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