, nor
has Target or any of its subsidiaries disposed of, transported, sold, used,
released, exposed its employees or others to or manufactured any product
containing a Hazardous Material (collectively "HAZARDOUS MATERIALS ACTIVITIES")
in violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. Target and its subsidiaries currently hold all
-------
environmental approvals, permits, licenses, clearances and consents (the "TARGET
ENVIRONMENTAL PERMITS") necessary for the conduct of Target's and its
subsidiaries' Hazardous Material Activities and other businesses of Target and
its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding,
-------------------------
revocation proceeding, amendment procedure, writ, injunction or claim is
pending, or to Target's knowledge, threatened concerning any Target
Environmental Permit, Hazardous Material or any Hazardous Materials Activity of
Target or any of its subsidiaries. Target is not aware of any fact or
circumstance which could involve Target or any of its subsidiaries in any
material environmental litigation or impose upon Target any material
environmental liability.
2.17 Agreements, Contracts and Commitments. Except as set forth in the
-------------------------------------
Target Schedules, neither Target nor any of its subsidiaries is a party to or is
bound by:
(a) any employment or consulting agreement, contract or commitment
with any officer or director level employee or member of Target's Board of
Directors, other than those that are terminable by Target or any of its
subsidiaries on no more than thirty days notice without liability or financial
obligation, except to the extent general principles of wrongful termination law
may limit Target's or any of its subsidiaries' ability to terminate employees at
will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement;
(c) any agreement of indemnification or guaranty not entered into in
the ordinary course of business other than indemnification agreements between
Target or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of Target or any of its subsidiaries to engage in any line
of business or compete with any person or granting any exclusive distribution
rights;
(e) any agreement, contract or commitment currently in force relating
to the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise;
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(f) any material joint marketing or development agreement; or
(g) any agreement, contract or commitment described in Item 10 of
Regulation S-K (whether or not a filing with the SEC requiring such document to
be included as an exhibit is yet due).
Neither Target nor any of its subsidiaries, nor to Target's knowledge any
other party to a Target Contract (as defined below), has breached, violated or
defaulted under, or received notice that it has breached violated or defaulted
under, any of the material terms or conditions of any of the agreements,
contracts or commitments to which Target or any of its subsidiaries is a party
or by which it is bound of the type described in clauses (a) through (g) above
(any such agreement, contract or commitment, a "TARGET CONTRACT") in such a
manner as would permit any other party to cancel or terminate any such Target
Contract, or would permit any other party to seek damages, which would be
reasonably likely to be material to Target.
2.18 Change of Control Payments. The Target Schedules set forth each plan
--------------------------
or agreement pursuant to which any material amounts may become payable (whether
currently or in the future) to current or former officers and directors of
Target as a result of or in connection with the Merger.
2.19 Statements; Proxy Statement/Prospectus. The information supplied by
--------------------------------------
Target for inclusion in the Registration Statement (as defined in Section
3.4(b)) shall not at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act, 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 not
misleading. The information supplied by Target for inclusion in the proxy
statement/prospectus to be sent to the stockholders of Target and stockholders
of Acquiror in connection with the meeting of Target's stockholders to consider
the approval and adoption of this Agreement and the approval of the Merger (the
"TARGET STOCKHOLDERS' MEETING") and in connection with the meeting of Acquiror's
stockholders to consider the approval of (i) the amendment of Acquiror's
Certificate of Incorporation to increase its authorized share capital to allow
for the issuance of shares of Acquiror Common Stock by virtue of the Merger and
(ii) the issuance of shares of Acquiror Common Stock by virtue of 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 or
the Acquiror Stockholders' Meeting and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not 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. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time, any event relating to
Target or any of its affiliates, officers or directors 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.
Notwithstanding the foregoing, Target makes no representation or
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warranty with respect to any information supplied by Acquiror or Merger Sub
which is contained in any of the foregoing documents.
2.20 Board Approval. The Board of Directors of Target has, as of the date
--------------
of this Agreement, determined (i) in its reasonable business judgment that the
Merger is fair from a financial point of view to, and in the best interests of,
Target and its stockholders, and (ii) to recommend that the stockholders of
Target approve and adopt this Agreement and approve the Merger.
2.21 Fairness Opinion. Target's Board of Directors has received an oral
----------------
opinion from Deutsche Morgan Grenfell (to be subsequently confirmed in writing),
to the effect that as of the date hereof, the Exchange Ratio is fair to Target's
stockholders from a financial point of view.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Acquiror and Merger Sub represent and warrant to Target, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by Acquiror to Target dated as of the date hereof (the "ACQUIROR SCHEDULES"), as
follows:
3.1 Organization of Acquiror.
------------------------
(a) Acquiror and each of its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation; has the corporate power and authority to own,
lease and operate its assets and property and to carry on its business as now
being conducted and as proposed to be conducted; and is duly qualified or
licensed to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary, except where the
failure to be so qualified would not have a Material Adverse Effect (as defined
below) on Acquiror.
(b) Acquiror has delivered to Target a true and complete list of all
of Acquiror's subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and Acquiror's equity interest therein.
(c) Acquiror has delivered or made available to Target a true and
correct copy of the Certificate of Incorporation and Bylaws of Acquiror and
similar governing instruments of each of its subsidiaries, each as amended to
date, and each such instrument is in full force and effect. Neither Acquiror
nor any of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with Acquiror, the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect that
is materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of Acquiror and its subsidiaries
taken as a whole, except (i) that a change in the market price of the Acquiror
Common Stock shall not, in and of itself, be deemed a Material Adverse Effect
with respect to
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Acquiror, and (ii) that a "Material Adverse Effect" with respect to Acquiror
shall not include any adverse effect (i) on the bookings, revenues, gross
margins or earnings of Acquiror (or the direct consequences thereof) following
the date of this Agreement which is attributable to a delay of, reduction or
cancellation or change in the terms of product orders by customers of Acquiror
or (ii) due to employee attrition of Acquiror, where Acquiror sustains the
burden of reasonably demonstrating that any such delay, reduction, cancellation,
change or attrition is primarily attributable to the transactions contemplated
by this Agreement or the pendency or announcement of the Merger. Target may
conclude that a Material Adverse Effect on Acquiror has occurred only if Target
makes such determination in good faith after consultation with its and
Acquiror's Chief Financial Officer or Chief Executive Officer, auditors and
other financial advisors.
3.2 Acquiror and Merger Sub 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 March 31, 1997, 47,781,260 shares of Common Stock
and no shares of Preferred Stock. Since the close of business on March 31,
1997, no shares of Acquiror capital stock have been issued except pursuant to
the exercise of options outstanding as of March 31, 1997 under the Acquiror
Stock Option Plans (as defined below). As of the close of business on March 31,
1997, 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 and other plans set forth in Section 3.2 of
the Acquiror Schedules, (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 March 31, 1997,
Acquiror has reserved 8,829,450 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 March 31, 1997, 8,417,436
shares were subject to outstanding, unexercised options and 412,014 shares
remained available for future grant. Other than pursuant to this Agreement, the
Acquiror 1994 Employee Stock Purchase Plan, and the SQA, Inc. 1995 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 Obligations With Respect to Capital Stock. Except as set forth in
-----------------------------------------
Section 3.2 and except for the Acquiror Option Agreement, there are no equity
securities, partnership interests or similar ownership interests of any class of
Acquiror, or any securities exchangeable or convertible into or exercisable for
such equity securities, partnership interests or similar ownership interests,
issued, reserved for issuance or outstanding. Except for securities Acquiror
owns, directly or indirectly
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through one or more subsidiaries, there are no equity securities, partnership
interests or similar ownership interests of any class of any subsidiary of
Acquiror, or any security exchangeable or convertible into or exercisable for
such equity securities, partnership interests or similar ownership interests,
issued, reserved for issuance or outstanding. Except as set forth in Section
3.2, there are no options, warrants, equity securities, partnership interests or
similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which Acquiror or any of its
subsidiaries is a party or by which it is bound obligating Acquiror or any of
its subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition, of any shares of capital stock, partnership interests
or similar ownership interests of Acquiror or any of its subsidiaries or
obligating Acquiror or any of its subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call, right,
commitment or agreement. There are no registration rights and, to the knowledge
of Acquiror, as of the date of this Agreement, there are no voting trusts,
proxies or other agreements or understandings with respect to any equity
security of any class of Acquiror or with respect to any equity security,
partnership interest or similar ownership interest of any class of any of its
subsidiaries, other than the Acquiror Voting Agreements.
3.4 Authority.
---------
(a) Each of Acquiror and Merger Sub has 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, in the case of
this Agreement, Merger Sub, subject only to the filing and recordation of the
Certificate of Merger pursuant to Delaware Law and the approval by Acquiror's
stockholders of (i) the amendment of Acquiror's Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of
Acquiror Common Stock by virtue of the Merger and (ii) the issuance of shares of
Acquiror Common Stock by virtue of the Merger. A vote of the holders of at
least a majority of the outstanding shares of the Acquiror Common Stock is
required for Acquiror's stockholders to approve each of (i) the amendment of
Acquiror's Certificate of Incorporation to increase its authorized share capital
to allow for the issuance of shares of Acquiror Common Stock by virtue of the
Merger and (ii) the issuance of shares of Acquiror Common Stock by virtue of the
Merger. This Agreement has been duly executed and delivered by each of Acquiror
and Merger Sub and, assuming the due authorization, execution and delivery by
Target, constitutes the valid and binding obligation of Acquiror, enforceable in
accordance with its terms, except as enforceability may be limited by bankruptcy
and other similar laws and general principles of equity. The execution and
delivery of this Agreement by each of Acquiror and Merger Sub does not, and the
performance of this Agreement by each of Acquiror and Merger Sub will not, (i)
conflict with or violate the Certificate of Incorporation or Bylaws of Acquiror
or the Certificate of Incorporation or Bylaws of Merger Sub or the equivalent
organizational documents of any of Acquiror's other subsidiaries, (ii) subject
to obtaining the approval of Acquiror's stockholders of (y) the amendment of
Acquiror's Certificate of Incorporation to increase its authorized share capital
to allow for the issuance of shares of Acquiror Common Stock by virtue of the
Merger and (z) the issuance of shares of Acquiror Common Stock by virtue of the
Merger as contemplated in Section 5.2 and compliance with the requirements set
forth in Section 3.4(b) below, conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to Acquiror or any of its
subsidiaries (including Merger Sub) or by which its or any of their
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<PAGE>
respective properties is bound or affected or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair Acquiror's rights or alter the rights
or obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of Acquiror
or any of its subsidiaries (including Merger Sub) pursuant to, any material
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Acquiror or any of its
subsidiaries (including Merger Sub) is a party or by which Acquiror or any of
its subsidiaries or its or any of their respective properties are bound or
affected except, with respect to clause (iii), for any such conflicts,
violations, defaults or other occurrences that would not have a Material Adverse
Effect on Acquiror. The Acquiror Schedules list all material consents, waivers
and approvals under any of Acquiror's or any of its subsidiaries' agreements,
contracts, licenses or leases required to be obtained in connection with the
consummation of the transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to Acquiror or Merger Sub in connection with the execution and delivery
of this Agreement or the consummation of the Merger, except for (i) the filing
of a Form S-4 Registration Statement (the "REGISTRATION STATEMENT") with the SEC
in accordance with the Securities Act, (ii) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, (iii) the filing of
the Proxy Statement with the SEC in accordance with the Exchange Act, (iv) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable federal and state securities laws
and the HSR Act and the securities or antitrust laws of any foreign country, and
(v) such other consents, authorizations, filings, approvals and registrations
which if not obtained or made would not have a Material Adverse Effect on Target
or Acquiror or have a material adverse effect on the ability of the parties to
consummate the Merger.
3.5 Section 203 of the Delaware General Corporation Law Not Applicable.
------------------------------------------------------------------
The Board of Directors of Acquiror has taken all actions so that the
restrictions contained in Section 203 of the Delaware General Corporation Law
applicable to a "business combination" (as defined in such Section 203) will not
apply to the execution, delivery or performance of this Agreement or to the
consummation of the Merger or the other transactions contemplated by this
Agreement.
3.6 SEC Filings; Acquiror Financial Statements.
------------------------------------------
(a) Acquiror has filed all forms, reports and documents required to be
filed with the SEC since June 30, 1994, and has made available to Target such
forms, reports and documents in the form filed with the SEC. All such required
forms, reports and documents (including those that Acquiror may file subsequent
to the date hereof) are referred to herein as the "ACQUIROR SEC REPORTS." As of
their respective dates, the Acquiror SEC Reports (i) were prepared in accordance
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and the rules and regulations of the SEC thereunder applicable to such
Acquiror SEC Reports, and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) contain any untrue statement of a material fact or omit
to state a
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material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. None of Acquiror's subsidiaries is required to file any
forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in Acquiror SEC Reports (the
"ACQUIROR FINANCIALS"), including any Acquiror SEC Reports filed after the date
hereof until the Closing, (x) complied as to form in all material respects with
the published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q under the Exchange Act) and (z) fairly presented the consolidated
financial position of Acquiror and its subsidiaries as at the respective dates
thereof and the consolidated results of Acquiror's operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments. The balance
sheet of Acquiror contained in Acquiror SEC Reports as of December 31, 1997 is
hereinafter referred to as the "ACQUIROR BALANCE SHEET." Except as disclosed in
the Acquiror Financials, since the date of the Acquiror Balance Sheet neither
Acquiror nor any of its subsidiaries has any liabilities (absolute, accrued,
contingent or otherwise) of a nature required to be disclosed on a balance sheet
or in the related notes to the consolidated financial statements prepared in
accordance with GAAP which are, individually or in the aggregate, material to
the business, results of operations or financial condition of Acquiror and its
subsidiaries taken as a whole, except liabilities (i) provided for in the
Acquiror Balance Sheet, or (ii) incurred since the date of the Acquiror Balance
Sheet in the ordinary course of business consistent with past practices.
(c) Acquiror has heretofore furnished to Target a complete and correct
copy of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Acquiror with the SEC pursuant to
the Securities Act or the Exchange Act.
3.7 Absence of Certain Changes or Events. Since the date of the Acquiror
------------------------------------
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Acquiror, (ii) any material change by Acquiror in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP, or (iii) any material revaluation by Acquiror of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the ordinary
course of business.
3.8 Taxes and Returns. Acquiror and each of its subsidiaries, and any
-----------------
consolidated, combined, unitary or aggregate group for Tax purposes of which
Acquiror or any of its subsidiaries is or has been a member has timely filed all
Returns required to be filed by it (other than those that are not, individually
or in the aggregate, material), has paid all Taxes shown thereon to be due and
has provided adequate accruals in all material respects in accordance with GAAP
in its financial statements for any Taxes that have not been paid, whether or
not shown as being due on any returns. In addition, (i) no material claim for
unpaid 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,
(ii) no audit of any Tax Return of Acquiror or any of its subsidiaries is being
conducted by a Tax authority (A) as of the date of this Agreement and (B) which,
as of the Closing Date, has had and could reasonably be
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expected to have a Material Adverse Effect on Acquiror and its subsidiaries,
(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 (A) as of the date of this Agreement and (B) which, as of the Closing
Date, has had and could reasonably be expected to have a Material Adverse Effect
on Acquiror and its subsidiaries 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 pursuant to
Sections 280G, 162 or 404 of the Code. As used herein, "TAXES" shall mean all
taxes of any kind, including, without limitation, those on or measured by or
referred to as income, gross receipts, sales, use, ad valorem, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, value added, property or windfall profits taxes, customs,
duties or similar fees, assessments or charges of any kind whatsoever, together
with any interest and any penalties, additions to tax or additional amounts
imposed by any govern mental authority, domestic or foreign. As used herein,
"RETURN" shall mean any return, report or statement required to be filed with
any governmental authority with respect to Taxes.
3.9 Title to Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) The Acquiror Schedules list each item of real property consisting
of over 15,000 square feet owned by Acquiror. The Acquiror Schedules list all
real property leases relating to properties consisting of over 40,000 square
feet to which Acquiror is a party and each amendment thereto. All such current
leases are in full force and effect, are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default) that would give rise to a claim in an amount
greater than $100,000.
(b) Acquiror has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in Acquiror
Financials or in the Acquiror Schedules and except for liens for taxes not yet
due and payable and such imperfections of title and encumbrances, if any, which
are not material in character, amount or extent, and which do not materially
detract from the value, or materially interfere with the present use, of the
property subject thereto or affected thereby.
3.10 Intellectual Property.
---------------------
(a) Acquiror and its subsidiaries either own, or have a valid license
with respect to, all patents, copyrights, trademarks, trade secrets and other
intellectual property used in, by or necessary to the operation or conduct of
their respective businesses as presently conducted (such intellectual property
and the rights thereto are collectively referred to herein as the "ACQUIROR IP
RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any patent, copyright,
trademark, trade secret or other intellectual property rights licensed by or to,
Acquiror, will not cause the forfeiture or termination or give rise to a right
of forfeiture or termination of any Acquiror IP Rights or materially impair the
right of
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Acquiror, the Surviving Corporation or Target in or to use, sell, enforce,
license or otherwise exploit any Acquiror IP Rights or portion thereof.
(c) Neither the operation of Acquiror's nor any of its subsidiaries'
respective business nor the manufacture, marketing, license, sale or intended
use of any product, service or technology currently licensed, manufactured,
created, distributed, authored, used, sold or under development by Acquiror or
any of its subsidiaries (i) violates in any material respect any license or
agreement between Acquiror or any of its subsidiaries and any third party or
(ii) infringes any patent, copyright, trademark, trade secret or other
intellectual property right of any other party; and there is no pending or, to
the knowledge of Acquiror, threatened claim or litigation contesting the
validity, ownership or right to use, sell, enforce, license or dispose of any
Acquiror IP Rights, nor has Acquiror received any written notice asserting that
any Acquiror IP Rights or the proposed use, sale, license or disposition thereof
conflicts or will conflict with the rights of any other party, except, with
respect to clauses (i) and (ii), for violation, infringements, claims or
litigation that would not have a Material Adverse Effect on Acquiror.
(d) Acquiror has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all Acquiror IP Rights.
3.11 Compliance; Permits; Restrictions.
---------------------------------
(a) Neither Acquiror nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or violation of (i) any law, rule,
regulation, order, judgment or decree applicable to Acquiror or any of its
subsidiaries or by which Acquiror or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Acquiror or any of its subsidiaries is a
party or by which Acquiror or any of its subsidiaries or its or any of their
respective properties is bound or affected. To the knowledge of Acquiror, no
investigation or review by any Governmental Entity is pending or threatened
against Acquiror or any of its subsidiaries, nor has any Governmental Entity
indicated an intention to conduct the same. There is no material agreement,
judgment, injunction, order or decree binding upon Acquiror or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of Acquiror or any of
its subsidiaries, any acquisition of material property by Acquiror or any of its
subsidiaries or the conduct of business by Acquiror as currently conducted.
(b) Acquiror and its subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals from governmental authorities which
are material to the operation of the business of Acquiror (collectively, the
"ACQUIROR PERMITS"). Acquiror and its subsidiaries are in compliance in all
material respects with the terms of the Acquiror Permits.
3.12 Litigation. There is no action, suit, proceeding, claim, arbitration
----------
or investigation pending, or as to which Acquiror or any of its subsidiaries has
received any notice of assertion nor, to
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Acquiror's knowledge, is there a threatened action, suit, proceeding, claim,
arbitration or investigation against Acquiror or any of its subsidiaries which
reasonably would be likely to be material to Acquiror, or which in any manner
challenges or seeks to prevent, enjoin, alter or delay any of the transactions
contemplated by this Agreement. To the knowledge of Acquiror, no Governmental
Entity has at any time challenged or questioned in writing the legal right of
Acquiror to manufacture, offer or sell any of its products in the present manner
or style thereof.
3.13 Brokers' and Finders' Fees. Except for fees payable to Hambrecht &
--------------------------
Quist LLC pursuant to an engagement letter dated April 4, 1997, a copy of which
has been provided to Target, Acquiror has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
3.14 Employee Benefit Plans.
----------------------
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of ERISA) maintained or contributed to by
Acquiror or any trade or business which is under common control with Acquiror
within the meaning of Section 414 of the Code (the "ACQUIROR EMPLOYEE PLANS"),
Acquiror has made available to Target a true and complete copy of, to the extent
applicable, (i) such Acquiror Employee Plan, (ii) the most recent annual report
(Form 5500), (iii) each trust agreement related to such Acquiror Employee Plan,
(iv) the most recent summary plan description for each Acquiror Employee Plan
for which such a description is required, (v) the most recent actuarial report
relating to any Acquiror Employee Plan subject to Title IV of ERISA and (vi) the
most recent IRS determination letter issued with respect to any Acquiror
Employee Plan.
(b) Each Acquiror Employee Plan which is intended to be qualified
under Section 401(a) of the Code has received a favorable determination from the
IRS covering the provisions of the Tax Reform Act of 1986 stating that such
Acquiror Employee Plan is so qualified and nothing has occurred since the date
of such letter that could reasonably be expected to affect the qualified status
of such plan. Each Acquiror Employee Plan has been operated in all material
respects in accordance with its terms and the requirements of applicable law.
Neither Acquiror nor any ERISA Affiliate of Acquiror has incurred or is
reasonably expected to incur any material liability under Title IV of ERISA in
connection with any Acquiror Employee Plan.
3.15 Employees; Labor Matters. To Acquiror's knowledge, no employee of
------------------------
Acquiror is in violation of any term of any employment contract, patent
disclosure agreement, non-competition agreement, or any restrictive covenant to
a former employer relating to the right of any such employee to be employed by
Acquiror because of the nature of the business conducted or presently proposed
to be conducted by Acquiror or to the use of trade secrets or proprietary
information of others. To Acquiror's knowledge, there are no activities or
proceedings of any labor union to organize any employees of Acquiror or any of
its subsidiaries and there are no strikes, or material slowdowns, work stoppages
or lockouts, or threats thereof by or with respect to any employees of Acquiror
or any of its subsidiaries. Acquiror and its subsidiaries are and have been in
compliance in all material respects with all applicable laws regarding
employment practices, terms and conditions of
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employment, and wages and hours (including, without limitation, ERISA, WARN or
any similar state or local law).
3.16 Environmental Matters.
---------------------
(a) Hazardous Material. Except as reasonably would not be likely to
------------------
result in a material liability to Acquiror, no underground storage tanks and no
amount of any Hazardous Material, but excluding office and janitorial supplies,
are present, as a result of the actions of Acquiror or any of its subsidiaries
or any affiliate of Acquiror, or, to Acquiror's knowledge, as a result of any
actions of any third party or otherwise, in, on or under any property, including
the land and the improvements, ground water and surface water thereof, that
Acquiror or any of its subsidiaries has at any time owned, operated, occupied or
leased.
(b) Hazardous Materials Activities. Except as reasonably would not be
------------------------------
likely to result in a material liability to Acquiror, neither Acquiror nor any
of its subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in violation
of any law in effect on or before the Closing Date, nor has Acquiror or any of
its subsidiaries engaged in any Hazardous Materials Activities in violation of
any rule, regulation, treaty or statute promulgated by any Governmental Entity
in effect prior to or as of the date hereof to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activity.
(c) Permits. Acquiror and its subsidiaries currently hold all
-------
environmental approvals, permits, licenses, clearances and consents (the
"ACQUIROR ENVIRONMENTAL PERMITS") necessary for the conduct of Acquiror's and
its subsidiaries' Hazardous Material Activities and other businesses of Acquiror
and its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding,
-------------------------
revocation proceeding, amendment procedure, writ, injunction or claim is
pending, or to Acquiror's knowledge, threatened concerning any Acquiror
Environmental Permit, Hazardous Material or any Hazardous Materials Activity of
Acquiror or any of its subsidiaries. Acquiror is not aware of any fact or
circumstance which could involve Acquiror or any of its subsidiaries in any
material environmental litigation or impose upon Acquiror any material
environmental liability.
3.17 Agreements, Contracts and Commitments. Except as set forth in the
-------------------------------------
Acquiror Schedules, neither Acquiror nor any of its subsidiaries is a party to
or is bound by:
(a) any employment or consulting agreement, contract or commitment
with any officer or director level employee or member of Acquiror's Board of
Directors, other than those that are terminable by Acquiror or any of its
subsidiaries on no more than thirty days notice without liability or financial
obligation, except to the extent general principles of wrongful termination law
may limit Acquiror's or any of its subsidiaries' ability to terminate employees
at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions
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contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement;
(c) any agreement of indemnification or guaranty not entered into in
the ordinary course of business other than indemnification agreements between
Acquiror or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of Acquiror or any of its subsidiaries to engage in any
line of business or compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating
to the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise;
(f) any material joint marketing or development agreement; or
(g) any agreement, contract or commitment described in Item 10 of
Regulation S-K (whether or not a filing with the SEC requiring such document to
be included as an exhibit is yet due).
Neither Acquiror nor any of its subsidiaries, nor to Acquiror's knowledge
any other party to a Acquiror Contract (as defined below), has breached,
violated or defaulted under, or received notice that it has breached violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which Acquiror or any of its
subsidiaries is a party or by which it is bound of the type described in clauses
(a) through (g) above (any such agreement, contract or commitment, an "ACQUIROR
CONTRACT") in such a manner as would permit any other party to cancel or
terminate any such Acquiror Contract, or would permit any other party to seek
damages, which would be reasonably likely to be material to Acquiror.
3.18 Change of Control Payments. The Acquiror Schedules set forth each
--------------------------
plan or agreement pursuant to which any material amounts may become payable
(whether currently or in the future) to current or former officers and directors
of Acquiror as a result of or in connection with the Merger.
3.19 Statements; Proxy Statement/Prospectus. The information supplied by
--------------------------------------
Acquiror for inclusion in the Registration Statement shall not at the time the
Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, 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 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 Acquiror's stockholders and
Target's stockholders, at the time of the Acquiror Stockholders' Meeting or the
Target Stockholders' Meeting and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication
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<PAGE>
with respect to the solicitation of proxies for the Acquiror Stockholders'
Meeting or the Target Stockholders' Meeting which has become false or
misleading. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time, any event relating to
Acquiror or any of its affiliates, officers or directors should be discovered by
Acquiror which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, Acquiror shall promptly inform Target.
Notwithstanding the foregoing, Acquiror makes no representation or warranty with
respect to any information supplied by Target which is contained in any of the
foregoing documents.
3.20 Board Approval. The Board of Directors of Acquiror has, as of the
--------------
date of this Agreement, determined (i) in its reasonable business judgment, that
the Merger is fair from a financial point of view to, and in the best interests
of Acquiror, and (ii) to recommend that the stockholders of Acquiror approve (x)
the amendment of Acquiror's Certificate of Incorporation to increase its
authorized share capital to allow for the issuance of shares of Acquiror Common
Stock by virtue of the Merger and (y) the issuance of shares of Acquiror Common
Stock by virtue of the Merger.
3.21 Fairness Opinion. Acquiror's Board of Directors has received written
----------------
opinions from Hambrecht & Quist LLC, dated as of the date hereof, to the effect
that as of the date hereof, the Exchange Ratio is fair to Acquiror from a
financial point of view and has delivered to Target a copy of such opinions.
3.22 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which Acquiror is a party or, to the knowledge of Acquiror, otherwise binding
upon Acquiror, which has or reasonably could be expected to have the effect of
prohibiting or impairing any business practice of Acquiror, any acquisition of
property (tangible or intangible) by Acquiror or the conduct of business by
Acquiror. Without limiting the foregoing, Acquiror has not entered into any
agreement under which Acquiror is restricted from selling, licensing or
otherwise distributing any of its products to any class of customers, in any
geographic area, during any period of time or in any segment of the market.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business. During the period from the date of this
-------------------
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Target (which for the purposes of
this Article IV shall include Target and each of its subsidiaries) and Acquiror
(which for the purposes of this Article IV shall include Acquiror and each of
its subsidiaries) agree, except (i) in the case of Target as provided in Article
IV of the Target Schedules and in the case of Acquiror as provided in Article IV
of the Acquiror Schedules, or (ii) to the extent that the other of them shall
otherwise consent in writing, to carry on its business diligently and in
accordance with good commercial practice and to carry on its business in the
usual, regular and ordinary course, in substantially the same manner as
heretofore conducted and in compliance with all applicable laws and regulations,
to pay its debts and taxes when due subject to good faith disputes over such
debts or taxes, to pay or perform other material obligations when due, and to
use its
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<PAGE>
commercially reasonable efforts consistent with past practices and policies to
preserve intact its present business organization, keep available the services
of its present officers and employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others with which
it has business dealings. In addition, each of Target and Acquiror will promptly
notify the other of any material event involving its business or operations,
except where prohibited by applicable law or contracts existing as of the date
of this Agreement; provided that Target or Acquiror, as the case may be, shall
--------
use its best efforts to have such prohibition removed promptly following such
material event.
In addition, except as permitted by the terms of this Agreement and except
in the case of Target as provided in Article IV of the Target Schedules, and
except in the case of Acquiror as provided in Article IV of the Acquiror
Schedules, without the prior written consent of the other (which consent will
not be unreasonably withheld), neither Target nor Acquiror shall do any of the
following, and neither Target nor Acquiror shall permit its subsidiaries to do
any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize cash
payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer, employee or
consultant, except payments in amounts consistent with policies and past
practices or pursuant to written agreements outstanding, or policies existing,
on the date hereof and as previously disclosed in writing to the other, or adopt
any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Target IP Rights or
the Acquiror IP Rights, as the case may be, or enter into grants to future
patent rights, other than in the ordinary course of business;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any capital stock or split,
combine or reclassify any capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for any
capital stock;
(e) Repurchase or otherwise acquire, directly or indirectly, any
shares of capital stock, except pursuant to rights of repurchase of any such
shares under any employee, consultant or director stock plan existing on the
date hereof;
(f) Issue, deliver, sell, authorize or propose the issuance, delivery
or sale of, any shares of capital stock or any securities convertible into
shares of capital stock, or subscriptions, rights, warrants or options to
acquire any shares of capital stock or any securities convertible into shares of
capital stock, or enter into other agreements or commitments of any character
obligating it to issue any such shares or convertible securities, other than (i)
the issuance of shares of Target Common Stock or Acquiror Common Stock, as the
case may be, pursuant to the exercise of stock options therefor outstanding as
of the date of this Agreement, (ii) options to purchase shares of Target Common
Stock or Acquiror Common Stock, as the case may be, to be granted at fair market
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<PAGE>
value in the ordinary course of business, consistent with past practice and in
accordance with stock option plans existing on the date hereof; provided,
--------
however, that Target shall not, without the prior written consent of Acquiror,
- -------
issue options to purchase more than an aggregate of 100,000 shares of Target
Common Stock, (iii) shares of Target Common Stock or Acquiror Common Stock, as
the case may be, issuable upon the exercise of the options referred to in clause
(ii), (iv) shares of Target Common Stock or Acquiror Common Stock, as the case
may be, issuable to participants in the Target Employee Stock Purchase Plan or
the Acquiror Employee Stock Purchase Plan, as the case may be, consistent with
past practice and the terms thereof and (v) shares of the Target Common Stock,
issuable pursuant to the Option Agreement;
(g) Cause, permit or propose any amendments to any charter document or
Bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity interest in or a material portion of the assets of, or
by any other manner, any business or any corporation, partnership interest,
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 the business of Target or Acquiror, as the case may be;
(i) Sell, lease, license, encumber or otherwise dispose of any
properties or assets which are material, individually or in the aggregate, to
the business of Target or Acquiror, as the case may be, except in the ordinary
course of business consistent with past practice;
(j) Incur any indebtedness for borrowed money (other than ordinary
course trade payables or pursuant to existing credit facilities in the ordinary
course of business) or guarantee any such indebtedness or issue or sell any debt
securities or warrants or rights to acquire debt securities of Target or
Acquiror, as the case may be, or guarantee any debt securities of others;
(k) Adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its officers or employees, in each case other than in
the ordinary course of business, consistent with past practice.
(l) Pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business;
(m) Make any grant of exclusive rights to any third party, other than
in the ordinary course of business;
(n) Enter into any agreement, contract or commitment containing any
covenant limiting its freedom to engage in any line of business or compete with
any person;
(o) 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 or material impairment or loss of a Target IP Right or
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<PAGE>
a material asset, provided that it consults with the other prior to the filing
--------
of such a suit, or (iii) for a breach or threatened breach of this Agreement;
(p) 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 it 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;
(q) 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;
(r) Enter into any partnership arrangements, joint ventures, joint
development agreements, strategic partnership or 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,
except, in the case of Acquiror or any of its subsidiaries, where such action
described in this clause (r) would not have a Material Adverse Effect;
(s) Take any action that would be reasonably likely to interfere with
Acquiror's ability to account for the Merger as a pooling of interests; or
(t) Intentionally take or agree in writing or otherwise to take any of
the actions described in Article IV (a) through (s) 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, except to the extent that such action would not be
reasonably expected to result in a Material Adverse Effect with respect to such
party or otherwise interfere with, delay or impede the consummation of the
transactions contemplated hereby in any material respect.
4.2 Acquiror Acquisitions. Notwithstanding anything in this Agreement to
---------------------
the contrary, Acquiror may acquire or agree to acquire by merging or
consolidating with, or by purchasing any equity interest in or a material
portion of the assets of, or by any other manner, any business or any
corporation, partnership interest, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets, as the
case may be (an "ACQUIROR ACQUISITION"). An Acquiror Acquisition may involve
cash, stock or other consideration, and may include such other actions as are
customary in connection with such type of transaction, including without
limitation entering into employment agreements and severance arrangements in
connection with any such transaction. Notwithstanding the foregoing, the
Acquiror may not make or enter into any agreements pertaining to an Acquiror
Acquisition where (i) such action would reasonably be expected to have a
Material Adverse Effect with respect to Acquiror, Surviving Corporation or
Target (ii) such action would prevent or materially delay the satisfaction of
the condition set forth in Sections 6.1(a) (Stockholder Approval), 6.1(b)
(Registration Statement Effective; Proxy Statement), 6.1(c) (No Order; HSR Act)
or 6.1(f) (Opinion of Accountants) or otherwise interfere with, delay or impede
the consummation of the transactions contemplated hereby in any material respect
(iii) together with the aggregate deal value of any prior Acquiror Acquisitions,
such Acquiror Acquisition would exceed $100 million in deal value or (iv) result
in a change of control of Acquiror. The taking of any action
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allowed by this Section 4.2 shall not be deemed a violation of any
representation, warranty or covenant set forth in this Agreement, nor shall it
constitute a failure of a condition to close.
4.3 No HSR Act Violation. Notwithstanding anything to the contrary in
--------------------
this Article IV, neither Target nor Acquiror shall be required under this
Article IV to take any action or obtain any consent that would cause a violation
of the HSR Act.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings;
------------------------------------------------------------------
Board Recommendations.
- ---------------------
(a) As promptly as practicable after the execution of this Agreement,
Target and Acquiror will prepare, and file with the SEC, the Proxy Statement and
Acquiror will prepare and file with the SEC the Registration Statement in which
the Proxy Statement will be included as a prospectus. Each of Target and
Acquiror will respond to any comments of the SEC, will use its respective best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing and will cause the
Proxy Statement to be mailed to its respective stockholders at the earliest
practicable time. As promptly as practicable after the date of this Agreement,
Target and Acquiror will prepare and file any other filings required under the
Exchange Act, the Securities Act or any other Federal, foreign or Blue Sky laws
relating to the Merger and the transactions contemplated by this Agreement (the
"OTHER FILINGS"). Each of Target and Acquiror will notify the other promptly
upon 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, the Proxy Statement or any Other
Filing or for additional information and will supply the other with copies of
all correspondence between such party 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 Statement, the Proxy Statement, the
Merger or any Other Filing. The Proxy Statement, the Registration Statement and
the Other Filings will comply in all material respects with all applicable
requirements of law and the rules and regulations promulgated thereunder.
Whenever any event occurs which is required to be set forth in an amendment or
supplement to the Proxy Statement, the Registration Statement or any Other
Filing, Target or Acquiror, as the case may be, will 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 Target, such
amendment or supplement.
(b) Subject to the provisions of Section 5.4, the Proxy Statement will
include the recommendation of the Board of Directors of Target in favor of
adoption and approval of this Agreement and approval of the Merger. In
addition, the Proxy Statement will include the recommendations of the Board of
Directors of Acquiror in favor of (x) the amendment of Acquiror's Certificate of
Incorporation to increase its authorized share capital to allow for the issuance
of shares of Acquiror Common Stock by virtue of the Merger and (y) the issuance
of shares of Acquiror Common Stock by virtue of the Merger.
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5.2 Meetings of Stockholders. Promptly after the date hereof, Target will
------------------------
take all action necessary in accordance with Delaware Law and its Certificate of
Incorporation and Bylaws to convene the Target Stockholders' Meeting to be held
as promptly as practicable, and in any event (to the extent permissible under
applicable law) within 45 days after the declaration of effectiveness of the
Registration Statement, for the purpose of voting upon this Agreement. Target
will consult with Acquiror and use its reasonable best efforts to hold the
Target Stockholders' Meeting on the same day as the Acquiror Stockholders'
Meeting. Promptly after the date hereof, Acquiror will take all action
necessary in accordance with Delaware Law and its Certificate of Incorporation
and Bylaws to convene the Acquiror Stockholders' Meeting to be held as promptly
as practicable, and in any event (to the extent permissible under applicable
law) within 45 days after the declaration of effectiveness of the Registration
Statement, for the purpose of (i) amending its Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of
Acquiror Common Stock by virtue of the Merger and (ii) voting upon the issuance
of shares of Acquiror Common Stock by virtue of the Merger. Acquiror will
consult with Target and will use its reasonable best efforts to hold the
Acquiror Stockholders' Meeting on the same day as the Target Stockholders'
Meeting. For so long as the Board of Directors of Target is required to make the
recommendation set forth in Section 5.1, Target will use its reasonable best
efforts to solicit from its stockholders proxies in favor of the adoption and
approval of this Agreement and the approval of the Merger and will take all
other action necessary or advisable to secure the vote or consent of its
stockholders required by Delaware Law to approve the Merger. For so long as the
Board of Directors of Acquiror is required to make the recommendations set forth
in Section 5.1, Acquiror will use its best efforts to solicit from its
stockholders proxies in favor of (i) the amendment of Acquiror's Certificate of
Incorporation to increase its authorized share capital to allow for the issuance
of shares of Acquiror Common Stock by virtue of the Merger and (ii) the issuance
of shares of Acquiror Common Stock by virtue of the Merger.
5.3 Confidentiality; Access to Information.
--------------------------------------
(a) The parties acknowledge that Target and Acquiror have previously
executed a mutual confidentiality letter, dated April 1, 1997, (the
"CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information. Each party will afford the other party and
---------------------
its accountants, counsel and other representatives reasonable access during
normal business hours to the properties, books, records and personnel of the
other party during the period prior to the Effective Time to obtain all
information concerning the business, including the status of product development
efforts, properties, results of operations and personnel of such party, as the
other party may reasonably request. No information or knowledge obtained in any
investigation pursuant to this Section 5.3 will 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.
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5.4 No Solicitation.
---------------
(a) Restriction on Acquiror.
-----------------------
(i) From and after the date of this Agreement until the earlier
of the Effective Time or termination of this Agreement pursuant to its terms,
Acquiror and its subsidiaries will not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, (ii) solicit or knowingly encourage
submission of, any proposals or offers by any person, entity or group, or (iii)
participate in any discussions or negotiations with, or disclose any non-public
information concerning Acquiror or any of its subsidiaries to, or afford any
access to the properties, books or records of Acquiror or any of its
subsidiaries to, or otherwise assist or facilitate, or enter into any agreement
or understanding with, any person, entity or group, in connection with any
Acquisition Proposal with respect to Acquiror. For the purposes of this
Agreement, an "ACQUISITION PROPOSAL" with respect to an entity means any
proposal or offer relating to (i) any merger, consolidation, sale of substantial
assets or similar transactions involving the entity or any subsidiaries of the
entity (other than sales of assets or inventory in the ordinary course of
business or as permitted under the terms of this Agreement); (ii) sale of 15% or
more of the outstanding shares of capital stock of the entity (including without
limitation by way of a tender offer or an exchange offer); (iii) the acquisition
by any person of beneficial ownership or a right to acquire beneficial ownership
of, or the formation of any "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) which beneficially owns,
or has the right to acquire beneficial ownership of, 15% or more of the then
outstanding shares of capital stock of the entity (except for acquisitions for
passive investment purposes only in circumstances where the person or group
qualifies for and files a Schedule 13G with respect thereto and does not
subsequently become required to file a Schedule 13D); or (iv) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing. Acquiror will immediately disclose
to Target and cease any and all existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing.
Acquiror will (i) notify Target as promptly as practicable if any inquiry or
proposal is made or any information or access is requested in connection with an
Acquisition Proposal or potential Acquisition Proposal and (ii) as promptly as
practicable notify Target of the significant terms and conditions of any such
Acquisition Proposal. In addition, subject to the other provisions of this
Section 5.4(a), from and after the date of this Agreement until the earlier of
the Effective Time and termination of this Agreement pursuant to its terms,
Acquiror and its subsidiaries will not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Acquisition Proposal
made by any person, entity or group; provided, however, that nothing herein
-------- -------
shall prohibit Acquiror's Board of Directors from taking and disclosing to
Acquiror's stockholders a position with respect to a tender offer pursuant to
Rules 14d-9 and 14e-2 promulgated under the Exchange Act.
(ii) Notwithstanding any other provision of this Agreement, prior
to the Effective Time, Acquiror may, to the extent the Board of Directors of
Acquiror determines, in good faith, after consultation with outside legal
counsel, that the Board's fiduciary duties under applicable law require it to do
so, participate in discussions or negotiations with, and, subject to the
requirements of paragraph (c), below, furnish information to any person, entity
or group after such
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<PAGE>
person, entity or group has delivered to Acquiror, an unsolicited bona fide
Acquisition Proposal which the Board of Directors of Acquiror in its good faith
reasonable judgment determines, (i) after consultation with its independent
financial advisors, would result in a transaction more favorable than the Merger
to the stockholders of Acquiror from a financial point of view and (ii) after
reasonable inquiry by Acquiror, that the party making such Acquisition Proposal
is financially capable of consummating such Acquisition Proposal (an "ACQUIROR
SUPERIOR PROPOSAL"). In addition, notwithstanding any other provision of this
Agreement in connection with a possible Acquisition Proposal, Acquiror may refer
any third party to this Section 5.4 or make a copy of this Section 5.4 available
to a third party. In the event Acquiror receives an Acquiror Superior Proposal,
nothing contained in this Agreement (but subject to the terms of this Section
5.4(a)) will prevent the Board of Directors of Acquiror from recommending such
Acquiror Superior Proposal to its stockholders, if the Board determines, in good
faith, after consultation with outside legal counsel, that such action is
required by its fiduciary duties under applicable law; in such case, the Board
of Directors of Acquiror may withdraw, modify or refrain from making its
recommendation set forth in Section 5.1(b), and, to the extent it does so,
Acquiror may refrain from soliciting proxies and taking such other action
necessary to secure the vote of its stockholders as may be required by Section
5.2; provided, however, that Acquiror shall not recommend to its stockholders
-------- -------
an Acquiror Superior Proposal for a period of not less than 48 hours after
Target's receipt of a copy of such Acquiror Superior Proposal (or a description
of the significant terms and conditions thereof, if such Acquiror Superior
Proposal is not in writing); and provided further, that nothing contained in
-------- -------
this Section shall limit Acquiror's obligation to hold and convene the Acquiror
Stockholders Meeting (regardless of whether the recommendation of the Board of
Directors of Acquiror shall have been withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary in this Section
5.4(a) Acquiror will not provide any non-public information to a third party
unless: (x) Acquiror provides such non-public information pursuant to a
nondisclosure agreement with terms regarding the protection of confidential
information at least as restrictive as such terms in the Confidentiality
Agreement; and (y) such non-public information has been previously delivered to
Target.
(b) Restrictions on Target.
----------------------
(i) From and after the date of this Agreement until the earlier
of the Effective Time or termination of this Agreement pursuant to its terms,
Target and its subsidiaries will not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, (i) solicit or knowingly encourage
submission of, any proposals or offers by any person, entity or group (other
than Acquiror and its affiliates, agents and representatives), or (ii)
participate in any discussions or negotiations with, or disclose any non-public
information concerning Target or any of its subsidiaries to, or afford any
access to the properties, books or records of Target or any of its subsidiaries
to, or otherwise assist or facilitate, or enter into any agreement or
understanding with, any person, entity or group (other than Acquiror and its
affiliates, agents and representatives), in connection with any Acquisition
Proposal with respect to Target. Target will immediately disclose to Acquiror
and cease any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing. Target will
(i) notify Acquiror as promptly as practicable if any inquiry or proposal is
made or any information or access is requested in connection with an Acquisition
Proposal or
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<PAGE>
potential Acquisition Proposal and (ii) as promptly as practicable notify
Acquiror of the significant terms and conditions of any such Acquisition
Proposal. In addition, subject to the other provisions of this Section 5.4(b),
from and after the date of this Agreement until the earlier of the Effective
Time and termination of this Agreement pursuant to its terms, Target and its
subsidiaries will not, and will instruct their respective directors, officers,
employees, representatives, investment bankers, agents and affiliates not to,
directly or indirectly, make or authorize any public statement, recommendation
or solicitation in support of any Acquisition Proposal made by any person,
entity or group (other than Acquiror); provided, however, that 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.
(ii) Notwithstanding any other provision of this Agreement, prior
to the Effective Time, Target may, to the extent the Board of Directors of
Target determines, in good faith, after consultation with outside legal counsel,
that the Board's fiduciary duties under applicable law require it to do so,
participate in discussions or negotiations with, and, subject to the
requirements of paragraph (c), below, furnish information to any person, entity
or group after such person, entity or group has delivered to Target, an
unsolicited bona fide Acquisition Proposal which the Board of Directors of
Target in its good faith reasonable judgment determines, (i) after consultation
with its independent financial advisors, would result in a transaction more
favorable to the stockholders of Target from a financial point of view than the
Merger and (ii) after reasonable inquiry by Target, that the party making such
Acquisition Proposal is financially capable of consummating such Acquisition
Proposal (a "TARGET SUPERIOR PROPOSAL"). In addition, notwithstanding any other
provision of this Agreement, in connection with a possible Acquisition Proposal,
Target may refer any third party to this Section 5.4 or make a copy of this
Section 5.4 available to a third party. In the event Target receives a Target
Superior Proposal, nothing contained in this Agreement (but subject to the terms
of this Section 5.4(b)) will prevent the Board of Directors of Target from
recommending such Target Superior Proposal to its stockholders, if the Board
determines, in good faith, after consultation with outside legal counsel, that
such action is required by its fiduciary duties under applicable law; in such
case, the Board of Directors of Target may withdraw, modify or refrain from
making its recommendation set forth in Section 5.1(b), and, to the extent it
does so, Target may refrain from soliciting proxies and taking such other action
necessary to secure the vote of its stockholders as may be required by Section
5.2; provided, however, that Target shall not recommend to its stockholders a
-------- -------
Target Superior Proposal for a period of not less than 48 hours after Acquiror's
receipt of a copy of such Target Superior Proposal (or a description of the
significant terms and conditions thereof, if such Target Superior Proposal is
not in writing); and provided further, that nothing contained in this Section
-------- -------
shall limit Target's obligation to hold and convene the Target Stockholders
Meeting (regardless of whether the recommendation of the Board of Directors of
Target shall have been withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary in this paragraph
(b), Target will not provide any non-public information to a third party unless:
(x) Target provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information at
least as restrictive as such terms in the Confidentiality Agreement; and (y)
such non-public information has been previously delivered to Acquiror.
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<PAGE>
5.5 Public Disclosure. Acquiror and Target will consult with each other
-----------------
before issuing any press release or otherwise making any public statement with
respect to the Merger, or this Agreement or an Acquisition Proposal and will not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by law or any listing agreement with a
national securities exchange or the Nasdaq Stock Market.
5.6 Legal Requirements. Each of Acquiror, Merger Sub and Target will take
------------------
all reasonable actions necessary or desirable 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 (including furnishing all
information required in connection with approvals by or filings with any
Governmental Entity, and prompt resolution of any litigation prompted hereby)
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such filings with or investigations by any
Governmental Entity, and any other such requirements imposed upon any of them or
their respective subsidiaries in connection with the consummation of the
transactions contemplated by this Agreement. Acquiror will use its commercially
reasonable efforts to 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 Acquiror Common Stock pursuant hereto. Target will use its
commercially reasonable 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 pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date
--------------------
hereof, Acquiror and Target will each use its commercially reasonable efforts to
obtain all material consents, waivers and approvals under any of its or its
subsidiaries' agreements, contracts, licenses or leases required to be obtained
in connection with the consummation of the transactions contemplated hereby.
5.8 Notification of Certain Matters. Acquiror and Merger Sub will give
-------------------------------
prompt notice to Target, and Target will give prompt notice to Acquiror, of the
occurrence, or failure to occur, of any event, which occurrence or failure to
occur would be reasonably likely to cause (a) any representation or warranty
contained in this Agreement and made by it to be untrue or inaccurate in any
material respect at any time from the date of this Agreement to the Effective
Time such that the conditions set forth in Section 6.2(a) or 6.3(a), as the case
may be, would not be satisfied as a result thereof, or (b) any material failure
of Acquiror and Merger Sub or Target, as the case may be, or of any officer,
director, employee or agent thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement. Notwithstanding the above, the delivery of any notice pursuant to
this Section 5.8 will not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
5.9 Best Efforts and Further Assurances. Subject to the respective rights
-----------------------------------
and obligations of Acquiror and Target under this Agreement, each of the parties
to this Agreement will use its reasonable best efforts to effectuate the Merger
and the other 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, will 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 the
transactions contemplated hereby.
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<PAGE>
5.10 Stock Options and Warrants.
--------------------------
(a) At the Effective Time, each outstanding option to purchase shares
of Target Common Stock (each a "TARGET STOCK OPTION") under the Target Stock
Option Plans, whether or not exercisable, will be assumed by Acquiror. Each
Target Stock Option so assumed by Acquiror under this Agreement will continue to
have, and be subject to, the same terms and conditions set forth in the
applicable Target Stock Option Plan immediately prior to the Effective Time
(including, without limitation, any repurchase rights), except that (i) each
Target Stock Option will be exercisable (or will become exercisable in
accordance with its terms) 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 Target Stock Option immediately prior to the
Effective Time multiplied by the Exchange Ratio, 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 Target Stock Option will be equal to the quotient determined by dividing
the exercise price per share of Target Common Stock at which such Target Stock
Option was exercisable immediately prior to the Effective Time by the Exchange
Ratio, rounded up to the nearest whole cent. After the Effective Time, Acquiror
will issue to each holder of an outstanding Target Stock Option a notice
describing the foregoing assumption of such Target Stock Option by Acquiror.
(b) It is intended that Target Stock Options assumed by Acquiror shall
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent Target Stock Options qualified as
incentive stock options immediately prior to the Effective Time and the
provisions of this Section 5.10 shall be applied consistent with such intent.
(c) Acquiror will reserve sufficient shares of Acquiror Common Stock
for issuance under Section 5.10(a) and under Section 1.6(c) hereof.
5.11 Form S-8. Acquiror agrees to file a registration statement on Form S-
--------
8 for the shares of Acquiror Common Stock issuable with respect to assumed
Target Stock Options and the rights assumed under the Target ESPP no later than
five (5) business days after the Closing Date.
5.12 Indemnification and Insurance.
-----------------------------
(a) From and after the Effective Time, Acquiror will fulfill and honor
and will cause the Surviving Corporation to fulfill and honor in all respects
the obligations of Target pursuant to any indemnification agreements between
Target and any of its subsidiaries and their respective directors and officers
(the "INDEMNIFIED PARTIES") existing prior to the date hereof. From and after
the Effective Time, such obligations shall be the joint and several obligations
of Acquiror and the Surviving Corporation and, by executing this Agreement,
Acquiror hereby assumes such obligations. The Certificate of Incorporation and
Bylaws of the Surviving Corporation will contain the provisions with respect to
indemnification and elimination of liability for monetary damages set forth in
the Certificate of Incorporation and Bylaws of Target, which provisions will not
be amended, repealed or
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<PAGE>
otherwise modified from the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who, immediately prior to the
Effective Time, were directors, officers, employees or agents of Target or its
subsidiaries, unless such modification is required by law.
(b) For a period of six years after the Effective Time, Acquiror will
either (i) maintain at least $10,000,000 in cash, marketable securities and
unrestricted lines of credit which the Chief Financial Officer of Acquiror, on
behalf of Acquiror, certifies in writing are and will continue to be available
to provide the indemnification in accordance with Section 5.12(a) above, or (ii)
cause the Surviving Corporation to use its best efforts to maintain in effect,
if available, directors' and officers' liability insurance for at least
$10,000,000 covering those persons who are Indemnified Parties; provided,
--------
however, that at no time when Acquiror is required to provide indemnification
- -------
under Section 5.12 will the indemnification provided to the Indemnified Parties
under this Section 5.12(b) be less favorable in amount or material terms than
the indemnification provided by Acquiror to its own directors and officers.
In the event of any claim, action, suit, proceeding or investigation to
which paragraph (a) applies, (i) any counsel retained by the Indemnified Parties
for any period after the Effective Time will be reasonably satisfactory to the
Surviving Corporation and Acquiror, (ii) after the Effective Time, the Surviving
Corporation or Acquiror will 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 Acquiror nor the Surviving Corporation will be
- -------- -------
liable for any settlement effected without the Surviving Corporation's or
Acquiror's written consent (which consent will 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 will continue until the
disposition of any and all such claims. The Indemnified Parties as a group may
retain 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.
(c) This Section 5.13 will survive any termination of this Agreement
and the consummation of the Merger at the Effective Time, is intended to benefit
Target, the Surviving Corporation and the persons who are or were directors or
officers of Target or its subsidiaries on or prior to the Effective Time, and
will be binding on all successors and assigns of the Surviving Corporation.
5.13 Nasdaq National Market Listing. Acquiror agrees to file with the
------------------------------
Nasdaq National Market prior to the Effective Time a Notification Form for
Listing of Additional Shares with respect to the shares of Acquiror Common Stock
issuable, and those required to be reserved for issuance, in connection with the
Merger, upon official notice of issuance.
5.14 Acquiror Affiliate Agreement. Set forth on the Acquiror Schedules is
----------------------------
a list of those persons who, in Acquiror's reasonable judgment, may be deemed to
be affiliates of Acquiror within the meaning of Rule 145 promulgated under the
Securities Act (each an "ACQUIROR AFFILIATE"). Acquiror will provide Target with
such information and documents as Target reasonably requests for purposes of
reviewing such list. Acquiror will use its reasonable best efforts to deliver
or cause to be
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<PAGE>
delivered to Target, as promptly as practicable on or following the date hereof,
from each Acquiror Affiliate an executed affiliate agreement in substantially
the form attached hereto as Exhibit C-1.
-----------
5.15 Target Affiliate Agreement. Set forth on the Target Schedules is a
--------------------------
list of those persons who may be deemed to be, in Target's reasonable judgment,
affiliates of Target within the meaning of Rule 145 promulgated under the
Securities Act (each a "TARGET AFFILIATE"). Target will provide Acquiror with
such information and documents as Acquiror reasonably requests for purposes of
reviewing such list. Target will use its reasonable best efforts to deliver or
cause to be delivered to Acquiror, as promptly as practicable on or following
the date hereof, from each Target Affiliate an executed affiliate agreement in
substantially the form attached hereto as Exhibit C-2 (the "TARGET AFFILIATE
-----------
AGREEMENT"). Acquiror will be entitled to place appropriate legends on the
certificates evidencing any Acquiror Common Stock to be received by a Target
Affiliate pursuant to the terms of this Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for the Acquiror Common Stock,
consistent with the terms of the Target Affiliate Agreement.
5.16 Acquiror Voting Agreements. To the extent not delivered to Target
--------------------------
concurrently with the execution of this Agreement, Acquiror shall use its best
efforts, on behalf of Target and pursuant to the request of Target, to cause
each Acquiror stockholder named in Schedule 5.16 of the Acquiror Schedule (which
-------------
accurately states the number of shares of Target Common Stock beneficially owned
by each person named thereon) to execute and deliver to Target an Acquiror
Voting Agreement in substantially the form of Exhibit A-2 attached hereto
-----------
promptly following 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).
5.17 Target Voting Agreements. To the extent not delivered to Acquiror
------------------------
concurrently with the execution of this 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 5.17 of the Target Schedule (which
-------------
accurately states as of March 14, 1997 the number of shares of Target Common
Stock beneficially owned by each person named thereon) to execute and deliver to
Acquiror a Target Voting Agreement in substantially the form of Exhibit A-1
-----------
attached hereto promptly following 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).
5.18 Regulatory Filings; Reasonable Efforts. If required under applicable
--------------------------------------
law, as soon as may be reasonably practicable, Target and Acquiror each shall
file with the United States Federal Trade Commission (the "FTC") and the
Antitrust Division of the United States Department of Justice ("DOJ")
Notification and Report Forms relating to the transactions contemplated herein
as required by the HSR Act, as well as comparable pre-merger notification forms
required by the merger notification or control laws and regulations of any
applicable jurisdiction, as agreed to by the parties. Target and Acquiror each
shall promptly (a) supply the other with any information which may be required
in order to effectuate such filings and (b) supply any additional information
which reasonably may be required by the FTC, the DOJ or the competition or
merger control authorities of any other jurisdiction and which the parties may
reasonably deem appropriate.
5.19 Increase in Authorized Shares. Subject to the terms hereof, at the
-----------------------------
Acquiror Stockholders' Meeting, Acquiror shall propose and recommend that its
Certificate of Incorporation
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<PAGE>
be amended to increase the authorized number of shares of Common Stock
thereunder to at least 110,000,000 shares, provided that Acquiror may propose
and recommend an increase of such lesser number as in good faith it determines
(provided that, subject to the terms hereof, such lesser number is not less
--------
than the number required to issue shares by virtue of the Merger and the other
transactions contemplated hereby).
5.20 Tax-Free Reorganization. Each party shall take such reasonable action
-----------------------
as may be required to cause the Merger to qualify as a "reorganization" under
Section 368(a) of the Code, and no party shall take any action either prior to
or after the Effective Time that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code.
5.21 Nasdaq Quotation. Acquiror and Target agree to continue the quotation
----------------
of Acquiror Common Stock and Target Common Stock, respectively, on the Nasdaq
National Market during the term of the Agreement so that appraisal rights will
not be available to stockholders of Target under Section 262 of the Delaware
Law.
5.22 Employee Benefit Arrangements. As soon as practicable following the
-----------------------------
Effective Time, Acquiror shall enroll employees of Target who will become
employees of Acquiror in all "employee welfare benefit plans," as such term is
defined in Section 3.(1) of ERISA, maintained by Acquiror and shall take such
steps as are necessary to ensure that there are no pre-existing condition
limitations that apply to any medical, life or disability insurance coverage.
5.23 [Intentionally left blank]
5.24 Amendment to Registration Rights. Target shall use its reasonable
--------------------------------
best efforts to obtain such amendments to registration rights agreements to
which it is a party which may be reasonably requested by Acquiror.
5.25 Pooling Accounting.
------------------
(a) Acquiror and Target shall each use its best efforts to take all
actions required 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 such term is used in
Sections 5.14 and 5.15) 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 interests. Acquiror and Target shall each advise each other and their
own respective accounting firms of any action known to such party to have been
taken by any of its directors, officers, affiliate, or stockholder which, to the
knowledge of such party, could preclude accounting for the Merger as a pooling
of interests.
(b) Target shall use all reasonable efforts to cause to be delivered
to Acquiror a letter of Target's independent auditors in writing two business
days prior to the Effective Time 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
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<PAGE>
Acquiror and customary in scope and substance for letters delivered by
independent public accountants in connection with transactions of this type.
(c) Acquiror shall use all reasonable efforts to cause to be delivered
to Target a letter of Acquiror's independent auditors in writing two business
days before the Effective Time 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.
5.26 Option Agreement. Concurrently with the execution of this Agreement,
----------------
Target shall deliver to Acquiror an executed Target Option Agreement in the form
of Exhibit B-1 attached hereto. Target agrees to fully perform its obligations
-----------
under the Target Option Agreement. Concurrently with the execution of this
Agreement, Acquiror shall deliver to Target an executed Acquiror Option
Agreement in the form of Exhibit B-2 attached hereto. Acquiror agrees to fully
-----------
perform its obligations under the Acquiror Option Agreement.
5.27 ESPP. Employees of Target as of the Effective Time shall be permitted
----
to participate in the Acquiror's Employee Stock Purchase Plan commencing on the
first enrollment date following the Effective Time, subject to compliance with
the eligibility provisions of such plan.
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 effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
--------------------
adopted, and the Merger shall have been duly approved, by the requisite vote
under applicable law, by the stockholders of Target; and an increase in the
authorized number of shares of Acquiror Common Stock so as to permit the
issuance of shares of Acquiror Common Stock by virtue of the Merger, as well as
such issuance, shall have been duly approved by the requisite vote under
applicable law and the rules of the National Association of Securities Dealers,
Inc. by the stockholders of Acquiror.
(b) Registration Statement Effective; Proxy Statement. The SEC shall
-------------------------------------------------
have declared the Registration 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 in
respect of the Proxy Statement, shall have been initiated or threatened in
writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted,
-----------------
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect
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<PAGE>
of making the Merger illegal or otherwise prohibiting consummation of the
Merger. All waiting periods, if any, under the HSR Act relating to the
transactions contemplated hereby will have expired or terminated early.
(d) Tax Opinions. Acquiror and Target shall each have received
------------
substantially identical written opinions from their counsel, Wilson Sonsini
Goodrich & Rosati, and Fenwick & West LLP, respectively, in form and substance
reasonably satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. The parties to
this Agreement agree to make reasonable representations as requested by such
counsel for the purpose of rendering such opinions.
(e) Nasdaq Listing. The shares of Acquiror Common Stock issuable to
--------------
stockholders of Target pursuant to this Agreement and such other shares required
to be reserved for issuance in connection with the Merger shall have been
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
(f) Opinion of Accountants. Each of Acquiror and Target shall have
----------------------
received a letter from Ernst & Young LLP and KPMG Peat Marwick LLP,
respectively, dated within two (2) business days prior to the Effective Time, as
described in Section 5.25.
6.2 Additional Conditions to Obligations of Target. The obligation 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, exclusively by Target:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Acquiror and Merger Sub contained in this Agreement shall have
been true and correct in all material respects (i) as of the date of this
Agreement and (ii) as of the Effective Time except, in each case, for changes
contemplated by this Agreement and except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such particular date), with the same force and
effect as if made on and as of the Effective Time, except in such cases (other
than the representations in Sections 3.2 and 3.3) where the failure to be so
true and correct would not have a Material Adverse Effect on Acquiror. Target
shall have received a certificate with respect to the foregoing signed on behalf
of Acquiror by the Chief Executive Officer and the Chief Financial Officer of
Acquiror.
(b) Agreements and Covenants. Acquiror and Merger Sub shall have
------------------------
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to the Effective
Time, except where the failure to so perform or comply would not have a Material
Adverse Effect with respect to Acquiror and Target shall have received a
certificate to such effect signed on behalf of Acquiror by the Chief Executive
Officer and the Chief Financial Officer of Acquiror.
(c) Material Adverse Effect. No Material Adverse Effect with respect
-----------------------
to Acquiror shall have occurred since the date of this Agreement.
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<PAGE>
(d) Legal Opinion. Target shall have received a legal opinion from
-------------
Wilson Sonsini Goodrich & Rosati, P.C., counsel to Acquiror, in substantially
the form set forth in Exhibit D-1.
-----------
(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 jurisdiction or other legal, contractual or regulatory
restraint provision limiting or restricting Acquiror's conduct or operation of
its business or 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 Acquiror.
6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub.
-------------------------------------------------------------------
The obligations 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, exclusively
by Acquiror:
(a) Representations and Warranties. The representations and warranties
------------------------------
of Target contained in this Agreement shall have been true and correct in all
material respects (i) as of the date of this Agreement and (ii) as of the
Effective Time except, in each case, for changes contemplated by this Agreement
or the Target Schedules and except for those representations and warranties
which address matters only as of a particular date (which shall remain true and
correct as of such particular date), with the same force and effect as if made
on and as of the Effective Time, except in such cases (other than the
representations in Sections 2.2 and 2.3) where the failure to be so true and
correct would not have a Material Adverse Effect on Target. Acquiror shall have
received a certificate with respect to the foregoing signed on behalf of Target
by the Chief Executive Officer and the Chief Financial Officer of Target.
(b) Agreements and Covenants. Target shall have performed or complied
------------------------
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time, except where the failure
to so perform or comply would not have a Material Adverse Effect with respect to
Target and the Acquiror shall have received a certificate to such effect signed
on behalf of Target by the President and the Chief Financial Officer of Target.
(c) Material Adverse Effect. No Material Adverse Effect with respect
-----------------------
to Target shall have occurred since the date of this Agreement.
(d) No Dissenters. Holders of more than 4.9% of the outstanding
-------------
shares of Target Common Stock shall not have exercised, nor shall they have any
continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
(e) Employment and Noncompetition Agreement. Reed Hastings shall have
---------------------------------------
entered into the Noncompetition Agreement in the form of Exhibit E hereto.
---------
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<PAGE>
(f) Legal Opinion. Acquiror shall have received a legal opinion from
-------------
Fenwick & West LLP, counsel to Target, in substantially the form set forth in
Exhibit D-2.
- -----------
(g) Injunctions or Restraints on Conduct of Business. No temporary
------------------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal, contractual or regulatory
restraint provision limiting or restricting Acquiror's conduct or operation of
its business or 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.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Effective Time of the Merger, whether before or after approval of the Merger
by the stockholders of Target or the approval of the issuance of Acquiror Common
Stock in connection with the Merger by the stockholders of Acquiror:
(a) by mutual written consent duly authorized by the Boards of
Directors of Acquiror and Target;
(b) by either Target or Acquiror if the Merger shall not have been
consummated by September 30, 1997 for any reason; provided, however, 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 a principal 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 either Target or Acquiror if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action (an "ORDER"), in any
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree or ruling is final and
nonappealable;
(d) by either Target or Acquiror if the required approvals of the
stockholders of Target or the stockholders of Acquiror contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of stockholders duly convened
therefor or at any adjournment thereof (provided that the right to terminate
--------
this Agreement under this Section 7.1(d) shall not be available to any party
where the failure to obtain stockholder approval of such party shall have been
caused by the action or failure to act of such party in breach of this
Agreement);
(e) by Acquiror, if the Board of Directors of Target recommends a
Target Superior Proposal to the stockholders of Target, or if the Board of
Directors of Target shall have
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<PAGE>
withheld, withdrawn or modified in a manner adverse to Acquiror its
recommendation in favor of adoption and approval of this Agreement and approval
of the Merger;
(f) by Target, if the Board of Directors of Acquiror recommends an
Acquiror Superior Proposal to the stockholders of Acquiror, or if the Board of
Directors of Acquiror shall have withheld, withdrawn or modified in a manner
adverse to Target its recommendation in favor of approving the amendment of
Acquiror's Certificate of Incorporation to increase its authorized share capital
to allow the issuance of shares of Acquiror Common Stock by virtue of the Merger
and the issuance of the shares of Acquiror Common Stock by virtue of the Merger;
(g) by Target, 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 representation
or warranty shall have become untrue, provided that if such inaccuracy in
--------
Acquiror's representations and warranties or breach by Acquiror is curable by
Acquiror through the exercise of its commercially reasonable efforts within ten
(10) days of the time such representation or warranty shall have become untrue
or such breach, then Target may not terminate this Agreement under this Section
7.1(g) during such ten-day period provided Acquiror continues to exercise such
commercially reasonable efforts to cure such breach;
(h) by Acquiror, 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
representation or warranty shall have become untrue, provided, that if such
--------
inaccuracy in Target's representations and warranties or breach by Target is
curable by Target through the exercise of its commercially reasonable efforts
within ten (10) days of the time such representation or warranty shall have
become untrue or such breach, then Acquiror may not terminate this Agreement
under this Section 7.1(h) during such ten-day period provided Target continues
to exercise such commercially reasonable efforts to cure such breach.
(i) by Target, if there shall have occurred any Material Adverse
Effect with respect to Acquiror since the date of this Agreement; or
(j) by Acquiror, if there shall have occurred any Material Adverse
Effect with respect to Target since the date of this Agreement.
7.2 Notice of Termination; Effect of Termination. Any termination of this
--------------------------------------------
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties hereto.
In the event of the termination of this Agreement as provided in Section 7.1,
this Agreement shall be of no further force or effect, except (i) as set forth
in this Section 7.2, Section 7.3 and Article 8 (General Provisions), each of
which shall survive the termination of this Agreement, and (ii) nothing herein
shall relieve any party from liability for any breach of this Agreement. No
termination of this Agreement shall affect the obligations of the parties
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<PAGE>
contained in the Confidentiality Agreement or the Option Agreement, all of which
obligations shall survive termination of this Agreement in accordance with their
terms.
7.3 Fees and Expenses.
-----------------
(a) General. Except as set forth in this Section 7.3, all fees and
-------
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses whether
or not the Merger is consummated; provided, however, that Acquiror and Target
-------- -------
shall share equally all fees and expenses, other than attorneys' and accountants
fees and expenses, incurred in relation to the printing and filing of the Proxy
Statement (including any preliminary materials related thereto) and the
Registration Statement (including financial statements and exhibits) and any
amendments or supplements thereto.
(b) Target Payments.
---------------
(i) If (x) the Board of Directors of Target shall have withheld,
withdrawn or modified in a manner adverse to Acquiror its recommendation in
favor of adoption and approval of this Agreement and approval of the Merger, and
at that time there shall not have occurred a Material Adverse Effect on
Acquiror, (y) the Board of Directors of Target recommends a Target Superior
Proposal to the stockholders of Target, or (z) Target fails to hold the Target
Stockholders Meeting as required by this Agreement by September 30, 1997, Target
shall pay to Acquiror an amount equal to $18,000,000 within one business day
following the earlier to occur of (A) termination of this Agreement pursuant to
Section 7.1(b) or 7.1(e) hereof and (B) a Target Negative Vote (as defined
below);
(ii) If no payment shall be required pursuant to clause 7.3(b)(i)
above, and if (x) the vote of the stockholders of Target approving and adopting
this Agreement and approving the Merger shall not have been obtained by reason
of the failure to obtain the required vote upon a vote taken at a meeting of
stockholders duly convened therefor or at any adjournment thereof (a "TARGET
NEGATIVE VOTE") and (y) prior to such Target Negative Vote there shall have
occurred an Acquisition Proposal with respect to Target which shall have been
publicly disclosed and not withdrawn (a "TARGET COMPETING PROPOSAL") and (z) (i)
within 12 months of such Target Negative Vote, Target shall enter into a
definitive agreement with respect to an Acquisition Proposal with the party (or
any affiliate of the party) that made the Target Competing Proposal or an
Acquisition Proposal with such party (or any such affiliate) with respect to
Target shall have been consummated or (ii) within 6 months following such Target
Negative Vote, Target shall enter into a definitive agreement with respect to an
Acquisition Proposal with any other party or an Acquisition Proposal with any
other party with respect to Target shall have been consummated, then, provided
that there shall have not occurred a Material Adverse Effect on Acquiror prior
to the Target Negative Vote, Target shall pay to Acquiror an amount equal to
$18,000,000 within one business day following demand therefor after the
occurrence of the events set forth in (x) and (y) and either (z)(i) or (z)(ii)
above; and
(iii) If (A) payment is required pursuant to clauses 7.3(b)(i) or
(ii) above, (B) if there shall otherwise be a Target Negative Vote or (C) if
this Agreement is terminated by
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<PAGE>
Acquiror pursuant to Section 7.1(h) or 7.1(j) then Target shall pay to Acquiror
an amount equal to $3,000,000 within one business day following demand therefor.
(c) Acquiror Payments.
-----------------
(i) If (x) the Board of Directors of Acquiror shall have
withheld, withdrawn or modified in a manner adverse to Target its recommendation
in favor of the approval of the issuance of shares of its capital stock in
connection with the Merger, and at that time there shall not have occurred a
Material Adverse Effect on Target, (y) the Board of Directors of Acquiror
recommends an Acquiror Superior Proposal to the stockholders of Acquiror or (z)
Acquiror fails to hold the Acquiror Stockholders Meeting as required by this
Agreement by September 30, 1997, Acquiror shall pay to Target an amount equal to
$18,000,000 within one business day following the earlier to occur of (A)
termination of the Agreement pursuant to Section 7.1(b) or 7.1(f) hereof and (B)
an Acquiror Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(c)(i)
above, and if (x) the vote of the stockholders of Acquiror approving the
amendment of its Certificate of Incorporation to increase its authorized share
capital to allow the issuance of shares of Acquiror Common Stock by virtue of
the Merger and the issuance of such shares by virtue of the Merger shall not
have been obtained by reason of the failure to obtain the required vote upon a
vote taken at a meeting of stockholders duly convened therefor or at any
adjournment thereof (an "ACQUIROR NEGATIVE VOTE") and (y) prior to such
Acquiror Negative Vote there shall have occurred an Acquisition Proposal with
respect to Acquiror which shall have been publicly disclosed and not withdrawn
("ACQUIROR COMPETING PROPOSAL") and (z) (i) within 12 months of such Acquiror
Negative Vote, Acquiror shall enter into a definitive agreement with respect to
an Acquisition Proposal with the party (or any affiliate of the party) that made
the Acquiror Competing Proposal or an Acquisition Proposal with such party (or
any such affiliate) with respect to Acquiror shall have been consummated or (ii)
within 6 months following such Acquiror Negative Vote, Acquiror shall enter into
a definitive agreement with respect to an Acquisition Proposal with any other
party or an Acquisition Proposal with any other party with respect to Acquiror
shall have been consummated, then, provided that there shall have not occurred a
Material Adverse Effect on Target prior to the Acquiror Negative Vote, Acquiror
shall pay to Target an amount equal to $18,000,000 within one business day
following demand therefor after the occurrence of the events set forth in (x)
and (y) and either (z)(i) or (z)(ii) above; and
(iii) If (A) payment is required pursuant to clause 7.3(c)(i) or
(ii) above, (B) if there shall be an Acquiror Negative Note or (C) if this
Agreement is terminated by Target pursuant to Section 7.1(g) or 7.1(i) then
Acquiror shall pay to Target an amount equal to $3,000,000 within one business
day following demand therefor.
(d) Payment of the amounts described in Section 7.3(b) or (c) above
shall not be in lieu of damages incurred in the event of breach of this
Agreement.
7.4 Amendment. Subject to applicable law, this Agreement may be amended
---------
by the parties hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
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<PAGE>
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 compliance 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. Delay in exercising any right under
this Agreement shall not constitute a waiver of such right.
7.6 Extension of Date. The references in this Article VII to September
-----------------
30, 1997 shall be deemed to be references to September 30, 1997, or such later
date as may be necessary to allow time to comply with the HSR Act (provided that
the parties are using their best efforts with respect to such matter), but in no
event later than December 31, 1997.
ARTICLE VII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
----------------------------------------------
and warranties of Target, Acquiror and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time 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 sent via telecopy (receipt confirmed) to the parties at the
following addresses or facsimile numbers (or at such other address or facsimile
numbers 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: Chief Executive Officer
Telephone No.: (408) 496-3600
Facsimile No.: (408) 496-3636
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Francis S. Currie, Esq.
Telephone No.: (415) 493-9300
Facsimile No.: (415) 493-6811
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<PAGE>
(b) if to Target, to:
Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, California 94087
Attention: President and Chief Executive Officer
Telephone No.: (408) 720-1600
Facsimile No.: (408) 720-0324
with a copy to:
Fenwick & West LLP
Two Palo Alto Square, Suite 700
Palo Alto, California 94306
Attention: Dennis R. DeBroeck, Esq.
Telephone No.: (415) 494-0600
Facsimile No.: (415) 494-1417
8.3 Interpretation; Knowledge.
-------------------------
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit 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 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. When reference is made herein to "THE BUSINESS OF" an entity, such
reference shall be deemed to include the business of all direct and indirect
subsidiaries of such entity. Reference to the subsidiaries of an entity shall
be deemed to include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "KNOWLEDGE" means, with
respect to any matter in question, that any of the executive officers of Target
or Acquiror, as the case may be, has actual knowledge of such matter.
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 party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
-------------------------------------------
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including Target Schedules and the
Acquiror Schedules (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, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive any
termination of this Agreement; and (b) are not intended to confer upon
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<PAGE>
any other person any rights or remedies hereunder, except with respect to the
matters set forth in Sections 1.6(c), 5.10, 5.11, 5.12 and 5.13.
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 unenforceable, 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 Other Remedies; Specific Performance. 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. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
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 thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction of
any state or federal court within the State of Delaware, in connection with any
matter based upon or arising out of this Agreement or the matters contemplated
herein, other than issues involving the corporate governance of any of the
parties hereto, 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 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.
8.10 Assignment. No party may assign either this Agreement or any of its
----------
rights, interests, or obligations hereunder without the prior written approval
of the of the parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
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<PAGE>
8.11 Waiver of Jury Trial. EACH OF ACQUIROR, TARGET AND MERGER SUB HEREBY
--------------------
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF ACQUIROR, TARGET OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
*****
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
RATIONAL SOFTWARE CORPORATION
By: ________________________________________
Name:
Title:
WINGS MERGER CORPORATION
By: ________________________________________
Name:
Title:
PURE ATRIA CORPORATION
By: ________________________________________
Name:
Title:
**** AGREEMENT AND PLAN OF REORGANIZATION ****
<PAGE>
Exhibit 99.1
------------
FOR IMMEDIATE RELEASE
Investor contact: Robert T. Bond, Rational Software Corporation
(408) 496-3694
E-mail [email protected]
Press contact: Kara Myers, Rational Software Corporation
(408) 496-3891
E-mail [email protected]
RATIONAL SOFTWARE CORPORATION ANNOUNCES AGREEMENT TO ACQUIRE PURE ATRIA
Santa Clara, CA (April 7, 1997)--Rational Software Corporation (NASDAQ: RATL)
announced today that it has entered into a definitive agreement to acquire Pure
Atria Corporation (NASDAQ: PASW) to create a leading software company, operating
worldwide, whose products automate the component-based development of software
applications.
Under the terms of the acquisition agreement all of the outstanding shares of
Pure Atria common stock will be exchanged for shares of Rational on the basis of
0.90 shares of Rational stock for each share of Pure Atria stock. Outstanding
options to purchase Pure Atria stock will be converted at the exchange ratio
into Rational options. The transaction is expected to be accounted for as a
pooling of
interests and to qualify as a tax-free reorganization. Rational expects to
recognize a one-time charge related to certain merger costs and related expenses
in the second quarter of its fiscal 1998.
"Rational's mission is to enable our customers to automate the component-based
development of software. Rational and Pure Atria share a common vision and are
committed to providing best-in-class products to our customers. By quickly
integrating the Pure Atria sales operation into the Rational field sales
operation and quickly integrating the industry-leading Pure Atria and Rational
products in the context of Rational's proven business model, we are creating in
Rational a partner that customers around the world can depend on," said Paul D.
Levy, a founder, chairman, and chief executive officer of Rational.
Reed Hastings, a founder, president, and chief executive officer of Pure Atria,
stated, "This combination takes advantage of Rational's world-class field sales
organization and disciplined management style to accelerate the combined
company's drive to become a world-leading software business. Combining with
Rational reinforces Pure Atria's founding vision, which is to automate software
development while leveraging Pure Atria's superb product portfolio and providing
an expanding array of opportunities for the tremendously capable members of the
Pure Atria team."
Michael T. Devlin, a Rational founder and the company's president, said, "By
quickly integrating the industry-leading Pure Atria and Rational products, we
will be providing the most complete solution
<PAGE>
for automating the component-based development of software applications
available today. The combined company's product line will address the needs of
customers who are demanding complete solutions covering all of the critical
aspects of developing business-critical software applications for Windows, the
Web, and UNIX."
The board members and officers of Pure Atria will agree to vote their shares in
favor of the acquisition. Furthermore, Pure Atria and Rational have granted
reciprocal options to purchase newly issued shares equal to approximately 19.9
percent of each of the issuing company's currently outstanding shares, which are
exerciseable upon certain events. Completion of the transaction is subject to
customary conditions, including approval by the stockholders of Rational and
Pure Atria and Hart-Scott-Rodino review. The merger is expected to close in the
third quarter of calendar 1997.
Paul D. Levy, a founder, will continue as Rational's chairman and chief
executive officer, and Michael T. Devlin, a founder, will continue as Rational's
president. Robert T. Bond, a thirteen-year veteran with Rational, will continue
as the company's chief operating and financial officer. Upon completion of the
merger, Reed Hastings, a founder, president, and chief executive officer of Pure
Atria, will become Rational's chief technical officer. Pure Atria's principal
lines of business, which focus on automating software quality and test and
software configuration management, will become new Rational business units
within Rational's products group. The Pure Atria sales and services operation
will be integrated into Rational's worldwide field sales operation to form a
single, unified sales force managed by Rational's senior vice president for
worldwide field operations, John Lovitt, a twelve-year veteran with the company.
Rational's board of directors will continue in place following completion of the
acquisition.
Rational Software Corporation develops, markets, and supports a comprehensive
solution that automates the component-based development of software. Rational's
solution includes an integrated family of products that automate development and
quality assurance throughout the software lifecycle, a software process that can
be configured to the specific needs of customers, and a range of consulting and
support services. For more information on Rational's products and services,
visit Rational's Web site at www.rational.com.
The forward looking statements contained in this news release, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties, including the potential inability to complete the described
transactions as scheduled, or at all, risks involving the ability to
successfully integrate Rational and Pure Atria, the ability to successfully
develop new products, market acceptance of existing and new products of the
combined companies, the continued success of the Microsoft and UNIX operating
systems, variances between actual and estimated costs and expenses related to
the proposed merger, the potential for fluctuations in quarterly operating
results, rapid technological change, and intense competition from current and
potential competitors who may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. Actual results may differ
materially.
<PAGE>
# # # # #
The word "Rational" and Rational's products are trademarks of Rational Software
Corporation. References to other companies and their products use trademarks
owned by the respective companies and are for reference purposes only.
For more information contact:
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, CA 95051-0951
Tel. (408) 496-3600 or (800) RAT-1212 Fax (408) 496-3636
Fax-on-demand (408) 496-3966
E-mail [email protected]
Web www.rational.com
<PAGE>
EXHIBIT 99.2
------------
PURE ATRIA CORPORATION
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of April 7,
1997, between Rational Software Corporation, a Delaware corporation ("PARENT"),
and the undersigned stockholder ("STOCKHOLDER") of Pure Atria Corporation, a
Delaware corporation (the "COMPANY").
RECITALS
A. Concurrently with the execution of this Agreement, Parent, the Company
and Wings Merger Corporation, a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), are entering into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into the Company. Pursuant to the Merger,
shares of capital stock of the Company will be converted into Common Stock of
Parent on the basis described in the Merger Agreement.
B. The Stockholder is the record holder and beneficial owner (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")), of such number of shares of the outstanding Common Stock of
the Company as is indicated on the final page of this Agreement (the "SHARES").
C. As a material inducement to enter into the Merger Agreement, Parent
desires the Stockholder to agree, and the Stockholder is willing to agree to
vote the Shares and any other such shares of capital stock of the Company so as
to facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
1. Agreement to Vote Shares; Additional Purchases.
----------------------------------------------
1.1 Agreement to Vote Shares. At every meeting of the stockholders
------------------------
of the Company called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of the
stockholders of the Company with respect to any of the following, Stockholder
shall vote the Shares and any New Shares in favor of approval of the Merger
Agreement and the Merger.
1.2 Additional Purchases. Stockholder agrees that any shares of
--------------------
capital stock of the Company that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership after the execution of this
Agreement and prior to the Expiration Date ("NEW SHARES") shall be subject to
the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
2. Irrevocable Proxy. Concurrently with the execution of this Agreement,
-----------------
Stockholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "PROXY"), which shall be irrevocable, with the total number of
shares of capital stock of the Company beneficially owned (as such term is
defined in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein.
3. Representations and Warranties of the Stockholder. Stockholder (i) is
-------------------------------------------------
the beneficial owner of the Shares, which at the date hereof are free and clear
of any liens, claims, options, charges or other encumbrances; (ii) does not
beneficially own any shares of capital stock of the Company other than the
Shares (excluding shares as to which
<PAGE>
Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into and
carry out the terms of this Agreement.
4. Additional Documents. Stockholder hereby covenants and agrees to
--------------------
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Parent or Stockholder, as the case may be, to carry out
the intent of this Agreement.
5. Consent and Waiver. Stockholder hereby gives any consents or waivers
------------------
that are reasonably required for the consummation of the Merger under the terms
of any agreements to which Stockholder is a party or pursuant to any rights
Stockholder may have.
6. Termination. This Agreement shall terminate and shall have no further
-----------
force or effect as of the earlier to occur of (i) such date and time as the
Merger shall become effective in accordance with the terms and provisions of the
Merger Agreement or (ii) such date and time as the Merger Agreement shall have
been terminated pursuant to Article VII thereof.
7. Miscellaneous.
-------------
7.1 Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
7.2 Binding Effect and Assignment. This Agreement and all of the
-----------------------------
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without prior written consent of the other.
7.3 Amendments and Modification. This Agreement may not be modified,
---------------------------
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
7.4 Specific Performance; Injunctive Relief. The parties hereto
---------------------------------------
acknowledge that Parent will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at law
or in equity.
7.5 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or certified
mail, postage prepaid, return receipt requested) or overnight courier (prepaid)
to the respective parties as follows:
If to Parent: Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051-0951
Attn: President and Chief Executive Officer
-2-
<PAGE>
With a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Francis S. Currie, Esq.
If to the Stockholder: To the address for notice set forth on the
last page hereof.
With a copy to: Fenwick & West
Two Palo Alto Square
Palo Alto, California 94304
Attn: Dennis R. DeBroeck, Esq.
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
7.6 Governing Law. This Agreement shall be governed by, and
-------------
construed and enforced in accordance with, the internal laws of the State of
Delaware (without regard to the principles of conflict of laws thereof).
7.7 Entire Agreement. This Agreement contains the entire
----------------
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.
7.8 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
7.9 Effect of Headings. The section headings herein are for
------------------
convenience only and shall not affect the construction or interpretation of this
Agreement.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed on the date and year first above written.
RATIONAL SOFTWARE CORPORATION
By:
-------------------------------------
Title:
----------------------------------
STOCKHOLDER:
By:
-------------------------------------
Stockholder's Address for Notice:
----------------------------------------
----------------------------------------
----------------------------------------
------- Shares of Common Stock Beneficially Owned:
***TARGET VOTING AGREEMENT***
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of Pure Atria Corporation, a Delaware
corporation (the "COMPANY"), hereby irrevocably appoints the directors on the
Board of Directors of Rational Software Corporation, a Delaware corporation
("PARENT"), and each of them, as the sole and exclusive attorneys and proxies of
the undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the shares of capital stock
of the Company beneficially owned by the undersigned, which shares are listed on
the final page of this Proxy (the "SHARES"), and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof,
until such time as that certain Agreement of Merger and Plan of Reorganization
dated as of April 7, 1997 (the "MERGER AGREEMENT"), among Parent, [Merger Sub],
a Delaware corporation and a wholly-owned subsidiary of Parent ("MERGER SUB"),
and the Company, shall be terminated in accordance with its terms or the Merger
(as defined in the Merger Agreement) is effective. Upon the execution hereof,
all prior proxies given by the undersigned with respect to the Shares and any
and all other shares or securities issued or issuable in respect thereof on or
after the date hereof are hereby revoked and no subsequent proxies will be
given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement
dated as of April 7, 1997 between Parent and the undersigned stockholder (the
"VOTING AGREEMENT"), and is granted in consideration of Parent entering into the
Merger Agreement. The attorneys and proxies named above will be empowered at any
time prior to termination of the Merger Agreement to exercise all voting and
other rights (including, without limitation, the power to execute and deliver
written consents with respect to the Shares) of the undersigned at every annual,
special or adjourned meeting of the Company stockholders, and in every written
consent in lieu of such a meeting, or otherwise, in favor of approval of the
Merger and the Merger Agreement.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to termination of the Merger
Agreement at every annual, special or adjourned meeting of the stockholders of
the Company and in every written consent in lieu of such meeting, in favor of
approval of the Merger and the Merger Agreement and any matter that could
reasonably be expected to facilitate the Merger. The undersigned stockholder may
vote the Shares on all other matters.
<PAGE>
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: April __, 1997
Signature of Stockholder:
----------------------------
Print Name of Stockholder:
---------------------------
Shares of Common Stock Beneficially Owned
---------------
***TARGET PROXY***
<PAGE>
EXHIBIT 99.3
------------
RATIONAL SOFTWARE CORPORATION
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of April 7,
1997, between Pure Atria Corporation, a Delaware corporation (the "COMPANY"),
and the undersigned stockholder ("STOCKHOLDER") of Rational Software
Corporation, a Delaware corporation ("PARENT").
RECITALS
A. Concurrently with the execution of this Agreement, the Company, Parent
and Wings Merger Corporation, a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), are entering into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into the Company. Pursuant to the Merger,
shares of capital stock of the Company will be converted into Common Stock of
Parent on the basis described in the Merger Agreement.
B. The Stockholder is the record holder and beneficial owner (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")), of such number of shares of the outstanding Common Stock of
Parent as is indicated on the final page of this Agreement (the "SHARES").
C. As a material inducement to enter into the Merger Agreement, the
Company desires the Stockholder to agree, and the Stockholder is willing to
agree to vote the Shares and any other such shares of capital stock of Parent so
as to facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
1. Agreement to Vote Shares: Additional Purchases.
----------------------------------------------
1.1 Agreement to Vote Shares. At every meeting of the stockholders
------------------------
of Parent called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of Parent with respect to any of the following Stockholder shall vote the Shares
and any New Shares in favor of approval of (x) the amendment of Parent's
Certificate of Incorporation to increase its authorized share capital to allow
for the issuance of shares of its Common Stock by virtue of the Merger and (y)
the issuance of shares of such Common Stock by virtue of the Merger.
1.2 Additional Purchases. Stockholder agrees that any shares of
--------------------
capital stock of Parent that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership after the execution of this
Agreement and prior to the Expiration Date ("NEW SHARES") shall be subject to
the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
2. Irrevocable Proxy. Concurrently with the execution of this Agreement,
-----------------
Stockholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "PROXY"), which shall be irrevocable, with the total number of
shares of capital stock of Parent beneficially owned (as such term is defined in
Rule 13d-3 under the Exchange Act) by Stockholder set forth therein.
3. Representations and Warranties of the Stockholder. Stockholder (i)
-------------------------------------------------
is the beneficial owner of the Shares, which at the date hereof are free and
clear of any liens, claims, options, charges or other encumbrances; (ii) does
<PAGE>
not beneficially own any shares of capital stock of Parent other than the Shares
(excluding shares as to which Stockholder currently disclaims beneficial
ownership in accordance with applicable law); and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement.
4. Additional Documents. Stockholder hereby covenants and agrees to
--------------------
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of the Company or Stockholder, as the case may be, to carry
out the intent of this Agreement.
5. Consent and Waiver. Stockholder hereby gives any consents or waivers
------------------
that are reasonably required for the consummation of the Merger under the terms
of any agreements to which Stockholder is a party or pursuant to any rights
Stockholder may have.
6. Termination. This Agreement shall terminate and shall have no further
-----------
force or effect as of the earlier to occur of (i) such date and time as the
Merger shall become effective in accordance with the terms and provisions of the
Merger Agreement or (ii) such date and time as the Merger Agreement shall have
been terminated pursuant to Article VII thereof.
7. Miscellaneous.
-------------
7.1 Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
7.2 Binding Effect and Assignment. This Agreement and all of the
-----------------------------
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without prior written consent of the other.
7.3 Amendments and Modification. This Agreement may not be modified,
---------------------------
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
7.4 Specific Performance; Injunctive Relief. The parties hereto
---------------------------------------
acknowledge that the Company will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or agreements
of Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to the Company upon any such violation,
the Company shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to the
Company at law or in equity.
7.5 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or certified
mail, postage prepaid, return receipt requested) or overnight courier (prepaid)
to the respective parties as follows:
If to the Company: Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, California 94087
Attn: President and Chief Executive Officer
-2-
<PAGE>
With a copy to: Fenwick & West
Two Palo Alto Square
Palo Alto, California 94304
Attn: Dennis R. DeBroeck, Esq.
If to the Stockholder: To the address for notice set forth on the
last page hereof.
With a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Francis S. Currie, Esq.
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
7.6 Governing Law. This Agreement shall be governed by, and
-------------
construed and enforced in accordance with, the internal laws of the State of
Delaware (without regard to the principles of conflict of laws thereof).
7.7 Entire Agreement. This Agreement contains the entire
----------------
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.
7.8 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
7.9 Effect of Headings. The section headings herein are for
------------------
convenience only and shall not affect the construction or interpretation of this
Agreement.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed on the date and year first above written.
PURE ATRIA CORPORATION
By:
-----------------------------
Title:
--------------------------
STOCKHOLDER:
By:
-----------------------------
Stockholder's Address for Notice:
--------------------------------
--------------------------------
--------------------------------
Shares of Common Stock Beneficially Owned:
--------
***ACQUIROR VOTING AGREEMENT***
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of Rational Software Corporation, a Delaware
corporation ("PARENT"), hereby irrevocably appoints the directors on the Board
of Directors of Pure Atria Corporation, a Delaware corporation (the "COMPANY"),
and each of them, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the shares of capital stock
of Parent beneficially owned by the undersigned, which shares are listed on the
final page of this Proxy (the "SHARES"), and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof,
until such time as that certain Agreement of Merger and Plan of Reorganization
dated as of April 7, 1997 (the "MERGER AGREEMENT"), among Parent, [Merger Sub],
a Delaware corporation and a wholly-owned subsidiary of Parent ("MERGER SUB"),
and the Company, shall be terminated in accordance with its terms or the Merger
(as defined in the Merger Agreement) is effective. Upon the execution hereof,
all prior proxies given by the undersigned with respect to the Shares and any
and all other shares or securities issued or issuable in respect thereof on or
after the date hereof are hereby revoked and no subsequent proxies will be
given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement
dated as of April 7, 1997 between the Company and the undersigned stockholder
(the "VOTING AGREEMENT"), and is granted in consideration of the Company
entering into the Merger Agreement. The attorneys and proxies named above will
be empowered at any time prior to termination of the Merger Agreement to
exercise all voting and other rights (including, without limitation, the power
to execute and deliver written consents with respect to the Shares) of the
undersigned at every annual, special or adjourned meeting of Parent
stockholders, and in every written consent in lieu of such a meeting, or
otherwise, in favor of approval of (x) the amendment of Parent's Certificate of
Incorporation to increase its authorized share capital to allow for the issuance
of shares of its Common Stock by virtue of the Merger and (y) the issuance of
shares of such Common Stock by virtue of the Merger.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to termination of the Merger
Agreement at every annual, special or adjourned meeting of the stockholders of
the Company and in every written consent in lieu of such meeting, in favor of
approval of (x) the amendment of Parent's Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of its
Common Stock by virtue of the Merger, (y) the issuance of shares of such Common
Stock by virtue of the Merger and (z) any matter that could reasonably be
expected to facilitate the Merger. The undersigned stockholder may vote the
Shares on all other matters.
<PAGE>
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: April __, 1997
Signature of Stockholder:
----------------------------
Print Name of Stockholder:
---------------------------
Shares of Common Stock Beneficially Owned
------------
***ACQUIROR PROXY***
<PAGE>
EXHIBIT 99.4
------------
[Option from Target to Acquiror]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of April 7, 1997 (the "AGREEMENT") is
entered into by and between Pure Atria Corporation, a Delaware corporation
("TARGET"), and Rational Software Corporation, a Delaware corporation
("ACQUIROR"). Capitalized terms used in this Agreement but not defined herein
shall have the meanings ascribed thereto in the Merger Agreement (as defined
below).
RECITALS
--------
WHEREAS, concurrently with the execution and delivery of this Agreement,
Target, Acquiror and Wings Merger Corporation, a Delaware corporation and a
wholly owned subsidiary of Acquiror ("MERGER"), 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, Target and
Acquiror will enter into a business combination transaction (the "MERGER"); and
WHEREAS, as a condition to Acquiror' 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,
$0.0001 par value, 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 up to a number of shares of the Common Stock, $0.0001 par value, of
Target ("TARGET SHARES") equal to 19.9% of the issued and outstanding shares as
of the first date, if any, upon which an Exercise Event (as defined in Section
2(a) below) shall occur (the "OPTION SHARES"), in the manner set forth below
(i) by paying cash at a price of $21.038 per share (the "EXERCISE PRICE")
and/or, at Acquiror' election, (ii) by exchanging therefor shares of the Common
Stock, no par value per share, of Acquiror ("ACQUIROR SHARES") at a rate (the
"EXERCISE RATIO"), for each Option Share, of a number of Acquiror Shares equal
to the Exercise Price divided by the closing sale price of Acquiror Shares on
<PAGE>
the Nasdaq National Market for the trading day immediately preceding the date of
the Closing (as defined below) of the particular Option exercise.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
------------------------------------
(a) For all purposes of this Agreement, an "EXERCISE EVENT" shall have
occurred (i) immediately prior to the earlier of (x) the consummation of, or (y)
the record date, if any, for a meeting of Target's stockholders with regard to,
an Acquisition Proposal with respect to Target with any party other than
Acquiror (or an affiliate of Acquiror) if the Board of Directors of Target shall
have withheld, withdrawn or modified in a manner adverse to Acquiror its
recommendation in favor of adoption and approval of the Merger Agreement and
approval of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on Acquiror) after receipt of and in connection with an
Acquisition Proposal with respect to Target, (ii) immediately prior to the
consummation of a tender or exchange offer for 25% or more of any class of
Target's capital stock, or (iii) immediately prior to the time at which all of
the events specified in Section 7.3(b)(ii)(x), Section 7.3(b)(ii)(y) and either
Section 7.3(b)(ii)(z)(i) or Section 7.3(b)(ii)(z)(ii) of the Merger Agreement
shall have occurred.
(b) Acquiror may deliver to Target a written notice (an "EXERCISE
NOTICE") specifying that it wishes to exercise and close a purchase of Option
Shares upon the occurrence of an Exercise Event and specifying the total number
of Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of Target shall
have withheld, withdrawn or modified in a manner adverse to Acquiror its
recommendation in favor of adoption and approval of the Merger Agreement and
approval of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on Acquiror) after receipt of and in connection with an
Acquisition Proposal with respect to Target, (ii) upon the commencement of a
tender or exchange offer for 25% or more of any class of Target's capital stock
(and/or during any time which such a tender or exchange offer remains open or
has been consummated) or (iii) at any time following the occurrence of each of
the events specified in Section 7.3(b)(ii)(x) and 7.3(b)(ii)(y) of the Merger
Agreement (the events specified in clauses (i), (ii) or (iii) of this sentence
being referred to herein as a "CONDITIONAL EXERCISE EVENTS"). At any time after
delivery of an Exercise Notice, unless such Exercise Notice is withdrawn by
Acquiror, the closing of a purchase of Option Shares (a "CLOSING") specified in
such Exercise Notice shall take place at the principal offices of Target upon
the occurrence of an Exercise Event or at such later date prior to the
termination of the Option as may be designated by Acquiror in writing. In the
event that no Exercise Event shall occur prior to termination of the Option,
such Exercise Notice shall be void and of no further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective
Time, (ii) 12 months following the termination of the Merger Agreement pursuant
to Article VII thereof if a Conditional Exercise Event shall have occurred on or
prior to the date of such termination, and (iii) the date on which the Merger
Agreement is terminated if no Conditional Exercise Event shall have occurred on
or prior to such date of termination; provided, however, that if the Option is
-------- -------
exercisable but cannot be exercised by reason of any applicable government order
or because the waiting period related to the issuance of the Option Shares under
the HSR Act shall not have expired or been terminated, then the Option shall not
terminate until the tenth business day after such impediment to
-2-
<PAGE>
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 (i)
Acquiror shall have breached in any material respect any of its covenants or
agreements contained in the Merger Agreement or (ii) the representations and
warranties of Acquiror contained in the Merger Agreement shall not have been
true and correct in all material respects on and as of the date when made.
(d) If Acquiror receives in the aggregate pursuant to Section 7.3(b)
of the Merger Agreement together with proceeds in connection with any sales or
other dispositions of Option Shares and any dividends received by Acquiror
declared on Option Shares, more than the sum of (x) $21,000,000 plus (y) the
Exercise Price multiplied by the number of Target Shares purchased by Acquiror
pursuant to the Option, then all proceeds to Acquiror in excess of such sum
shall be remitted by Acquiror to Target.
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 material consents, approvals, orders or authorizations
of, or registrations, declarations or filings with, any Federal, state or local
administrative agency or commission or other Federal state or local 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. It is understood and agreed that at any time during which
Acquiror shall be entitled to deliver to Target an Exercise Notice, the parties
will use their respective best efforts to satisfy all conditions to Closing, so
that a Closing may take place as promptly as practicable, and in any event, upon
the occurrence of an Exercise Event.
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 10 hereof, against
delivery of (b) payment by Acquiror to Target of the aggregate purchase price
for the Target Shares so designated and being purchased by delivery of (i) a
certified check or bank check and/or, at Acquiror' election, (ii) a single
certificate in definitive form representing the number of Acquiror Shares being
issued by Acquiror in consideration therefor (based on the Exercise Ratio), such
certificate to be registered in the name of Target and to bear the legend set
forth in Section 10 hereof.
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
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<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
required under the HSR Act, 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 9(a) 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 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; (g) the execution and delivery of this Agreement by Target
does 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; and (h) any Acquiror
Shares acquired pursuant to this Agreement will not be acquired by Target with a
view to the public distribution thereof and Target will not sell or otherwise
dispose of such shares in violation of applicable law or this Agreement.
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
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<PAGE>
Acquiror of the transactions contemplated hereby have been duly authorized by
all necessary 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) except for any filings required under the HSR Act,
Acquiror has taken (or will in a timely manner take) all necessary corporate and
other action in connection with any exercise of the Option; (e) upon delivery of
Acquiror Shares to Target in consideration of any acquisition of Target Shares
pursuant hereto, Target will acquire such Acquiror Shares free and clear of all
material claims, liens, charges, encumbrances and security interests of any kind
or nature whatsoever, excluding those imposed by Target; (f) 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;
(g) 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; and (h) 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. CERTAIN RIGHTS
--------------
(a) ACQUIROR PUT. Acquiror may deliver to Target a written notice (a
------------
"PUT NOTICE") at any time during which Acquiror may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by Acquiror
pursuant thereto, at the price set forth in subparagraph (ii) below (as limited
by subparagraph (iii) below) (the "PUT"). At any time after delivery of a Put
Notice, unless such Put Notice is withdrawn by Acquiror, the closing of the Put
(the "PUT CLOSING") shall take place at the principal offices of Target upon the
occurrence of an Exercise Event or at such later date prior to the termination
of the Option as may be designated by Acquiror in writing. In the event that no
Exercise Event shall occur prior to termination of the Option, such Put Notice
shall be void and of no further force and effect.:
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<PAGE>
(i) The difference between the "MARKET/TENDER OFFER PRICE" for
Target Shares as of the date Acquiror gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest price
per share offered as of such date pursuant to any Acquisition Proposal which was
made prior to such date and not terminated or withdrawn as of such date and (B)
the highest closing sale price of Target Shares on the Nasdaq National Market
during the twenty (20) trading days ending on the trading day immediately
preceding such date) and the Exercise Price, multiplied by the number of Target
Shares purchasable pursuant to the Option, but only if the Market/Tender Offer
Price is greater than the Exercise Price. For purposes of determining the
highest price offered pursuant to any Acquisition Proposal which involves
consideration other than cash, the value of such consideration shall be equal to
the higher of (x) if securities of the same class of the proponent as such
consideration are traded on any national securities exchange or by any
registered securities association, a value based on the closing sale price or
asked price for such securities on their principal trading market on such date
and (y) the value ascribed to such consideration by the proponent of such
Acquisition Proposal, or if no such value is ascribed, a value determined in
good faith by the Board of Directors of Target.
(ii) The Exercise Price paid by Acquiror for Target Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer Price
----
and such Exercise Price (but only if the Market/Tender Offer Price is greater
than the Exercise Price) multiplied by the number of Target Shares so purchased.
If Acquiror issued Acquiror Shares in connection with any exercise of the
Option, the Exercise Price in connection with such exercise shall be calculated
as set forth in the last sentence of Section 1 as if Acquiror had exercised its
right to pay cash instead of issuing Acquiror Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to
this Section 7 Target shall not be required to pay Acquiror in excess of an
aggregate of (x) $21,000,000 plus (y) the Exercise Price paid by Acquiror for
----
Target Shares acquired pursuant to the Option minus (z) any amounts paid to
-----
Acquiror by Target pursuant to Section 7.3(b) of the Merger Agreement.
(b) REDELIVERY OF ACQUIROR SHARES. If Acquiror has acquired Target
-----------------------------
Shares pursuant to exercise of the Option by the issuance and delivery of
Acquiror Shares, then Target shall, if so requested by Acquiror, in fulfillment
of its obligation pursuant to the first clause of Section 7(a)(ii) with respect
to the Exercise Price paid in the form of Acquiror Shares only, redeliver the
certificate(s) for such Acquiror Shares to Acquiror, free and clear of all
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, other than those imposed by Acquiror.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. At the Put Closing,
------------------------------------------
Target shall pay the required amount to Acquiror in immediately available funds
(and Acquiror Shares, if applicable) and Acquiror shall surrender to Target the
Option and the certificates evidencing the Target Shares purchased by Acquiror
pursuant thereto, and Acquiror shall represent and warrant that such shares are
then free and clear of all claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever, other than those imposed by Target.
-6-
<PAGE>
(d) TARGET CALL. If Acquiror has acquired Option Shares pursuant to
-----------
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "EXERCISE DATE") and no Acquisition Proposal with
respect to Target has been consummated at any time after the date of this
Agreement and prior to the date one year following such Exercise Date (nor has
Target entered into a definitive agreement or letter of intent with respect to
such an Acquisition Proposal which agreement or letter of intent remains in
effect at the end of such year), then, at any time after the date one year
following such Exercise Date and prior to the date eighteen months following
such Exercise Date, Target may require Acquiror, upon delivery to Acquiror of
written notice, to sell to Target any Target Shares held by Acquiror as of the
day that is ten business days after the date of such notice, up to a number of
shares equal to the number of Option Shares acquired by Acquiror pursuant to
exercise of the Option in connection with such Exercise Date. The per share
purchase price for such sale (the "TARGET CALL PRICE") shall be equal to the
Exercise Price, plus an amount equal to seven percent (7.0%) of the Exercise
Price per annum, compounded annually, since the applicable Exercise Date, less
any dividends paid on the Target Shares to be purchased by Target pursuant to
this Section 7(d). The closing of any sale of Target Shares pursuant to this
Section 7(d) shall take place at the principal offices of Target at a time and
on a date designated by Target in the aforementioned notice to Acquiror, which
date shall be no more than 20 and no less than 12 business days from the date of
such notice. The Target Call Price shall be paid in immediately available
funds, provided that, in the event Acquiror has acquired Option Shares pursuant
--------
to exercise of the Option by issuance and delivery of Acquiror Shares, at the
option of Target, the Target Call Price for part or all of any purchase of
Target Shares pursuant to this Section 7(d), up to a number of such shares equal
to the number of Option Shares acquired by Acquiror by issuance and delivery of
Acquiror Shares, shall be paid by delivery of a number of Acquiror Shares equal
to the Target Call Price divided by the closing sale price of Acquiror Shares on
the Nasdaq National Market for the trading day immediately preceding the date of
the Exercise Date on which the Option Shares to be purchased by Target pursuant
to this Section 7(d) were originally issued to Acquiror.
(e) RESTRICTIONS ON TRANSFER. Until the termination of the Option,
------------------------
Target shall not sell, transfer or otherwise dispose of any Acquiror Shares
acquired by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
-------------------
(a) Following the termination of the Merger Agreement, each party
hereto (a "HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other
party (the "REGISTRANT") request the Registrant to register under the Securities
Act all or any part of the shares acquired by such Holder pursuant to this
Agreement (the "REGISTRABLE SECURITIES") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment underwritten
public offering in which the Holder and the underwriters shall effect as wide a
distribution of such Registrable Securities as is reasonably practicable and
shall use reasonable efforts to prevent any person or group from purchasing
through such offering shares representing more than 1% of the outstanding shares
of Common Stock of the Registrant on a fully diluted basis (a "PERMITTED
OFFERING"); provided, however, that any such Registration Notice must relate to
-------- -------
a number of shares equal to at least 2% of the outstanding shares of Common
Stock of the Registrant on a fully diluted basis and that any rights
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to require registration hereunder shall terminate with respect to any shares
that may be sold pursuant to Rule 144(k) under the Securities Act. The
Registration Notice shall include a certificate executed by the Holder and its
proposed managing underwriter, which underwriter shall be an investment banking
firm of nationally recognized standing (the "MANAGER"), stating that (i) the
Holder and the Manager have a good faith intention to commence a Permitted
Offering and (ii) the Manager in good faith believes that, based on the then
prevailing market conditions, it will be able to sell the Registrable Securities
at a per share price equal to at least 80% of the per share average of the
closing sale prices of the Registrant's Common Stock on the Nasdaq National
Market for the twenty trading days immediately preceding the date of the
Registration Notice. The Registrant shall thereupon have the option exercisable
by written notice delivered to the Holder within ten business days after the
receipt of the Registration Notice, irrevocably to agree to purchase all or any
part of the Registrable Securities for cash at a price (the "OPTION PRICE" equal
to the product of (i) the number of Registrable Securities so purchased and (ii)
the per share average of the closing sale prices of the Registrant's Common
Stock on the Nasdaq National Market for the twenty trading days immediately
preceding the date of the Registration Notice. Any such purchase of Registrable
Securities by the Registrant hereunder shall take place at a closing to be held
at the principal executive offices of the Registrant or its counsel at any
reasonable date and time designated by the Registrant in such notice within 10
business days after delivery of such notice. The payment for the shares to be
purchased shall be made by delivery at the time of such closing of the Option
Price in immediately available funds.
(b) If the Registrant does not elect to exercise its option to
purchase pursuant to Section 8(a) with respect to all Registrable Securities,
the Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
- -------- -------
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of material
non-public information which it reasonably believes would be detrimental to be
disclosed at such time and, in the written opinion of counsel to such
Registrant, such information would have to be disclosed if a registration
statement were filed at that time; (B) such Registrant is required under the
Securities Act to include audited financial statements for any period in such
registration statement and such financial statements are not yet available for
inclusion in such registration statement; or (C) such Registrant determines, in
its reasonable judgment, that such registration would interfere with any
financing, acquisition or other material transaction involving the Registrant.
If consummation of the sale of any Registrable Securities pursuant to a
registration hereunder does not occur within 180 days after the filing with the
SEC of the initial registration statement therefor, the provisions of this
Section 8 shall again be applicable to any proposed registration, it being
understood that neither party shall be entitled to more than an aggregate of two
effective registration statements hereunder. The Registrant shall use all
reasonable efforts to cause any Registrable Securities registered pursuant to
this Section 8 to be qualified for sale under the securities or blue sky laws of
such jurisdictions as the Holder may reasonably request and shall continue such
registration or qualification in effect in such jurisdictions; provided,
--------
however, that the
- -------
-8-
<PAGE>
Registrant shall not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to
the condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to such Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all material facts required to
be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at
the Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall provide
to the underwriters such documentation (including certificates, opinions of
counsel and "comfort" letters from auditors) as are customary in connection with
underwritten public offerings and as such underwriters may reasonably require.
In connection with any registration, the Holder and the Registrant agree to
enter into an underwriting agreement reasonably acceptable to each such party,
in form and substance customary for transactions of this type with the
underwriters participating in such offering.
(e) Indemnification
---------------
(i) The Registrant will indemnify the Holder, each of its directors
and officers and each person who controls the Holder within the meaning of
Section 15 of the Securities Act, and each underwriter of the Registrant's
securities, with respect to any registration, qualification or compliance which
has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Registrant of any
rule or regulation promulgated under the Securities Act applicable to the
Registrant in connection with any such registration, qualification or
compliance, and the Registrant will reimburse the Holder and, each of its
directors and officers and each person who controls the Holder within the
meaning of Section 15 of the Securities Act, and each underwriter for any legal
and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
provided that the Registrant will not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or controlling
person or underwriter seeking indemnification.
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<PAGE>
(ii) The Holder will indemnify the Registrant, each of its directors
and officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses, damages
and liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Holder of any rule or regulation
promulgated under the Securities Act applicable to the Holder in connection with
any such registration, qualification or compliance, and will reimburse the
Registrant, such directors, officers or control persons or underwriters for any
legal or any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Registrant by the Holder for use therein, provided that in no event shall
any indemnity under this Section 8(e) exceed the gross proceeds of the offering
received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e)
(the "INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that the Indemnifying Party shall pay such
-------- -------
expense if representation of the Indemnified Party by counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding, and provided further that the failure of any
-------- -------
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 8(e) unless the failure
to give such notice is materially prejudicial to an Indemnifying Party's ability
to defend such action. No Indemnifying Party, in the defense of any such claim
or litigation shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnifying Party shall be required to indemnify any Indemnified
Party with respect to any settlement entered into without such Indemnifying
Party's prior consent (which shall not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
-------------------------------------------------------
(a) In the event of any change in the Target Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations,
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<PAGE>
exchanges of shares and the like, the type and number of shares or securities
subject to the Option, the Exercise Ratio 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.
(b) At any time during which the Option is exercisable, and at any
time after the Option is exercised (in whole or in part, if at all), neither
Target nor Acquiror shall adopt a stockholders rights plan (a so-called "poison
pill") that contains provisions for the distribution of rights thereunder as a
result of the other party being the beneficial owner of shares of the first
party by virtue of the Option being exercisable or having been exercised (or as
a result of such other party beneficially owning shares issuable in respect of
any Option Shares). It is understood, however, that following termination (if
any) of the Merger Agreement, a party may adopt a stockholders rights plan, that
contains provisions for the distribution of rights thereunder as a result of the
other party being the beneficial owner of shares of the first party in addition
to those that may be beneficially owned by virtue of the Option being
exercisable or having been exercised (or as a result of such other party
beneficially owning shares issuable in respect of any Option Shares).
10. RESTRICTIVE LEGENDS
-------------------
Each certificate representing Option Shares issued to Acquiror hereunder,
and each certificate representing Acquiror Shares delivered to Target at a
Closing, shall include a legend in substantially the following form:
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 APRIL 7,
1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
11. 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. Acquiror, upon the request of Target,
shall promptly file an application to list the Acquiror Shares issued and
delivered to Target pursuant to Section 1 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
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<PAGE>
other documents and exhibits required to be filed under the HSR Act to permit
the acquisition of the Target Shares subject to the Option at the earliest
possible date.
12. 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 8 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 8
shall not be required to bear the legend set forth in Section 10.
13. 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.
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<PAGE>
14. ENTIRE AGREEMENT
----------------
This Agreement and the Merger Agreement (including the appendices 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.
15. 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.
16. 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.
17. 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):
(a) if to Target, to:
Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, California 94087
Attn: President and Chief Executive Officer
with a copy to:
Fenwick & West
Two Palo Alto Square, Suite 700
Palo Alto, California 94306
Attn: Dennis R. DeBroeck, Esq.
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<PAGE>
(b) if to Acquiror, to:
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Attn: President and Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Francis S. Currie, Esq.
18. 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.
19. 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.
20. 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.
21. 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.
22. 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 the rights and obligations hereunder shall inure to
the benefit of and be binding upon any successor of a party hereto.
-14-
<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.
PURE ATRIA CORPORATION
By: /s/
---------------------------------------------
Name: Reed Hastings
Title: President and Chief Executive Officer
RATIONAL SOFTWARE CORPORATION
By: /s/
---------------------------------------------
Name: Paul D. Levy
Title: President, Chief Executive Officer
and Chairman of the Board of Directors
***STOCK OPTION AGREEMENT***
(Target option to Acquiror)
<PAGE>
EXHIBIT 99.5
------------
[Option from Acquiror to Target]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of April 7, 1997 (the "AGREEMENT") is
entered into by and between Pure Atria Corporation, a Delaware corporation
("TARGET"), and Rational Software Corporation, a Delaware corporation
("ACQUIROR"). Capitalized terms used in this Agreement but not defined herein
shall have the meanings ascribed thereto in the Merger Agreement (as defined
below).
RECITALS
--------
WHEREAS, concurrently with the execution and delivery of this Agreement,
Acquiror, Target and Wings Merger Corporation, a Delaware corporation and a
wholly owned subsidiary of Acquiror ("MERGER 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,
Acquiror and Target will enter into a business combination transaction (the
"MERGER"); and
WHEREAS, as a condition to Target's willingness to enter into the Merger
Agreement, Target has requested that Acquiror agree, and Acquiror has so agreed,
to grant to Target an option to acquire shares of Acquiror's Common Stock, $0.01
par value, 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
---------------
Acquiror hereby grants to Target an irrevocable option (the "OPTION") to
acquire up to a number of shares of the Common Stock, $0.01 par value, of
Acquiror ("ACQUIROR SHARES") equal to 19.9% of the issued and outstanding shares
as of the first date, if any, upon which an Exercise Event (as defined in
Section 2(a) below) shall occur (the "OPTION SHARES"), in the manner set forth
below (i) by paying cash at a price of $23.375 per share (the "EXERCISE PRICE")
and/or, at Target's election, (ii) by exchanging therefor shares of the Common
Stock, par value $0.0001 per share, of Target ("TARGET SHARES") at a rate (the
"EXERCISE RATIO"), for each Option Share, of a number of Target Shares equal to
the Exercise Price divided by the closing sale price of Target Shares on the
Nasdaq
<PAGE>
National Market for the trading day immediately preceding the date of the
Closing (as defined below) of the particular Option exercise.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
------------------------------------
(a) For all purposes of this Agreement, an "EXERCISE EVENT" shall have
occurred (i) immediately prior to the earlier of (x) the consummation of, or (y)
the record date, if any, for a meeting of Acquiror's stockholders with regard
to, an Acquisition Proposal with respect to Acquiror with any party other than
Target (or an affiliate of Target) if the Board of Directors of Acquiror shall
have withheld, withdrawn or modified in a manner adverse to Target its
recommendation in favor of adoption and approval of the Merger Agreement and
approval of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on Target) after receipt of and in connection with an
Acquisition Proposal with respect to Acquiror, (ii) immediately prior to the
consummation of a tender or exchange offer for 25% or more of any class of
Acquiror's capital stock, or (iii) immediately prior to the time at which all of
the events specified in Section 7.3(c)(ii)(x), Section 7.3(c)(ii)(y) and either
Section 7.3(c)(ii)(z)(i) or Section 7.3(c)(ii)(z)(ii) of the Merger Agreement
shall have occurred.
(b) Target may deliver to Acquiror a written notice (an "EXERCISE
NOTICE") specifying that it wishes to exercise and close a purchase of Option
Shares upon the occurrence of an Exercise Event and specifying the total number
of Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of Acquiror shall
have withheld, withdrawn or modified in a manner adverse to Target its
recommendation in favor of adoption and approval of the Merger Agreement and
approval of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on Target) after receipt of and in connection with an
Acquisition Proposal with respect to Acquiror, (ii) upon the commencement of a
tender or exchange offer for 25% or more of any class of Acquiror's capital
stock (and/or during any time which such a tender or exchange offer remains open
or has been consummated) or (iii) at any time following the occurrence of each
of the events specified in Section 7.3(c)(ii)(x) and 7.3(c)(ii)(y) of the Merger
Agreement (the events specified in clauses (i), (ii) or (iii) of this sentence
being referred to herein as a "CONDITIONAL EXERCISE EVENTS"). At any time after
delivery of an Exercise Notice, unless such Exercise Notice is withdrawn by
Target, the closing of a purchase of Option Shares (a "CLOSING") specified in
such Exercise Notice shall take place at the principal offices of Acquiror upon
the occurrence of an Exercise Event or at such later date prior to the
termination of the Option as may be designated by Target in writing. In the
event that no Exercise Event shall occur prior to termination of the Option,
such Exercise Notice shall be void and of no further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective
Time, (ii) 12 months following the termination of the Merger Agreement pursuant
to Article VII thereof if a Conditional Exercise Event shall have occurred on or
prior to the date of such termination, and (iii) the date on which the Merger
Agreement is terminated if no Conditional Exercise Event shall have occurred on
or prior to such date of termination; provided, however, that if the Option is
-------- -------
exercisable but cannot be exercised by reason of any applicable government order
or because the waiting period related to the issuance of the Option Shares under
the HSR Act 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.
-2-
<PAGE>
Notwithstanding the foregoing, the Option may not be exercised if (i) Target
shall have breached in any material respect any of its covenants or agreements
contained in the Merger Agreement or (ii) the representations and warranties of
Target contained in the Merger Agreement shall not have been true and correct in
all material respects on and as of the date when made.
(d) If Target receives in the aggregate pursuant to Section 7.3(c) of
the Merger Agreement together with proceeds in connection with any sales or
other dispositions of Option Shares and any dividends received by Target
declared on Option Shares, more than the sum of (x) $21,000,000 plus (y) the
Exercise Price multiplied by the number of Acquiror Shares purchased by Target
pursuant to the Option, then all proceeds to Target in excess of such sum shall
be remitted by Target to Acquiror.
3. CONDITIONS TO CLOSING
---------------------
The obligation of Acquiror to issue Option Shares to Target 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 material consents, approvals, orders or authorizations
of, or registrations, declarations or filings with, any Federal, state or local
administrative agency or commission or other Federal state or local 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. It is understood and agreed that at any time during which
Target shall be entitled to deliver to Acquiror an Exercise Notice, the parties
will use their respective best efforts to satisfy all conditions to Closing, so
that a Closing may take place as promptly as practicable, and in any event, upon
the occurrence of an Exercise Event.
4. CLOSING
-------
At any Closing, (a) Acquiror shall deliver to Target a single certificate
in definitive form representing the number of Acquiror Shares designated by
Target in its Exercise Notice, such certificate to be registered in the name of
Target and to bear the legend set forth in Section 10 hereof, against delivery
of (b) payment by Target to Acquiror of the aggregate purchase price for the
Acquiror Shares so designated and being purchased by delivery of (i) a certified
check or bank check and/or, at Target's election, (ii) a single certificate in
definitive form representing the number of Target Shares being issued by Target
in consideration therefor (based on the Exercise Ratio), such certificate to be
registered in the name of Acquiror and to bear the legend set forth in Section
10 hereof.
5. REPRESENTATIONS AND WARRANTIES OF ACQUIROR
------------------------------------------
Acquiror represents and warrants to Target that (a) Acquiror is a
corporation duly organized, 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
-3-
<PAGE>
execution and delivery of this Agreement by Acquiror and consummation by
Acquiror of the transactions contemplated hereby have been duly authorized by
all necessary 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) except for any filings required under the HSR Act,
Acquiror 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 Acquiror Shares for
Target to exercise the Option in full and will take all necessary corporate or
other action to authorize and reserve for issuance all additional Acquiror
Shares or other securities which may be issuable pursuant to Section 9(a) 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 Acquiror Shares and any other
securities to Target upon exercise of the Option, Target will acquire such
Acquiror 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 Target; (f) 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 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; (g) 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; and (h) any Target Shares acquired pursuant to this Agreement 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.
6. REPRESENTATIONS AND WARRANTIES OF TARGET
----------------------------------------
Target represents and warrants to Acquiror that (a) Target 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 Target and the consummation by Target of the
-4-
<PAGE>
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 required under the HSR Act, Target has
taken (or will in a timely manner take) all necessary corporate and other action
in connection with any exercise of the Option; (e) upon delivery of Target
Shares to Acquiror in consideration of any acquisition of Acquiror Shares
pursuant hereto, Acquiror will acquire such Target Shares 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; (g) the execution and
delivery of this Agreement by Target does 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; and (h) any Acquiror Shares acquired upon exercise of
the Option will not be acquired by Target with a view to the public distribution
thereof and Target will not sell or otherwise dispose of such shares in
violation of applicable law or this Agreement.
7. CERTAIN RIGHTS
--------------
(a) TARGET PUT. Target may deliver to Acquiror a written notice (a
----------
"PUT NOTICE") at any time during which Target may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by Target
pursuant thereto, at the price set forth in subparagraph (ii) below (as limited
by subparagraph (iii) below) (the "PUT"). At any time after delivery of a Put
Notice, unless such Put Notice is withdrawn by Target, the closing of the Put
(the "PUT CLOSING") shall take place at the principal offices of Acquiror upon
the occurrence of an Exercise Event or at such later date prior to the
termination of the Option as may be designated by Target in writing. In the
event that no Exercise Event shall occur prior to termination of the Option,
such Put Notice shall be void and of no further force and effect.:
-5-
<PAGE>
(i) The difference between the "MARKET/TENDER OFFER PRICE" for
Acquiror Shares as of the date Target gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest price
per share offered as of such date pursuant to any Acquisition Proposal which was
made prior to such date and not terminated or withdrawn as of such date and (B)
the highest closing sale price of Acquiror Shares on the Nasdaq National Market
during the twenty (20) trading days ending on the trading day immediately
preceding such date) and the Exercise Price, multiplied by the number of
Acquiror Shares purchasable pursuant to the Option, but only if the
Market/Tender Offer Price is greater than the Exercise Price. For purposes of
determining the highest price offered pursuant to any Acquisition Proposal which
involves consideration other than cash, the value of such consideration shall be
equal to the higher of (x) if securities of the same class of the proponent as
such consideration are traded on any national securities exchange or by any
registered securities association, a value based on the closing sale price or
asked price for such securities on their principal trading market on such date
and (y) the value ascribed to such consideration by the proponent of such
Acquisition Proposal, or if no such value is ascribed, a value determined in
good faith by the Board of Directors of Acquiror.
(ii) The Exercise Price paid by Target for Acquiror Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer Price
----
and such Exercise Price (but only if the Market/Tender Offer Price is greater
than the Exercise Price) multiplied by the number of Acquiror Shares so
purchased. If Target issued Target Shares in connection with any exercise of
the Option, the Exercise Price in connection with such exercise shall be
calculated as set forth in the last sentence of Section 1 as if Target had
exercised its right to pay cash instead of issuing Target Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to
this Section 7 Acquiror shall not be required to pay Target in excess of an
aggregate of (x) $21,000,000 plus (y) the Exercise Price paid by Target for
----
Acquiror Shares acquired pursuant to the Option minus (z) any amounts paid to
-----
Target by Acquiror pursuant to Section 7.3(c) of the Merger Agreement.
(b) REDELIVERY OF TARGET SHARES. If Target has acquired Acquiror
---------------------------
Shares pursuant to exercise of the Option by the issuance and delivery of Target
Shares, then Acquiror shall, if so requested by Target, in fulfillment of its
obligation pursuant to the first clause of Section 7(a)(ii) with respect to the
Exercise Price paid in the form of Target Shares only, redeliver the
certificate(s) for such Target Shares to Target, free and clear of all claims,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever, other than those imposed by Target.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. At the Put Closing,
------------------------------------------
Acquiror shall pay the required amount to Target in immediately available funds
(and Target Shares, if applicable) and Target shall surrender to Acquiror the
Option and the certificates evidencing the Acquiror Shares purchased by Target
pursuant thereto, and Target shall represent and warrant that such shares are
then free and clear of all claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever, other than those imposed by
Acquiror.
-6-
<PAGE>
(d) ACQUIROR CALL. If Target has acquired Option Shares pursuant to
-------------
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "EXERCISE DATE") and no Acquisition Proposal with
respect to Acquiror has been consummated at any time after the date of this
Agreement and prior to the date one year following such Exercise Date (nor has
Acquiror entered into a definitive agreement or letter of intent with respect to
such an Acquisition Proposal which agreement or letter of intent remains in
effect at the end of such year), then, at any time after the date one year
following such Exercise Date and prior to the date eighteen months following
such Exercise Date, Acquiror may require Target, upon delivery to Target of
written notice, to sell to Acquiror any Acquiror Shares held by Target as of the
day that is ten business days after the date of such notice, up to a number of
shares equal to the number of Option Shares acquired by Target pursuant to
exercise of the Option in connection with such Exercise Date. The per share
purchase price for such sale (the "ACQUIROR CALL PRICE") shall be equal to the
Exercise Price, plus an amount equal to seven percent (7.0%) of the Exercise
Price per annum, compounded annually, since the applicable Exercise Date, less
any dividends paid on the Acquiror Shares to be purchased by Acquiror pursuant
to this Section 7(d). The closing of any sale of Acquiror Shares pursuant to
this Section 7(d) shall take place at the principal offices of Acquiror at a
time and on a date designated by Acquiror in the aforementioned notice to
Target, which date shall be no more than 20 and no less than 12 business days
from the date of such notice. The Acquiror Call Price shall be paid in
immediately available funds, provided that, in the event Target has acquired
--------
Option Shares pursuant to exercise of the Option by issuance and delivery of
Target Shares, at the option of Acquiror, the Acquiror Call Price for part or
all of any purchase of Acquiror Shares pursuant to this Section 7(d), up to a
number of such shares equal to the number of Option Shares acquired by Target by
issuance and delivery of Target Shares, shall be paid by delivery of a number of
Target Shares equal to the Acquiror Call Price divided by the closing sale price
of Target Shares on the Nasdaq National Market for the trading day immediately
preceding the date of the Exercise Date on which the Option Shares to be
purchased by Acquiror pursuant to this Section 7(d) were originally issued to
Target.
(e) RESTRICTIONS ON TRANSFER. Until the termination of the Option,
------------------------
Acquiror shall not sell, transfer or otherwise dispose of any Target Shares
acquired by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
-------------------
(a) Following the termination of the Merger Agreement, each party
hereto (a "HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other
party (the "REGISTRANT") request the Registrant to register under the Securities
Act all or any part of the shares acquired by such Holder pursuant to this
Agreement (the "REGISTRABLE SECURITIES") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment underwritten
public offering in which the Holder and the underwriters shall effect as wide a
distribution of such Registrable Securities as is reasonably practicable and
shall use reasonable efforts to prevent any person or group from purchasing
through such offering shares representing more than 1% of the outstanding shares
of Common Stock of the Registrant on a fully diluted basis (a "PERMITTED
OFFERING"); provided, however, that any such Registration Notice must relate to
-------- -------
a number of shares equal to at least 2% of the outstanding shares of Common
Stock of the Registrant on a fully diluted basis and that any rights to require
registration hereunder shall terminate with respect to any shares that may be
sold pursuant
-7-
<PAGE>
to Rule 144(k) under the Securities Act. The Registration Notice shall include a
certificate executed by the Holder and its proposed managing underwriter, which
underwriter shall be an investment banking firm of nationally recognized
standing (the "MANAGER"), stating that (i) the Holder and the Manager have a
good faith intention to commence a Permitted Offering and (ii) the Manager in
good faith believes that, based on the then prevailing market conditions, it
will be able to sell the Registrable Securities at a per share price equal to at
least 80% of the per share average of the closing sale prices of the
Registrant's Common Stock on the Nasdaq National Market for the twenty trading
days immediately preceding the date of the Registration Notice. The Registrant
shall thereupon have the option exercisable by written notice delivered to the
Holder within ten business days after the receipt of the Registration Notice,
irrevocably to agree to purchase all or any part of the Registrable Securities
for cash at a price (the "OPTION PRICE" equal to the product of (i) the number
of Registrable Securities so purchased and (ii) the per share average of the
closing sale prices of the Registrant's Common Stock on the Nasdaq National
Market for the twenty trading days immediately preceding the date of the
Registration Notice. Any such purchase of Registrable Securities by the
Registrant hereunder shall take place at a closing to be held at the principal
executive offices of the Registrant or its counsel at any reasonable date and
time designated by the Registrant in such notice within 10 business days after
delivery of such notice. The payment for the shares to be purchased shall be
made by delivery at the time of such closing of the Option Price in immediately
available funds.
(b) If the Registrant does not elect to exercise its option to
purchase pursuant to Section 8(a) with respect to all Registrable Securities,
the Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
- -------- -------
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of material
non-public information which it reasonably believes would be detrimental to be
disclosed at such time and, in the written opinion of counsel to such
Registrant, such information would have to be disclosed if a registration
statement were filed at that time; (B) such Registrant is required under the
Securities Act to include audited financial statements for any period in such
registration statement and such financial statements are not yet available for
inclusion in such registration statement; or (C) such Registrant determines, in
its reasonable judgment, that such registration would interfere with any
financing, acquisition or other material transaction involving the Registrant.
If consummation of the sale of any Registrable Securities pursuant to a
registration hereunder does not occur within 180 days after the filing with the
SEC of the initial registration statement therefor, the provisions of this
Section 8 shall again be applicable to any proposed registration, it being
understood that neither party shall be entitled to more than an aggregate of two
effective registration statements hereunder. The Registrant shall use all
reasonable efforts to cause any Registrable Securities registered pursuant to
this Section 8 to be qualified for sale under the securities or blue sky laws of
such jurisdictions as the Holder may reasonably request and shall continue such
registration or qualification in effect in such jurisdictions; provided,
--------
however, that the
- -------
-8-
<PAGE>
Registrant shall not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to
the condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to such Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all material facts required to
be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at
the Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall provide
to the underwriters such documentation (including certificates, opinions of
counsel and "comfort" letters from auditors) as are customary in connection with
underwritten public offerings and as such underwriters may reasonably require.
In connection with any registration, the Holder and the Registrant agree to
enter into an underwriting agreement reasonably acceptable to each such party,
in form and substance customary for transactions of this type with the
underwriters participating in such offering.
(e) Indemnification
---------------
(i) The Registrant will indemnify the Holder, each of its directors
and officers and each person who controls the Holder within the meaning of
Section 15 of the Securities Act, and each underwriter of the Registrant's
securities, with respect to any registration, qualification or compliance which
has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Registrant of any
rule or regulation promulgated under the Securities Act applicable to the
Registrant in connection with any such registration, qualification or
compliance, and the Registrant will reimburse the Holder and, each of its
directors and officers and each person who controls the Holder within the
meaning of Section 15 of the Securities Act, and each underwriter for any legal
and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
provided that the Registrant will not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or controlling
person or underwriter seeking indemnification.
-9-
<PAGE>
(ii) The Holder will indemnify the Registrant, each of its directors
and officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses, damages
and liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Holder of any rule or regulation
promulgated under the Securities Act applicable to the Holder in connection with
any such registration, qualification or compliance, and will reimburse the
Registrant, such directors, officers or control persons or underwriters for any
legal or any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Registrant by the Holder for use therein, provided that in no event shall
any indemnity under this Section 8(e) exceed the gross proceeds of the offering
received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e)
(the "INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that the Indemnifying Party shall pay such
-------- -------
expense if representation of the Indemnified Party by counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding, and provided further that the failure of any
-------- -------
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 8(e) unless the failure
to give such notice is materially prejudicial to an Indemnifying Party's ability
to defend such action. No Indemnifying Party, in the defense of any such claim
or litigation shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnifying Party shall be required to indemnify any Indemnified
Party with respect to any settlement entered into without such Indemnifying
Party's prior consent (which shall not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
-------------------------------------------------------
(a) In the event of any change in the Acquiror Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations,
-10-
<PAGE>
exchanges of shares and the like, the type and number of shares or securities
subject to the Option, the Exercise Ratio and the Exercise Price shall be
adjusted appropriately, and proper provision shall be made in the agreements
governing such transaction so that Target shall receive, upon exercise of the
Option, the number and class of shares or other securities or property that
Target would have received in respect of the Acquiror Shares if the Option had
been exercised immediately prior to such event or the record date therefor, as
applicable.
(b) At any time during which the Option is exercisable, and at any
time after the Option is exercised (in whole or in part, if at all), neither
Acquiror nor Target shall adopt a stockholders rights plan (a so-called "poison
pill") that contains provisions for the distribution of rights thereunder as a
result of the other party being the beneficial owner of shares of the first
party by virtue of the Option being exercisable or having been exercised (or as
a result of such other party beneficially owning shares issuable in respect of
any Option Shares). It is understood, however, that following termination (if
any) of the Merger Agreement, a party may adopt a stockholders rights plan, that
contains provisions for the distribution of rights thereunder as a result of the
other party being the beneficial owner of shares of the first party in addition
to those that may be beneficially owned by virtue of the Option being
exercisable or having been exercised (or as a result of such other party
beneficially owning shares issuable in respect of any Option Shares).
10. RESTRICTIVE LEGENDS
-------------------
Each certificate representing Option Shares issued to Target hereunder, and
each certificate representing Target Shares delivered to Acquiror at a Closing,
shall include a legend in substantially the following form:
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 APRIL 7,
1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
11. LISTING AND HSR FILING
----------------------
Acquiror, upon the request of Target, shall promptly file an application to
list the Acquiror 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. Target, upon the request of
Acquiror, shall promptly file an application to list the Target Shares issued
and delivered to Acquiror pursuant to Section 1 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
-11-
<PAGE>
other documents and exhibits required to be filed under the HSR Act to permit
the acquisition of the Acquiror Shares subject to the Option at the earliest
possible date.
12. 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 8 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 8
shall not be required to bear the legend set forth in Section 10.
13. 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.
14. ENTIRE AGREEMENT
----------------
This Agreement and the Merger Agreement (including the appendices 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.
15. 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.
16. 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
-12-
<PAGE>
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.
17. 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):
(a) if to Target, to:
Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, California 94087
Attn: President and Chief Executive Officer
with a copy to:
Fenwick & West
Two Palo Alto Square, Suite 700
Palo Alto, California 94306
Attn: Dennis R. DeBroeck, Esq.
(b) if to Acquiror to:
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Attn: President and Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Francis S. Currie, Esq.
18. 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.
-13-
<PAGE>
19. 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.
20. 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.
21. 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.
22. 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 the rights and obligations hereunder shall inure to
the benefit of and be binding upon any successor of a party hereto.
-14-
<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.
PURE ATRIA CORPORATION
By: /s/
------------------------------------------
Name: Reed Hastings
Title: President, Chief Executive Officer
Chairman of the Board of Directors
Acquiror
By: /s/
-----------------------------------------
Name: Paul D. Levy
Title: Chief Executive Officer
***STOCK OPTION AGREEMENT***
(Acquiror option to Target)
<PAGE>
EXHIBIT 99.6
------------
RATIONAL SOFTWARE CORPORATION
AFFILIATE AGREEMENT
This RATIONAL SOFTWARE CORPORATION AFFILIATE AGREEMENT ("AGREEMENT") is
dated as of April 7, 1997, between Rational Software Corporation, a Delaware
corporation ("ACQUIROR"), Pure Atria Corporation, a Delaware corporation
("TARGET"), and the undersigned affiliate ("AFFILIATE") of Acquiror.
WHEREAS, Acquiror and Target have entered into an Agreement and Plan of
Reorganization ("MERGER AGREEMENT") pursuant to which Target and Acquiror intend
to enter into a business combination transaction (the "MERGER") (capitalized
terms used and not otherwise defined herein shall have the respective meanings
ascribed to them in the Merger Agreement);
WHEREAS, Affiliate has been advised that Affiliate may be deemed to be an
"affiliate" of Acquiror, as the term "affiliate" is used in Accounting Series
Releases 130 and 135, as amended, although nothing contained herein shall be
construed as an admission by Affiliate that Affiliate is in fact an affiliate of
Acquiror;
WHEREAS, it will be a condition to consummation of the Merger pursuant to
the Merger Agreement that the independent accounting firms that audit the annual
financial statements of Target and Acquiror will have delivered their written
concurrences with the conclusions of management of Target and Acquiror to the
effect that the Merger will be accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16;
WHEREAS, the execution and delivery of this Agreement by Affiliate is a
material inducement to Acquiror to enter into the Merger Agreement.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree as
follows:
1. Acknowledgments by Affiliate. Affiliate has carefully read this
----------------------------
Agreement and the Merger Agreement and has discussed the requirements of this
Agreement with Affiliate's professional advisors, who are qualified to advise
him with regard to such matters.
2. Covenants Related to Pooling of Interests. In accordance with SAB 65,
-----------------------------------------
during the period commencing 30 days preceding the Closing Date of the Merger
and continuing until the second day after the day that Acquiror publicly
announces financial results covering at least 30 days of combined operations of
Acquiror and Target, Affiliate will not sell, exchange, transfer, pledge,
distribute, make any gift or otherwise dispose of or grant any option, establish
any "short" or put-equivalent position with respect to or enter into any similar
transaction (through derivatives or otherwise) intended or having the effect,
directly or indirectly, to reduce Affiliate's risk relative to any
<PAGE>
shares of Acquiror Common Stock. Acquiror may, at its discretion, place a stock
transfer notice consistent with the foregoing with its transfer agent with
respect to Affiliate's shares. Notwithstanding the foregoing, Affiliate will not
be prohibited by the foregoing from selling or disposing of shares so long as
such sale or disposition is in accordance with the "de minimis" test set forth
in SEC Staff Accounting Bulletin No. 76.
3. Beneficial Ownership of Stock. Except for the Acquiror Common Stock
-----------------------------
and options to purchase Acquiror Common Stock set forth on the last page of this
Agreement, Affiliate does not beneficially own any shares of Acquiror Common
Stock or any other equity securities of Acquiror or any options, warrants or
other rights to acquire any equity securities of Acquiror.
4. Miscellaneous.
-------------
(a) For the convenience of the parties hereto, this Agreement may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same document.
(b) This Agreement shall be enforceable by, and shall inure to the
benefit of and be binding upon, the parties hereto and their respective
successors and assigns. As used herein, the term "successors and assigns" shall
mean, where the context so permits, heirs, executors, administrators, trustees
and successor trustees, and personal and other representatives.
(c) This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the internal laws of the State of Delaware (without
regard to the principles of conflict of laws thereof).
(d) If a court of competent jurisdiction determines that any provision
of this Agreement is not enforceable or enforceable only if limited in time
and/or scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
(e) Counsel to and accountants for the parties to the Agreement shall
be entitled to rely upon this Agreement as needed.
(f) This Agreement shall not be modified or amended, or any right
hereunder waived or any obligation excused, except by a written agreement signed
by both parties.
(g) No party shall be deemed an intended third party beneficiary of
this Agreement.
5. Termination. This Agreement shall terminate and shall have no further
-----------
force or effect upon any termination of the Merger Agreement pursuant to
Article VII thereof.
-2-
<PAGE>
Executed as of the date shown on the first page of this Agreement.
RATIONAL SOFTWARE CORPORATION
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
PURE ATRIA CORPORATION
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
AFFILIATE
By:
-----------------------------
Name of Affiliate:
-----------------
Name of Signatory (if different from name of
Affiliate):
------------------------
Title of Signatory
(if applicable):
-------------------
Number of shares of Rational Software Corporation Common Stock beneficially
owned by Affiliate:
- -----------------------
Number of shares Rational Software Corporation Common Stock subject to options
beneficially owned by Affiliate:
- -----------------------
***ACQUIROR AFFILIATE AGREEMENT***
-3-
<PAGE>
EXHIBIT 99.7
------------
PURE ATRIA CORPORATION
AFFILIATE AGREEMENT
This PURE ATRIA CORPORATION AFFILIATE AGREEMENT ("AGREEMENT") is dated as
of April 7, 1997, between Rational Software Corporation, a Delaware corporation
("ACQUIROR"), Pure Atria Corporation, a Delaware corporation ("TARGET") and the
undersigned affiliate ("AFFILIATE") of Target.
WHEREAS, Target and Acquiror have entered into an Agreement and Plan of
Reorganization ("MERGER AGREEMENT") pursuant to which Target and Acquiror intend
to enter into a business combination transaction (the "MERGER") (capitalized
terms used and not otherwise defined herein shall have the respective meanings
ascribed to them in the Merger Agreement);
WHEREAS, pursuant to the Merger, at the Effective Time outstanding shares
of Target Capital Stock, including any shares owned by Affiliate, will be
converted into the right to receive shares of Acquiror Common Stock as set forth
in the Merger Agreement;
WHEREAS, Affiliate has been advised that Affiliate may be deemed to be an
"affiliate" of Target, as the term "affiliate" is used (i) for purposes of
paragraphs (c) and (d) of Rule 145 of the Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and (ii) in the SEC's Accounting
Series Releases 130 and 135, as amended, although nothing contained herein shall
be construed as an admission by Affiliate that Affiliate is in fact an affiliate
of Target;
WHEREAS, it will be a condition to consummation of the Merger pursuant to
the Merger Agreement that (i) the attorneys for each of Acquiror and Target will
have delivered written opinions that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "CODE"), and (ii) the independent accounting firms that audit the
annual financial statements of Target and Acquiror will have delivered their
written concurrences with the conclusions of management of Target and Acquiror
to the effect that the Merger will be accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16;
WHEREAS, the execution and delivery of this Agreement by Affiliate is a
material inducement to Acquiror to enter into the Merger Agreement.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree as
follows:
1. Acknowledgments by Affiliate. Affiliate has carefully read this
----------------------------
Agreement and the Merger Agreement and has discussed the requirements of this
Agreement with Affiliate's professional advisors, who are qualified to advise
Affiliate with regard to such matters.
<PAGE>
2. Compliance with Rule 145 and the Act.
------------------------------------
(a) Affiliate has been advised that (i) the issuance of shares of
Acquiror Common Stock in connection with the Merger is expected to be effected
pursuant to a Registration Statement on Form S-4 under the Securities Act of
1933, as amended (the "ACT"), and as such will not be deemed "restricted
securities" within the meaning of Rule 144 promulgated thereunder and resale of
such shares will not be subject to any restrictions other than as set forth in
Rule 145 of the Act unless otherwise transferred pursuant to an effective
registration statement under the Act or an appropriate exemption from
registration, (ii) Affiliate may be deemed to be an affiliate of Target, and
(iii) no sale, transfer or other disposition by Affiliate of any Acquiror Common
Stock received by Affiliate will be registered under the Act. Affiliate
accordingly agrees not to sell, transfer or otherwise dispose of any Acquiror
Common Stock issued to Affiliate in the Merger unless (x) such sale, transfer or
other disposition is made in conformity with the requirements of Rule 145(d)
promulgated under the Act, or (y) Affiliate delivers to Acquiror a written
opinion of counsel, reasonably acceptable to Acquiror in form and substance,
that such sale, transfer or other disposition is otherwise exempt from
registration under the Act.
(b) Acquiror will give stop transfer instructions to its transfer
agent with respect to any Acquiror Common Stock received by Affiliate pursuant
to the Merger and there will be placed on the certificates representing such
Acquiror Common Stock, 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, AS AMENDED, APPLIES AND MAY ONLY BE TRANSFERRED IN CONFORMITY
WITH RULE 145(d) UNDER SUCH ACT OR IN ACCORDANCE WITH A WRITTEN
OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER IN THE FORM
AND SUBSTANCE THAT SUCH TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED."
The legend set forth above shall be removed (by delivery of a substitute
certificate without such legend) and Acquiror shall so instruct its transfer
agent, if Affiliate delivers to Acquiror (i) satisfactory written evidence that
the shares have been sold in compliance with Rule 145 (in which case, the
substitute certificate will be issued in the name of the transferee), or (ii) an
opinion of counsel, in form and substance reasonably satisfactory to the effect
that public sale of the shares by the holder thereof is no longer subject to
Rule 145.
(c) To the extent required by applicable securities laws, Acquiror
agrees, for a period of two years from the date of this Agreement, to file with
the SEC in a timely manner all reports and other documents required of Acquiror
under the Act and the Securities Exchange Act of 1934, as amended.
-2-
<PAGE>
3. Covenants Related to Pooling of Interests. In accordance with SAB 65,
-----------------------------------------
during the period commencing 30 days preceding the Closing Date of the Merger
and continuing until the second day after the day that Acquiror publicly
announces financial results covering at least 30 days of combined operations of
Acquiror and Target, Affiliate will not sell, exchange, transfer, pledge,
distribute, or otherwise dispose of or grant any option, establish any "short"
or put-equivalent position with respect to or enter into any similar transaction
(through derivatives or otherwise) intended or having the effect, directly or
indirectly, to reduce its risk relative to any securities, or shares of Acquiror
Common Stock received by Affiliate in connection with the Merger. Acquiror may,
at its discretion, cause a restrictive legend to the foregoing effect to be
placed on Acquiror Common Stock certificates issued to Affiliate in the Merger
and place a stock transfer notice consistent with the foregoing with its
transfer agent with respect to the certificates, provided that such restrictive
legend shall be removed and/or such notice shall be countermanded promptly upon
expiration of the necessity therefor at the request of Affiliate.
Notwithstanding the foregoing, Affiliate will not be prohibited by the foregoing
from selling or disposing of shares, so long as such sale or disposition is in
accordance with the "de minimis" test set forth in SEC Staff Accounting Bulletin
No. 76 and so long as Affiliate has obtained Acquiror's prior written approval
of such sale or disposition.
4. Representations, Warranties and Covenants Related to Tax Effects of
-------------------------------------------------------------------
the Merger.
- ----------
(a) Affiliate is the beneficial owner of the number of shares of
Target Common Stock (including shares issuable upon exercise of stock options)
set forth on the last page of this Agreement and did not acquire any of the
Target Common Stock in contemplation of the Merger;
(b) Affiliate has not engaged in a Sale (as defined below) of any
shares of Target Common Stock in contemplation of the Merger;
(c) Affiliate has no plan or intention (a "PLAN") to engage in a sale,
exchange, transfer, redemption or reduction in any way of Affiliate's risk of
ownership or other disposition, directly or indirectly (such actions being
collectively referred to herein as a "SALE") of more than 50% of the shares of
Acquiror Common Stock to be received by Affiliate in the Merger;
(d) If Affiliate is a partnership, then the term "sale" as used in
paragraph (c) above shall be deemed to include any distribution to the partners
of the undersigned unless no recipient of any such distribution will receive
shares of Target Common Stock representing 1% or more of the shares of Target
Common Stock presently outstanding;
(e) Affiliate is not aware of, or participating in, any Plan on the
part of the Affiliates of Target to engage in a Sale or Sales of the Acquiror
Common Stock to be received in the Merger such that the aggregate fair market
value, as of the Effective Date of the Merger, of the shares subject to such
Sales would exceed 50% of the aggregate fair market value of all shares of
outstanding Target Common Stock immediately prior to the Merger.
-3-
<PAGE>
5. Miscellaneous.
-------------
(a) For the convenience of the parties hereto, this Agreement may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same document.
(b) This Agreement shall be enforceable by, and shall inure to the
benefit of and be binding upon, the parties hereto and their respective
successors and assigns. As used herein, the term "successors and assigns" shall
mean, where the context so permits, heirs, executors, administrators, trustees
and successor trustees, and personal and other representatives.
(c) This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the internal laws of the State of Delaware (without
regard to the principles of conflict of laws thereof).
(d) If a court of competent jurisdiction determines that any provision
of this Agreement is not enforceable or enforceable only if limited in time
and/or scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
(e) Counsel to and accountants for the parties to the Agreement shall
be entitled to rely upon this Agreement as needed.
(f) This Agreement shall not be modified or amended, or any right
hereunder waived or any obligation excused, except by a written agreement signed
by both parties.
(g) No party shall be deemed an intended third party beneficiary of
this Agreement.
6. Termination. This Agreement shall terminate and shall have no further
-----------
force or effect upon any termination of the Merger Agreement pursuant to Article
VII thereof.
-4-
<PAGE>
Executed as of the date shown on the first page of this Agreement.
RATIONAL SOFTWARE CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
PURE ATRIA CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
AFFILIATE
By:
--------------------------------------
Name of Affiliate:
--------------------------
Name of Signatory (if different from name of
Affiliate):
---------------------------------
Title of Signatory
(if applicable):
----------------------------
Number of shares of Pure Atria Corporation Common Stock beneficially owned by
Affiliate:
- -------------------------
Number of shares of Pure Atria Corporation Common Stock subject to options
beneficially owned by Affiliate:
- -------------------------
***TARGET AFFILIATE AGREEMENT***
-5-
