STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made as of September 7,
1997 by and among Cylink Corporation, a California corporation (the
"Purchaser"), Algorithmic Research Ltd., a limited liability company organized
and existing under the laws of the State of Israel (the "Company"), and A.R.
Data Security Ltd., a limited liability company organized and existing under the
laws of the State of Israel (the "Seller").
RECITALS
A. The Seller and Algart Holdings Ltd., a limited liability company organized
and existing under the laws of the State of Israel and a wholly owned subsidiary
of the Seller ("Holdings"), are the sole shareholders of the Company.
B. The Seller desires to sell and the Purchaser desires to purchase (i) all of
the issued and outstanding shares of the Company that are owned by the Seller,
and (ii) all of the issued and outstanding shares of Holdings, in accordance
with the terms and conditions set forth in this Agreement, so that, upon
consummation of the transactions herein contemplated, the Purchaser shall
directly, or indirectly through Holdings, own all of the issued and outstanding
shares of the Company.
AGREEMENT
In consideration of the agreements, provisions and covenants set forth
below, the Purchaser, the Company and the Seller hereby agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1. Purchase and Sale of Stock. Subject to the terms and conditions set
forth below, on the Closing Date (as defined below), the Seller shall sell to
the Purchaser, and the Purchaser shall purchase from the Seller: (a) 81,749
ordinary shares of the Company, NIS 0.10 nominal value per share, representing
all of the ordinary shares of the Company that are owned by the Seller (said
81,749 ordinary shares of the Company being referred to herein as the
"Transferred Company Shares"), and (b) 81,749 ordinary shares of Holdings, NIS
0.10 nominal value per share, representing all of the outstanding ordinary
shares of Holdings (the "Holdings Shares").
1.2. Purchase Price.
(a) The aggregate consideration payable by the Purchaser for the
Transferred Company Shares and the Holdings Shares shall consist of (i) U.S.
$40,686,972 in cash, and (ii) 2,593,169 newly issued shares of the common stock,
$.01 par value per share, of the Purchaser
1
(the "Purchaser Common Stock"), as adjusted as appropriate for stock splits,
stock dividends and other changes to Purchaser Common Stock effected during the
period from the date hereof through the Closing Date.
(b) Any transfer taxes, stamp duties or other similar taxes or duties
incurred by the Seller, Holdings or the Purchaser in connection with the
transfer of the Transferred Company Shares or the Holdings Shares to the
Purchaser shall be borne and paid one half by the Seller and one half by the
Purchaser.
1.3. Exemption from Registration and Qualification.
(a) The shares of Purchaser Common Stock to be issued in connection
with this Agreement will be exempt from registration under Regulation S of the
Securities Act of 1933, as amended (the "Securities Act"), and exempt from
qualification under the California Corporations Code.
(b) Certificates representing those shares of Purchaser Common Stock
to be issued to the Seller pursuant to this Agreement will bear legends
describing certain of the applicable restrictions on transferability set forth
in Regulation S of the Securities Act and related stop-transfer instructions
will be placed on such shares of Purchaser Common Stock by Purchaser or its duly
appointed transfer agent and registrar. The Purchaser agrees that the
restrictive Regulation S legend and stop-transfer instructions referred to
herein will be removed upon the request of the Seller or the respective Parent
Shareholders (as defined below) at the end of the applicable restricted period
as set forth in Regulation S (which is forty (40) days from the Closing Date).
1.4. Closing.
(a) Unless this Agreement shall theretofore have been terminated
pursuant to the provisions of Article X hereof, subject to the terms and
conditions set forth herein, the closing of the transactions contemplated by
this Agreement (the "Closing") shall take place in Tel Aviv, Israel, at 12:00
p.m. local time on September 8, 1997 or at such other time, date and place as
the parties may mutually agree in writing (the date on which the Closing takes
place being referred to herein as the "Closing Date").
(b) At the Closing: (i) the Seller shall deliver to the Purchaser the
certificates (if any) representing the Transferred Company Shares and the
Holdings Shares, properly endorsed in favor of the Purchaser for transfer or
accompanied by a duly executed share transfer deed; and (ii) the Purchaser shall
(A) pay to the Seller the cash amount referred to in Section 1.2(a)(i) hereof,
by wire transfer in immediately available (U.S. dollar) funds, to a bank account
designated by the Seller, (B) issue and deliver to the Seller a certificate
representing 1,320,869 shares of Purchaser Common Stock, and (C) issue in the
name of and deliver to Hambrecht & Quist LLC (the "Escrow Agent") a certificate
representing 1,272,300 shares of Purchaser Common Stock (the "Escrow Shares"),
to be held in accordance with that certain Escrow Agreement to be entered into
at the Closing as contemplated by Sections 7.5 and 8.4 hereof (the "Escrow
Agreement"). In addition, all other actions shall be taken and all other
documents shall be delivered that are necessary to consummate
2
the transactions contemplated by this Agreement (other than such actions and
documents as are to be taken or delivered at another date, as specifically
provided in this Agreement).
3
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby represents and warrants to the Purchaser, except as
otherwise set forth in the Disclosure Schedule being furnished by the Seller to
the Purchaser simultaneously with the execution and delivery of this Agreement
(the "Company Schedule"), or as disclosed or otherwise described in any of the
documents listed or set forth in the Company Schedule or this Article II, as
follows:
2.1. Title to Ordinary Shares. The Seller is the record and beneficial
owner of the Transferred Company Shares and the Holdings Shares, and the Seller
holds title to the Transferred Company Shares and the Holdings Shares free and
clear of all liens, pledges, charges, encumbrances, security interests,
restrictive agreements or assessments (other than restrictions on
transferability generally imposed on securities under applicable securities
laws).
2.2. Organization of the Company and Holdings. Each of the Company and
Holdings is a limited liability private company duly organized and validly
existing under the laws of the State of Israel and has full power and authority
to carry on its business as now conducted, and to own its assets. Each of the
Company and Holdings is duly qualified to do business and is in good standing
(with respect to jurisdictions which recognize such concept) in the
jurisdictions set forth in Schedule 2.2 of the Company Schedule, which are the
only jurisdictions in which the Company or Holdings, as the case may be, is
required to be qualified in order to carry on its business, and is duly
authorized, and licensed under all laws, regulations, ordinances or orders of
public authorities, or otherwise, to carry on its business in the places and in
the manner presently conducted, except for qualifications, authorizations or
licenses for which the failure to obtain, if required, would not have a Material
Adverse Effect on the Company. Each of the Company and Holdings has heretofore
made available to the Purchaser true and complete copies of its Memorandum of
Association and its Articles of Association registered with the Registrar of
Companies, as in effect on the date hereof. The minute books of each of the
Company and Holdings contain substantially accurate records of all resolutions
adopted and other actions taken by the Company's Board of Directors, all
committees of its Board of Directors, and its shareholders from the date of its
incorporation to the date of this Agreement.
2.3. Nonviolation. The consummation by the Seller and the Company of the
stock sale contemplated by this Agreement will not (a) violate or conflict
with the Memorandum of Association or Articles of Association, or similar
instrument, of the Company or any Subsidiary (as defined below), (b) except as
set forth in this Agreement, require the Seller, the Company or any Subsidiary
to obtain the consent, approval or authorization of any governmental or
quasi-governmental person or entity prior to the Closing, except where the
failure to obtain such consent, approval or authorization would not have a
Material Adverse Effect on the Company, or (c) give rise to a right to terminate
by the other party thereto or result in a breach of the terms or conditions of,
or constitute a default under, or violate, as the case may be, any Listed
Agreement (as defined below), except for any such termination, breach, default
or violation which would not have a Material Adverse Effect on the Company.
4
2.4. Authority for Agreement. All corporate and other proceedings required
to be taken by or on behalf of the Company and the Seller to authorize the
Company and the Seller to enter into and carry out this Agreement have been duly
and properly taken. This Agreement has been duly executed and delivered by the
Company and the Seller and is valid and binding upon the Company and the Seller,
subject as to enforceability, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors' rights
and to general principles of equity.
2.5. Capitalization. The authorized capital of the Company consists of
200,000 ordinary shares, NIS .010 nominal value per share, of which 120,519
shares are issued and outstanding. All of such issued and outstanding ordinary
shares of the Company have been legally and validly issued and are fully paid
and nonassessable. Of such 120,519 ordinary shares, the Seller and Holdings own
81,749 and 38,770 shares, respectively, and there is no other shareholder of the
Company.
2.6. Options, Warrants, Etc. There are no outstanding options, warrants,
rights, calls, commitments or agreements calling for the issuance or transfer,
sale or disposition by the Company or any Subsidiary of any shares, issued or
unissued, of the capital stock of the Company or any Subsidiary, or of any
securities convertible or exchangeable, actually or contingently, into any such
capital stock, to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary is bound.
2.7. Officers and Directors. Schedule 2.7 of the Company Schedule contains
a complete and correct list of the names and home addresses of all officers and
directors of the Company, Holdings and each of the Subsidiaries.
2.8. Subsidiaries. Schedule 2.8 of the Company Schedule provides a complete
list of all of the subsidiaries of the Company (the "Subsidiaries"), the
respective jurisdictions of their incorporation and the percentage and numbers
of their outstanding shares owned by the Company, or any other person, firm or
corporation. For purposes of this Agreement, any corporation of which the
Company, directly or indirectly, through other corporations or otherwise, owns
50% or more of the outstanding capital stock shall be deemed to be a Subsidiary.
Each of the Subsidiaries is qualified to do business in the jurisdictions set
forth in Schedule 2.8 of the Company Schedule which are the only jurisdictions
in which each such Subsidiary is required to be qualified in order to carry on
its business, and is duly authorized, and licensed under all laws, regulations,
ordinances or orders of public authorities, or otherwise, to carry on its
business in the places and in the manner presently conducted, except for
authorizations, qualifications or licenses for which the failure to obtain, if
required, would not have a Material Adverse Effect on the Company. The
outstanding shares of capital stock of each of the Subsidiaries are validly
issued, fully paid and non-assessable, and all of such outstanding shares of
each of the Subsidiaries are owned by the Company or another Subsidiary (or
their nominees) free of any claims, liens, charges or encumbrances of any nature
whatsoever (other than any claims, liens, charges or encumbrances imposed under
applicable securities laws). Each of the Subsidiaries is duly organized and
validly existing in good standing (with respect to jurisdictions which recognize
such concept) under the
5
laws of the jurisdiction of its organization and has the power to carry on its
business as now conducted and to own its assets. The Company has made available
to the Purchaser true and complete copies of the Certificate of Incorporation
(or similar instrument) and By-Laws (or similar instrument) of each Subsidiary,
as in effect on the date hereof. The minute books of each Subsidiary contain
substantially accurate records of all resolutions adopted and other actions
taken by its Board of Directors and its shareholders between the time of its
incorporation and the date of this Agreement. Neither the Company nor any
Subsidiary has any investments in any corporation or other entity, except for
short-term investments in certificates of deposit, and other deposits and debt
obligations with a maturity of not more than 180 days.
2.9. Grants, Incentives and Subsidies. Schedule 2.9 of the Company Schedule
provides a complete list of all material grants, incentives and subsidies from
the Government of the State of Israel or any agency thereof or any quasi-public
agency made specifically to the Company, any Subsidiary or Holdings, with
respect to which the Company, any Subsidiary or Holdings has material continuing
obligations ("Grants") , including, without limitation, (i) Grants from the
Investment Center of the Ministry of Industry and Trade (the "Investment
Center"), (ii) Grants from the office of the Chief Scientist of the Ministry of
Industry and Trade (the "Chief Scientist") and (iii) Grants from the Fund for
Encouragement of Export. The Company is in compliance, in all material respects,
with the terms and conditions of the Grants and has duly fulfilled, in all
material respects, all the undertakings relating thereto and all conditions
imposed by law or regulation with respect thereto, including, without
limitation, Section A of the Law for The Encouragement of Industry, Research and
Development, except where the failure to be in compliance or to fulfill such
undertakings or conditions would not have a Material Adverse Effect on the
Company. To the knowledge of the Company, no event has occurred which would
reasonably be expected to lead to the annulment or material limitation of any of
the Grants.
2.10. Financial Statements. The audited consolidated financial statements
of the Seller and its consolidated subsidiaries for each of the years in the two
year period ended December 31, 1996, together with the notes thereto and the
reports and opinions thereon of Kost, Levary and Forer (the "Audited
Consolidated Financial Statements"), and the unaudited consolidated financial
statements of the Seller and its consolidated subsidiaries for the six months
ended June 30, 1997 and the notes thereto (the "Unaudited Consolidated Financial
Statements"), all of which have previously been delivered to the Purchaser,
fairly present the consolidated financial position of the Seller and its
consolidated subsidiaries, as of the respective dates thereof and the
consolidated results of their operations for the periods indicated, and were
prepared in conformity with Israel generally accepted accounting principles
consistently applied throughout the periods covered thereby except as
specifically indicated therein (subject, in the case of unaudited statements, to
normal recurring audit adjustments not material in scope or amount and except
that the footnotes contained in the unaudited statements may not satisfy the
requirements applicable to the preparation of footnotes under Israel generally
accepted accounting principles).(The Audited Consolidated Financial Statements
and the Unaudited
6
Consolidated Financial Statements are referred to collectively as the "Financial
Statements.") As of June 30, 1997, except for the Transferred Company Shares and
the Holdings Shares, the Seller had no assets of the type required to be
reflected in the assets column of an unconsolidated balance sheet prepared in
accordance with Israel generally accepted accounting principles.
2.11. Actions Since June 30, 1997. Except (a) as reflected in, or
contemplated by, the Financial Statements or (b) as otherwise expressly set
forth in or contemplated by this Agreement or in the Exhibits hereto or in the
Company Schedule since June 30, 1997, neither the Company nor any Subsidiary
has: (i) issued or sold, or agreed to issue or sell, or purchased, or agreed to
purchase, any of its equity shares or securities convertible or exchangeable
into such equity shares, or any options, warrants, rights or calls to purchase
such equity shares, or other corporate securities; (ii) incurred any material
obligation or material liability, absolute or contingent, of the type and
magnitude required to be reflected in the liabilities column of a consolidated
balance sheet of the Company prepared in accordance with Israel generally
accepted accounting principles except in the ordinary and usual course of
business; (iii) discharged or satisfied any lien or encumbrance, except in the
ordinary and usual course of business, or paid or satisfied any liability other
than liabilities as at June 30, 1997, except in the ordinary and usual course of
business; (iv) entered into, or modified in any material respect, any employment
or consulting agreement (other than its agreement with Hambrecht & Quist LLC),
or made any wage or salary increases or granted any bonuses to its employees,
except those made or granted in the ordinary and usual course of business; (v)
mortgaged, pledged or subjected to lien or other encumbrance ("Encumbrance") any
of its material properties or assets (other than (w) Encumbrances arising under
or relating to any license agreement to which the Company or any of the
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound, (x) liens for current taxes or other governmental charges or levies not
yet due, or for taxes or other governmental charges or levies being protested in
good faith, (y) Encumbrances arising from municipal and zoning ordinances and
easements for public utilities, and (z) such imperfections in the title to the
assets and properties of the Company and its Subsidiaries and Encumbrances, if
any, as do not materially detract from the value, or materially interfere with
the present or continued use, of such assets or properties, or otherwise
materially impair the business or operations of the Company and its Subsidiaries
(Encumbrances of the type referred to in clauses "(w)," "(x)," "(y)," and "(z)"
of this clause "(v)" being referred to herein as "Permitted Encumbrances"));
(vi) sold, assigned or transferred any of its material properties or assets,
except in the ordinary and usual course of business; (vii) entered into any
material transaction not in the ordinary and usual course of business; (viii)
irrevocably waived any rights of substantial value, or cancelled, modified or
irrevocably waived any debts held by the Company or such Subsidiary in excess of
U.S. $25,000 in the aggregate; (ix) made or incurred capital expenditures in
excess of an aggregate of U.S. $200,000 (the Company and all Subsidiaries to be
taken as a whole for this purpose); (x) declared, paid or set aside any
dividends or other distributions or payments on its equity shares; (xi) made any
loans or advances to any person or assumed, guaranteed, endorsed or otherwise
became responsible for the obligations of any person, except for loans and
advances to employees and to unaffiliated third parties in the ordinary and
usual course of business; (xii) effected any merger, consolidation,
recapitalization, stock split, stock dividend, reorganization or other similar
transaction affecting the equity shares of the Company; (xiii) made any illegal
payments to governmental or quasi-governmental officials; or (xiv) made any
payments that have not been properly reflected in the Company's books and
records to customers for the sharing of fees or to customers or suppliers for
rebating of charges, or engaged
7
in other reciprocal practices that have not been properly reflected in the
Company's books and records.
2.12. Liabilities Since June 30, 1997. There are no material liabilities or
obligations of the Company or any Subsidiary of the type and magnitude required
to be disclosed in the liabilities column of a consolidated balance sheet of the
Company and its consolidated Subsidiaries prepared in accordance with Israel
generally accepted accounting principles, whether accrued, absolute, contingent
or otherwise, and whether due or to become due, which arose or, in accordance
with Israel generally accepted accounting principles, were accrued or should be
accrued with respect to any period beginning after June 30, 1997 and ending on
the date of this Agreement other than (i) those incurred in the ordinary and
usual course of the business of the Company and its Subsidiaries, which have not
had in the aggregate a Material Adverse Effect on the Company, (ii) those
intercompany liabilities which are properly eliminated in consolidation, (iii)
those expressly disclosed in any Exhibit hereto or in the Company Schedule, (iv)
those reasonably incurred in connection with this Agreement including, without
limitation, any indebtedness incurred to pay any costs and expenses arising out
of the transactions contemplated by this Agreement, (v) those discharged prior
to the date of this Agreement, and (vi) those covered by insurance and not
otherwise having a Material Adverse Effect on the Company.
2.13. Absence of Undisclosed Liabilities. As of June 30, 1997, there were
no liabilities or obligations of the Company or its consolidated subsidiaries of
the type and magnitude required to be disclosed in the liabilities column of a
consolidated balance sheet of the Company and its consolidated Subsidiaries
prepared in accordance with Israel generally accepted accounting principles
(whether accrued, absolute, contingent or otherwise, and whether due or to
become due), which, in accordance with Israel generally accepted accounting
principles, should have been accrued as of June 30, 1997, other than (i) those
disclosed, or reflected as a liability or obligation, or reserved against on the
Unaudited Consolidated Financial Statements, (ii) those intercompany liabilities
or obligations between the Company and its Subsidiaries which are properly
eliminated in consolidation, (iii) those expressly disclosed in any Exhibit
hereto or in the Company Schedule, and (iv) those fully covered by insurance and
not otherwise having a Material Adverse Effect on the Company.
2.14. Litigation. There are no actions, suits, legal proceedings or
governmental or quasi-governmental investigations pending against the Company or
any Subsidiary before any court or governmental agency or before any arbitrator
of any kind, or any order, injunction or decree outstanding against the Company
or any Subsidiary and, to the knowledge of the Company, no person has since
January 1, 1996 threatened orally (to any officer or director of the Company) or
in writing to commence any action, suit or legal proceeding against the Company
or any Subsidiary or against or relating to their property, assets or business,
that in any such case would reasonably be expected to have a Material Adverse
Effect on the Company. Neither the Company nor any Subsidiary is in violation of
any applicable law, regulation, ordinance, order, injunction, decree, award or
other requirement of any governmental or quasi-governmental body, court, or
arbitrator relating to its property, assets, or business, except for any
violation that would not have a Material Adverse Effect on the Company.
8
2.15. Permits. The Company and its Subsidiaries have all material
governmental permits, licenses, orders, approvals, franchises and other rights
and privileges necessary (including, without limitation, approvals from the
Ministry of Defense and any other relevant governmental agency relating to the
development, sale and export of cryptography technology) in order for them to
carry on their business as conducted as of the date hereof (including, without
limitation, to manufacture, sell and distribute any Material Company Products
that are currently being manufactured by the Company and its Subsidiaries) and
to the knowledge of the Company, there are no material impediments to the
obtaining of any required governmental permits, licenses, orders, approvals,
franchises and other rights and privileges as to the development, sale and
export of any Material Company Products under development, except in each case,
such permits, licenses, orders, approvals, franchises, and other rights and
privileges of which the failure to obtain, if required, would not have a
Material Adverse Effect on the Company. Schedule 2.15 of the Company Schedule
sets forth a list of all such material permits, licenses, orders and approvals
from all Israeli and other governmental and regulatory bodies held by the
Company and its Subsidiaries.
2.16. Ownership of Assets. The Company and its Subsidiaries have good title
to all of their respective owned assets and properties, tangible and intangible
(including all assets reflected in the Unaudited Consolidated Financial
Statements, except those disposed of in the ordinary course of business since
June 30, 1997), and good title to their leasehold estates, in each case free and
clear of all Encumbrances except for Permitted Encumbrances. Except as set forth
in the Financial Statements, none of the material properties or assets of the
Company and its Subsidiaries the value of which is reflected in the assets
column of the balance sheet included in the Unaudited Consolidated Financial
Statements, is held by the Company or any Subsidiary as lessee or subject to any
lease or as conditional vendee under conditional sale or other title retention
agreement or as optionee under any option to purchase.
2.17. Intellectual Property.
(a) Schedule 2.17(a)-1 of the Company Schedule lists each patent,
patent application, registered trademark, trade name, registered service mark,
copyright and copyright application that (i) is owned by the Company or any of
its Subsidiaries as of the date of this Agreement, and (ii) provides
intellectual property protection for any material component of any Material
Company Product (or for any material component, module, feature or subassembly
thereof) or is otherwise material to the conduct of the business of the Company
and its Subsidiaries (taken as a whole) as of the date of this Agreement.
Schedule 2.17(a)-2 of the Company Schedule identifies each patent, trademark,
service mark and copyright that (A) is being licensed by a third party to the
Company or any of its Subsidiaries as of the date of this Agreement, (B)
provides intellectual property protection for any technology or invention for
which the Company cannot obtain the functional equivalent from more than one
source, and (C) provides intellectual property protection for any material
component of any Material Company Product (or for any material component,
module, feature or subassembly thereof). Schedule 2.17(a)-2 of the Company
Schedule further sets forth any such license that requires the Company or its
Subsidiaries to pay any material royalties or any material fixed or variable
fees or consideration for such licensing. Schedule 2.17(a)-3 of the Company
Schedule identifies each software system, software application, software module
or
9
software program, hardware component, system or product or other component,
card, subassembly or part that: (1) is a material component of a Material
Company Product, and (2) has been designed or developed for the Company by
employees of or consultants to the Company prior to the date of this Agreement.
For the purposes of this Agreement, "Company Intellectual Property" shall mean
both: (i) the items listed in Schedule 2.17(a)-1 and Schedule 2.17(a)-2 of the
Company Schedule (which, for purposes of this definition, shall be deemed to
include any item that should have been listed on Schedule 2.17(a)-1 or Schedule
2.17(a)-2 of the Company Schedule by the terms of this Section 2.17(a) and was
not so listed) and (ii) any technology, know-how, inventions or proprietary
information that (x) is (or is reasonably likely to be) incorporated in, and is
a material component of, a Material Company Product (or any material component,
module, feature or subassembly thereof), (y) is subject to protection under
applicable law as a trade secret right or equivalent intellectual property
right, and (z) is owned by the Company or its Subsidiaries; and "Material
Company Product" shall mean those existing and proposed products of the Company
and its Subsidiaries listed on Schedule 2.17(a)-4 of the Company Schedule.
(b) The Company Intellectual Property set forth in Schedule 2.17(a)-1
of the Company Schedule is owned by the Company or its Subsidiaries free and
clear of all Encumbrances other than Permitted Encumbrances.
(c) The sale of the Transferred Company Shares and Holding Shares by
the Seller to the Purchaser under this Agreement will not cause the forfeiture
or termination of any of the rights of the Company or its Subsidiaries to the
Company Intellectual Property or in any way impair the right of the Company or
its Subsidiaries to sell, license or dispose of, or to bring any action for the
infringement of, any Company Intellectual Property or to manufacture, sell and
use any Material Company Product, except for any forfeiture, termination or
impairment which would not reasonably be expected to have a Material Adverse
Effect on the Company.
(d) There are no royalties, honoraria or other similar payments
payable by the Company or any of its Subsidiaries to any third party for the use
by the Company or any of its Subsidiaries of any Company Intellectual Property
or for the manufacture, sale or use by the Company or any of its Subsidiaries of
any Material Company Product, other than (i) payments to the Office of the Chief
Scientist, and (ii) payments under Listed Agreements.
(e) To the knowledge of the Company, the Company Intellectual Property
that is owned by the Company, the use thereof by the Company or its Subsidiaries
and the manufacture, sale or use of any Material Company Product by the Company
or its Subsidiaries does not, in any case, infringe upon any U.S., Israeli or
other foreign patent, trade secret, copyright, trade name or other intellectual
property right of any third party. To the knowledge of the Company, no third
party is infringing upon any Company Intellectual Property that is owned by the
Company, except where the infringement would not reasonably be expected to have
a Material Adverse Effect on the Company. The Company owns or has a valid right
to use (by license, title or other right) all Company Intellectual Property that
is incorporated in, and is a material component of, the Material Company
Products. There is no action, suit or proceeding pending against the Company or
its Subsidiaries before any court or governmental agency or before any
arbitrator (and no person has since January 1, 1996 threatened orally (to an
officer or
10
director of the Company) or in a writing delivered to the Company to commence
any such action, suit or proceeding against the Company or any of its
Subsidiaries) contesting the validity of, or the right of the Company or any of
its Subsidiaries to own, use, license or dispose of, any Company Intellectual
Property or contesting the right of the Company or any of its Subsidiaries to
manufacture, sell or use any Material Company Product.
(f) The Individual Parent Shareholders (as defined below) have assigned to
the Company (or have otherwise permitted the Company to acquire) all of their
ownership rights (if any) in their Specified Intellectual Property (as defined
below) and have not voluntarily assigned any of such ownership rights (if any)
in their Specified Intellectual Property to any university or to any other third
party. Without limitation of the foregoing, there are no contractual obligations
binding on any of the Individual Parent Shareholders with any other employer or
institute of higher education which gives rise to any meritorious claim in such
employer or institute to any of the Specified Intellectual Property, except any
such claim which would not reasonably be expected to have a Material Adverse
Effect on the Company. For purposes of this Agreement (A) "Individual Parent
Shareholders" shall mean Yossi Tulpan, Amos Fiat and Yossi Cohen, and (B)
"Specified Intellectual Property" of an Individual Parent Shareholder shall
mean: (i) those material patents developed by such Individual Parent Shareholder
that provide intellectual property protection for any software, hardware or
invention that (A) has been personally developed by such Individual Parent
Shareholder, and (B) is material to the business of the Company and its
Subsidiaries; and (ii) those material copyrights and trade secrets developed by
such Individual Parent Shareholder that provide intellectual property protection
for any software, hardware or invention that (A) relates to encryption
technology, (B) has been personally developed by such Individual Parent
Shareholder, and (C) is material to the business of the Company and its
Subsidiaries. For purposes of the preceding sentence, any software, hardware or
invention will be deemed to be "material to the business of the Company and its
Subsidiaries" only if such software, hardware or invention is incorporated in,
and is a material component of, any Material Company Product (or any material
component, module, feature or subassembly of any such Material Company Product).
(g) The Company has taken reasonable steps to implement a policy requiring
each employee and consultant of or to the Company and its Subsidiaries that has
contributed in a material respect to the development of any software, hardware,
inventions, improvements, know-how or other proprietary information incorporated
into a Material Company Product to enter into an agreement substantially in the
form of that certain form of agreement delivered to the Purchaser, or to enter
into an ageement affording comparable protection to the protection provided by
such agreement delivered to the Purchaser.
2.18. Real Estate. Schedule 2.18 of the Company Schedule sets forth a brief
description of all real property which is owned by or leased to the Company or
its Subsidiaries. None of the properties occupied by the Company or its
Subsidiaries, or the occupancy or operation thereof by the Company or any of its
Subsidiaries, is in violation of any law or any building, zoning or other
ordinance, code or regulation in such a manner as to materially interfere with
the use and occupancy thereof in the ordinary course of the business of the
Company and its Subsidiaries. No written notice from any governmental body has
been served upon the Company or any of its Subsidiaries since January 1, 1995
claiming any material violation by the Company or any of its Subsidiaries of any
such law, ordinance, code or regulation, or requiring any
11
substantial work, repairs, construction, alterations or installation be
undertaken by the Company or any of its Subsidiaries on or in connection with
said properties, except for notices that have been complied with or withdrawn
and notices of violations that have been cured in all material respects.
2.19. Insurance. Schedule 2.19 of the Company Schedule provides a complete
list and brief description of all policies of fire, liability (including
officers' and directors' liability), title, key-man life and other forms of
insurance held by the Company and its Subsidiaries as of the date hereof.
2.20. Company Taxes.
(a) All taxes, including, without limitation, income, property, sales,
use, franchise, excise, value added, capital, social security, withholding, and
employees' withholding taxes imposed by the State of Israel, by any foreign
country, or by any political subdivision of the State of Israel or any foreign
country, which have become due and payable by the Company or any of its
Subsidiaries prior to the date of this Agreement and which are material to the
Company and its Subsidiaries, including any material taxes for which the Company
or any of its Subsidiaries is liable under contract or other arrangement,
together with any interest or penalties thereon (the "Company Taxes"), have been
paid in full or adequately provided for by reserves shown on the books of
account of the Company; all deposits required by law to be made by the Company
and its Subsidiaries with respect to the Company Taxes have been duly made, and
all material returns with respect to the Company Taxes which are levied on the
basis of income have been filed with, and where indicated on Schedule 2.20.1 of
the Company Schedule, have been examined by the relevant tax authorities through
the fiscal years ended on or before December 31, 1996, and no extension of time
for the assessment of deficiencies with respect to Company Taxes has been
granted by the Company and is in effect for any fiscal year. As of June 30,
1997, neither the Company nor any Subsidiary was liable for the payment of the
Company Taxes which are levied on the basis of income in any jurisdiction other
than those listed on Schedules 2.2 and 2.8 of the Company Schedule. No
deficiency or adjustment in respect of any of the Company Taxes has been
assessed against the Company or any Subsidiary prior to the date of this
Agreement and remains unpaid, other than such Company Taxes which are being
contested in good faith and disclosure of which has been previously made in
writing to the Purchaser, and to the knowledge of the Company there is not any
proposed or threatened assessment of additional liability for Company Taxes
(that remains unpaid) against the Company or any Subsidiary for any period
ending prior to June 30, 1997.
(b) Schedule 2.20.1 of the Company Schedule lists each material tax
incentive (other than generally available incentives that are not specifically
granted or awarded to the Company) to which the Company is entitled under the
laws of the State of Israel as of the date of this Agreement, the period for
which such tax incentive applies, and the nature of such tax incentive. To the
knowledge of the Company, the Company has complied with all material
requirements of Israeli law to be entitled to claim the tax incentives
identified in Schedule 2.20.1 of the Company Schedule. To the knowledge of the
Company, subject to the receipt of the approvals set forth in Section 8.3
hereof, the consummation of the stock purchase contemplated
12
by this Agreement will not materially and adversely affect the ability of the
Company to claim the benefit of any tax incentive referred to on Schedule 2.20.1
of the Company Schedule for the remaining duration of the incentive or require
any recapture of any such previous incentive claimed by the Company, and no
consent or approval of any governmental authority is required, other than as
contemplated by Section 8.3 hereof prior to consummation of the stock purchase
contemplated by this Agreement in order to preserve the entitlement of the
Company to any such incentive.
2.21. Environmental Matters. The Company and its Subsidiaries are in
substantial compliance with all applicable environmental regulations and
environmental standards applicable to the conduct of the business of the Company
and its Subsidiaries, as the case may be (except where the failure to be in such
compliance would not have a Material Adverse Effect on the Company), and there
exists no unlawfully stored or maintained toxic waste or other unlawful
environmental hazard that has not previously been disclosed in writing to the
Purchaser and which is not reflected in the Financial Statements, which would
have a Material Adverse Effect on the Company.
2.22. Agreements and Obligations.
(a) A "Listed Agreement" shall mean a material executory contract to which
the Company or any of its Subsidiaries or Holdings is a party as of the date of
this Agreement that is in one of the categories specified in the following
clauses "(i)" through "(xv)" and that is not an Excluded Agreement: (i) any
contract pursuant to which any Company Intellectual Property is being licensed
by the Company or any of its Subsidiaries to any third party (other than (A)
end-user licenses entered into in the ordinary course of business and (B) any
contract entered into on terms that do not materially deviate from the Company's
standard terms previously disclosed to the Purchaser), (ii) any contract
pursuant to which (A) a third party is licensing to the Company or any of its
Subsidiaries any material software, patents, or other proprietary information or
technical know-how and (B) the Company is required to pay a material royalty or
any other material fixed or variable fee or consideration for such licensing,
(iii) any employment contract that is with any employee whose annual
compensation exceeds $50,000 that has a remaining term exceeding six (6) months,
(iv) any consulting contract that is with any consultant whose annual
compensation exceeds $50,000, (v) any contract with any current officer,
director, employee or stockholder of the Company, the Seller or the Subsidiaries
(or with an affiliate or relative of any such officers, directors, employees or
stockholders) that is on terms that are less favorable to the Company than
comparable contracts negotiated at arm's length, or that requires the Company to
indemnify such officers, directors, employees or stockholders in their
capacities as such, (vi) any pension, retirement, profit sharing, deferred
compensation, health or life insurance, bonus or incentive plan, (vii) any
contract pursuant to which the Company or any of its Subsidiaries is leasing
real property from any third party, (viii) any contract pursuant to which the
Company or any of its Subsidiaries is leasing personal property from any third
party and which requires payments by the Company or any of its Subsidiaries of
more than $10,000 per annum, (ix) any union or other collective bargaining
agreement, (x) any contract for the purchase by the Company or any of its
Subsidiaries of materials, products, supplies or equipment which (A) requires
that the Company or any of its Subsidiaries pay in the future in excess of
$50,000, (B) contains any escalator or renegotiation or redetermination clause,
or (C) commits the
13
Company or any of its Subsidiaries for a fixed term of three months or more,
(xi) any agreement or instrument evidencing indebtedness for borrowed money in
excess of $50,000 or creating any security interest (other than a Permitted
Encumbrance) in any material property owned or used by the Company or any of its
Subsidiaries, (xii) any contract containing covenants limiting in any material
respect the legal right of the Company or any of its Subsidiaries to compete in
any material line of business in which the Company or any of its Subsidiaries is
or has historically been engaged, (xiii) any material reseller, original
equipment manufacturer or distribution agreement, (xiv) any contract with a
customer of the Company for the sharing of fees, the rebating of charges to such
customer, or other similar arrangement not reflected in the Company's books and
records, or (xv) any contract with holders of the Company's securities in their
capacities as such. Notwithstanding anything to the contrary contained in this
Agreement, a contract that is an "Excluded Agreement" shall not be deemed to be
a "Listed Agreement." An "Excluded Agreement" shall mean a contract that: (w) is
between or among two or more of the Company and its Subsidiaries or Holdings, or
(x) imposes no material future obligations on the Company or any of its
Subsidiaries, or (y) is expected to be fully performed, or is scheduled to
expire, on or prior to the date 90 days after the Closing Date without any
continuing material financial liability on the part of the Company or its
Subsidiaries, or (z) can be canceled or otherwise terminated by the Company or
any of its Subsidiaries on notice of 90 days or less without any continuing
material financial liability on the part of the Company or its Subsidiaries;
provided, however, that any agreement pursuant to which the Company or its
Subsidiaries license any Company Intellectual Property from any third party
shall not be deemed an Excluded Agreement by virtue of the preceding clauses (y)
or (z).
(b) Schedule 2.22 of the Company Schedule lists all of the Listed
Agreements. A true and correct copy of each Listed Agreement has been made
available to the Purchaser.
(c) The Company and its Subsidiaries are not in breach or default in
any material respect under any of the Listed Agreements such that the other
party would be permitted to terminate a Listed Agreement or would have a claim
for material damages against the Company or its Subsidiaries and to the
knowledge of the Company (i) no other party thereto is in default in any
material respect thereunder, and (ii) no event has occurred which, with the
giving of notice or the passage of time, would become such a default by the
Company or any of its Subsidiaries such that such other party would be permitted
to terminate any such Listed Agreement or would have a claim for material
damages against the defaulting party. The Company has taken all corporate action
necessary for the Company to properly enter into the Listed Agreements and has
not terminated or taken any action to terminate any of the Listed Agreements. To
the knowledge of the Company, there are no writings extrinsic to any of such
Listed Agreements which would materially modify their terms.
(d) None of the Listed Agreements that have been furnished or made
available only in a language other than English or Hebrew: (i) limits in any
material respect the legal right of the Company or its Subsidiaries to compete
in any material line of business, (ii) contains any unduly burdensome term or
covenant that is reasonably likely to have a Material Adverse Effect on the
Company, or (iii) grants a material exclusive license to a third party as to any
Company Intellectual Property.
14
2.23. Inventory. The inventory of the Company and its Subsidiaries as
reflected on the balance sheet included in the Unaudited Consolidated Financial
Statements (which has not been sold by the Company or its Subsidiaries since
June 30, 1997) is, in all material respects: (i) in good and merchantable
condition, and (ii) currently of a useable and saleable quality. Such inventory
is carried on the relevant books of account at values that approximate the lower
of cost or market, in conformity with Israel generally accepted accounting
principles applied on a consistent basis.
2.24. Accounts Receivable. All accounts receivable reflected on the balance
sheet included in the Unaudited Consolidated Financial Statements have arisen in
the ordinary course of business and, to the extent not collected prior to the
date hereof, represent valid obligations due to the Company or its Subsidiaries,
in the aggregate recorded amounts thereof, except to the extent set forth in the
Unaudited Consolidated Financial Statements as reserves for bad debts.
2.25. Condition of Plant and Equipment. All machinery and equipment owned
by the Company or any Subsidiary or otherwise used in the conduct of their
business is, to the knowledge of the Company, in good operating condition and
repair, except for normal breakdowns, reasonable wear and use and damage by fire
or unavoidable casualty, not materially affecting the business of the Company.
2.26. Customers and Suppliers. Schedule 2.26 of the Company Schedule lists
the ten largest customers and the ten largest suppliers of the Company and its
Subsidiaries on a consolidated basis for the year ended December 31, 1996. Since
January 1, 1997, there has been no material adverse change in the business
relationship of the Company with any customer or supplier named on Schedule 2.26
of the Company Schedule (except for fluctuations in the level of orders and
changes in the Company's customer base which have not had and are not reasonably
likely to have a Material Adverse Effect on the Company).
2.27. Banking Arrangements. Schedule 2.27 of the Company Schedule sets
forth: (i) the name of each bank, trust company, brokerage firm or other
financial institution in or with which the Company or a Subsidiary has an
account having a balance of at least $10,000 as of the date of this Agreement, a
credit line with an outstanding balance of at least $10,000 as of the date of
this Agreement or a safety deposit box containing assets with a value of at
least $10,000 as of the date of this Agreement and the names of all persons
authorized as of the date of this Agreement to draw thereon or having access
thereto, and a brief statement describing the purpose of each such account.
2.28. Company Products. To the knowledge of the Company, none of the
existing products of the Company have any defects in design or otherwise fail to
comply with their published specifications where, in either case, such defects
or non-compliance would have a Material Adverse Effect on the Company.
2.29. Potential Conflicts of Interest; Powers of Attorney. To the knowledge
of the Company, no officer, director or greater than 5% shareholder of the
Company or its Subsidiaries, or any member of their immediate families, owns any
material property or rights tangible or intangible, the use of which is
necessary for such business as now conducted. Schedule 2.29
15
of the Company Schedule sets forth the names of all persons now holding powers
of attorney from the Company or any Subsidiary as of the date of this Agreement,
and a summary of the terms thereof.
2.30. Interested Party Transactions. Since January 1, 1996, there have been
no transactions involving the Company or the Subsidiaries and any interested
parties which come within the purview of Chapter 4A of the Companies Ordinance
(new Version) 1983.
2.31. Brokers. Except with respect to the engagement of Hambrecht & Quist
LLC by the Company, the terms of which have been presented to the Purchaser,
neither the Company nor any of its officers or directors has engaged, consented
to, or authorized any broker or investment banker to act on its or his behalf,
directly or indirectly, as a broker or finder in connection with the
transactions contemplated by this Agreement.
2.32. Compliance with Law. The Company is in compliance with all laws,
regulations and orders applicable to its business, including, without
limitation, applicable environmental, anti-pollution, building, zoning or health
laws, ordinances and regulations in respect of its plants, structures and
equipment, except where the failure by the Company to be in compliance with such
laws, regulations and orders would not have a Material Adverse Effect on the
Company. The Company has not received any written notification that it is in
violation of any such laws, regulations or orders, except for (i) notices that
have been complied with in all material respects, (ii) notices that have been
withdrawn, or (iii) notices of violations that have been cured in all material
respects, or that relate to violations which can no longer form the basis of any
material liability to the Company or would not otherwise reasonably be expected
to have a Material Adverse Effect on the Company. Neither the Company nor, to
the knowledge of the Company, any employee or agent of the Company acting on
behalf of the Company has made any illegal payments to any governmental or
quasi-governmental officials.
2.33. Foreign Investor. The Seller is not a U.S. person and is not
acquiring the shares of Purchaser Common Stock for the account or benefit of any
U.S. person, as those terms are defined in Regulation S under the Securities
Act.
2.34. Resales Subject to U.S. Securities Laws. The Seller acknowledges that
the shares of Purchaser Common Stock being issued to the Seller pursuant to this
Agreement have not been registered under the Securities Act, and agrees to
resell the shares of Purchaser Common Stock being issued to the Seller pursuant
to this Agreement only in accordance with the Seller's Agreement.
2.35. Offshore Execution. This Agreement is being executed by the Seller
outside the United States.
2.36. Holdings.
(a) Holdings (i) has not conducted any material business following its
initial organization, (ii) has not incurred any material liabilities since
January 1, 1997 of the type and magnitude required to be reflected in the
liabilities column of a consolidated balance sheet of Holdings prepared in
accordance with Israel generally accepted accounting principles,
16
or (iii) has not directly incurred liabilities or obligations, actual or
contingent, that exceed or may exceed in the aggregate $10,000. Holdings (1) has
no subsidiaries, (2) does not own any securities of any entity other than the
Company, and (3) has title to 38,770 ordinary shares of the Company, free and
clear of all liens, pledges, charges, encumbrances, security interests,
restrictive agreements and assessments (other than restrictions on
transferability generally imposed on securities under applicable securities
laws).
(b) The authorized capital of Holdings consists of 238,000 ordinary
shares, NIS .010 nominal value per share, of which 81,749 shares are issued and
outstanding as of the date of this Agreement. All of the issued and outstanding
ordinary shares of Holdings have been legally and validly issued and are fully
paid and nonassessable. There are no outstanding options, warrants, rights,
calls, commitments or agreements calling for the issuance or transfer, sale or
disposition by Holdings of any shares of the capital stock of Holdings, or of
any securities convertible or exchangeable, actually or contingently, into any
such capital stock, to which Holdings is a party or by which Holdings is bound.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller, except as
otherwise set forth in the Disclosure Schedule being furnished by the Purchaser
to the Seller simultaneously with the execution and delivery of this Agreement
(the "Purchaser Schedule"), or as disclosed or otherwise described in any of the
documents listed or set forth in the Purchaser Schedule or this Article III, as
follows:
3.1. Organization of Purchaser. The Purchaser is a corporation duly
organized and validly existing under the laws of the State of California and has
full power and authority to carry on its business as now conducted, and to own
its assets. The Purchaser is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified and in
good standing would have a Material Adverse Effect on the Purchaser, is duly
authorized and licensed under all laws, regulations, ordinances or orders of
public authorities, or otherwise, to carry on its business in the places and in
the manner presently conducted, except for qualifications, authorizations or
licenses for which the failure to obtain, if required, would not have a Material
Adverse Effect on the Purchaser. The Purchaser has heretofore made available to
the Company true and complete copies of its Articles of Incorporation and Bylaws
as certified by the Secretary of the Purchaser, as in effect on the date hereof.
For purposes of this Agreement, those corporations in which the Purchaser,
directly or indirectly, through other corporations or otherwise, owns 50% or
more of the outstanding capital stock shall be deemed to be a Purchaser
Subsidiary.
3.2. Nonviolation. The consummation by the Purchaser of the stock purchase
contemplated by this Agreement will not (a) violate or conflict with the
Articles of Incorporation or Bylaws of the Purchaser or any Purchaser Subsidiary
(b) except as set forth in this Agreement, require the consent, approval or
authorization of any governmental or quasi-governmental person or entity, except
where the failure to obtain such consent, approval or
17
authorization would not have a Material Adverse Effect on the Purchaser, or (c)
give rise to a right to terminate by the other party thereto or result in a
breach of the terms or conditions of or constitute a default under, or violate,
as the case may be, any Material Agreement (as defined below).
3.3. Authority for Agreement. All corporate and other proceedings required
to be taken by or on behalf of the Purchaser to authorize and approve the
entering into and carrying out of this Agreement by the Purchaser have been duly
executed and properly taken. This Agreement has been duly executed and delivered
by the Purchaser and is valid and binding upon the Purchaser, subject, as to
enforceability, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
principles of equity.
3.4. Capitalization. As of August 28, 1997, the authorized capital stock of
the Purchaser consisted of (i) 5,000,000 shares of Preferred Stock, $.01 par
value per share, of which no shares were issued and outstanding, and (ii)
45,000,000 shares of Purchaser Common Stock, of which 26,003,636 shares were
issued and outstanding. All of the issued and outstanding shares of Purchaser
Common Stock have been legally and validly issued and are fully paid and
nonassessable. The shares of Purchaser Common Stock to be issued pursuant to
this Agreement will be duly authorized, validly issued, fully paid, and
nonassessable.
3.5. Options, Warrants, Etc. Other than as set forth in Section 3.4 hereof,
there are no other outstanding shares of capital stock or voting securities of
the Purchaser other than shares of Purchaser Common Stock issued under the
Purchaser's various stock option plans as in effect at the date hereof (the
"Purchaser Stock Option Plans"). As of the close of business on August 28, 1997,
the Purchaser has reserved 5,950,000 shares of Purchaser Common Stock for
issuance to employees and directors pursuant to the Purchaser Stock Option
Plans, of which 3,897,051 shares were subject to outstanding, unexercised
options. Other than this Agreement and pursuant to the Purchaser Stock Option
Plans, and except as disclosed in the Purchaser SEC Documents (as defined
below), there are no other options, warrants, calls, rights, commitments or
agreements of any character to which the Purchaser or any Purchaser Subsidiary
is a party or is bound obligating the Purchaser or any Purchaser Subsidiary to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of the Purchaser
or any Purchaser Subsidiary or obligating the Purchaser or any Purchaser
Subsidiary to grant, extend or enter into any such option, warrant, call, right,
commitment or agreement.
3.6. SEC Documents; Financial Statements. The Purchaser has filed all
statements, reports, registration statements, proxy statements and other
documents required to be filed by the Purchaser with the Securities and Exchange
Commission (the "SEC") since January 1, 1996 and has made available to the
Company a true and complete copy of each such statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act), definitive proxy statement, and other documents in the form
filed with the SEC by the Purchaser from January 1, 1996, and, until the Closing
Date, the Purchaser will have furnished the Company with true and complete
copies of any additional documents filed with the SEC by the Purchaser prior to
the Closing Date (all such statements, reports, registration statements, proxy
statements and other documents filed by the Purchaser with the SEC are
18
referred to as the "Purchaser SEC Documents"). In addition, the Purchaser has
made available to the Company all exhibits to the Purchaser SEC Documents filed
prior to the date hereof, and will promptly make available to the Company all
exhibits to any additional Purchaser SEC Documents filed prior to the Closing
Date. All documents required to be filed as exhibits to the Purchaser SEC
Documents have been so filed, and all Material Agreements (as defined below) so
filed as exhibits are in full force and effect, except those which have expired
in accordance with their terms, and Purchaser is not in default under any such
Material Agreements. As of their respective filing dates, the Purchaser SEC
Documents complied in all material respects with the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Securities Act, and none of the Purchaser SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading, except to the extent
corrected by a subsequently filed Purchaser SEC Document. The financial
statements of Purchaser, including the notes thereto, included in the Purchaser
SEC Documents (the "Purchaser Financial Statements") were complete and correct
in all material respects as of their respective dates, complied as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto as of their
respective dates, and have been prepared in accordance with U.S. generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods indicated and consistent with each other (except as may be indicated
in the notes thereto or, in the case of unaudited statements included in
Quarterly Reports on Form 10-Q, as permitted by Form 10-Q of the SEC). The
Purchaser Financial Statements fairly present the consolidated financial
condition and operating results of the Purchaser at the dates and during the
periods indicated therein (subject, in the case of unaudited statements, to
normal, recurring year-end audit adjustments not material in scope or amount).
There has been no change in the Purchaser accounting policies, except as
described in the notes to the Purchaser Financial Statements, since January 1,
1996.
3.7. Absence of Certain Changes. Since June 30, 1997 (the "Purchaser
Balance Sheet Date"), the Purchaser has conducted its business in the ordinary
course consistent with past practice and there has not occurred: (i) any change,
event or condition that has resulted in, or might reasonably be expected to
result in, a Material Adverse Effect on the Purchaser; (ii) any change in
accounting methods or practices by the Purchaser or any revaluation by the
Purchaser of any of its assets; (iii) any declaration, setting aside, or payment
of a dividend or other distribution with respect to the shares of the Purchaser,
or any direct or indirect redemption, purchase or other acquisition by the
Purchaser of any of its shares of capital stock, except for regular dividends
and stock repurchases at market prices at the time of repurchase, and except as
set forth in the Purchaser SEC Documents; (iv) any material contract entered
into by the Purchaser or any Purchaser Subsidiary other than in the ordinary
course of business, or any material amendment or termination of, or default
under, any material contract to which the Purchaser or any Purchaser Subsidiary
is a party or by which it is bound; or (v) any negotiation or agreement by the
Purchaser or any Purchaser Subsidiary to do any of the things described in the
preceding clauses (i) through (iv).
3.8. Absence of Undisclosed Liabilities. As of the Purchaser Balance Sheet
Date, the Purchaser has no material obligations or liabilities of the type and
magnitude required to be disclosed in the liabilities column of a consolidated
balance sheet prepared in accordance with
19
GAAP (whether accrued, absolute, contingent or otherwise, and whether due or to
become due) other than (i) those set forth or adequately provided for in the
balance sheet included in Purchaser's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 (the "Purchaser Balance Sheet"), (ii) those expressly
disclosed in any Exhibit hereto or in the Purchaser Schedule, (iii) those
incurred in connection with the execution of this Agreement, and (iv) those
fully covered by insurance and not otherwise having a Material Adverse Effect on
the Purchaser.
3.9. Permits. The Purchaser and each Purchaser Subsidiary has all
governmental permits, licenses, orders, approvals, franchises and other rights
and privileges necessary in order for them to carry on their respective business
as presently conducted, except such permits, licenses, orders, approvals,
franchises, and other rights and privileges of which the failure to obtain, if
required, would not have a Material Adverse Effect on the Purchaser.
3.10. Litigation. There are no actions, suits, legal proceedings or
governmental or quasi-governmental investigations, pending before any court or
governmental agency or before any arbitrator of any kind, or any order,
injunction or decree outstanding, and, to the knowledge of the Purchaser, no
person has since January 1, 1996 threatened orally (to any executive officer or
director of the Purchaser) or in writing to commence any action, suit or legal
proceeding against the Purchaser or any Purchaser Subsidiary or against or
relating to either of their property, assets or business, that would reasonably
be expected to have a Material Adverse Effect on the Purchaser. Neither the
Purchaser nor any Purchaser Subsidiary is in violation of any applicable law,
regulation, ordinance, order, injunction, decree, award or other requirement of
any governmental or quasi-governmental body, court, or arbitrator relating to
its property, assets, or business, except for violations which would not have a
Material Adverse Effect on the Purchaser.
3.11. Broker's and Finders' Fees. Except for the fees of its advisor, Volpe
Brown Whelan & Company LLC, the Purchaser has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or investment bankers' fees or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
3.12. Material Agreements
(a) A "Material Agreement" shall mean any agreement or contract to
which the Purchaser or any Purchaser Subsidiary is a party or by which the
Purchaser or a Purchaser Subsidiary is bound and that is or is required to be
filed as an exhibit to any of the Purchaser SEC Documents pursuant to the
applicable rules and regulations of the SEC and (ii) that has not expired or
been validly terminated prior to the date hereof.
(b) The Purchaser and the Purchaser Subsidiaries are not in breach or
default in any material respect under any of the Material Agreements such that
the other party would be permitted to terminate a Material Agreement or would
have a claim for material damages against the Purchaser or the Purchaser
Subsidiaries. To the knowledge of the Purchaser (i) no other party thereto is in
any default in any material respect under any Material Agreement and (ii) no
event has occurred which, with the giving of notice or the passage of time,
would become such a default by the Purchaser or any of the Purchaser
Subsidiaries such that
20
such other party would be permitted to terminate such Material Agreement or
would have a claim for material damages against the defaulting party. All of the
Material Agreements are valid and in full force and effect and, to the knowledge
of the Purchaser, none is subject to rescission or reformation and there are no
circumstances or writings extrinsic to any of such Material Agreements which
would materially modify their terms or prevent their assignment.
3.13. Compliance with Law. The Purchaser is in compliance with all laws,
regulations and orders applicable to its business, including, without
limitation, applicable environmental, anti-pollution, building, zoning or health
laws, ordinances and regulations in respect of its plants, structures and
equipment, except where the failure by the Purchaser to be in compliance with
such laws, regulations and orders would not have a Material Adverse Effect on
the Purchaser. The Purchaser has not received any notification that it is in
violation of any such laws, regulations or orders, except for (i) notices that
have been complied with in all material respects, (ii) notices that have been
withdrawn, or (iii) notices of violations that have been cured in all material
respects or that relate to violations which can no longer form the basis of any
material liability of the Purchaser or would otherwise reasonably be expected to
have a Material Adverse Effect on the Purchaser. Neither the Purchaser nor, to
the knowledge of the Purchaser, any employee or agent of the Purchaser acting on
behalf of the Purchaser has made any illegal payments to any governmental or
quasi-governmental officials.
3.14. Purchaser Taxes. All taxes, including, without limitation, income,
property, sales, use, franchise, excise, value added, capital, social security,
withholding, and employees' withholding taxes imposed by the United States, by
any foreign country, or by any political subdivision of the United States or any
foreign country, which have become due and payable by the Purchaser or any of
the Purchaser Subsidiaries prior to the date of this Agreement and which are
material to the Purchaser and the Purchaser Subsidiaries, including any material
taxes for which the Purchaser or any of the Purchaser Subsidiaries is liable
under contract or other arrangement, together with any interest or penalties
thereon (the "Purchaser Taxes"), have been paid in full or adequately provided
for by reserves shown on the books of account of the Purchaser; all deposits
required by law to be made by the Purchaser and the Purchaser Subsidiaries with
respect to the Purchaser Taxes have been duly made. No deficiency or adjustment
in respect of any of the Purchaser Taxes has been assessed against the Purchaser
or any Purchaser Subsidiary prior to the date of this Agreement and remains
unpaid, other than such Purchaser Taxes which are being contested in good faith
and to the knowledge of the Purchaser there is not any proposed or threatened
assessment of additional liability for the Purchaser Taxes (that remains unpaid)
against the Purchaser or any Purchaser Subsidiary for any period ending prior to
December 31 1996.
3.15. Investment Intent of the Purchaser. Purchaser is acquiring the
Transferred Company Shares and the Holdings Shares for its own account and for
investment, and not with a view to, or for sale in connection with, any
distribution of any of such shares.
21
ARTICLE IV
CERTAIN TRANSACTIONS AND AGREEMENTS
4.1. The Confidentiality Agreement. That certain Mutual Non-Disclosure
Agreement, dated as of June 12, 1997 between the Company and the Purchaser (the
"Confidentiality Agreement") shall remain in full force and effect between them
and shall not be terminated or otherwise modified by this Agreement and shall
survive any termination of this Agreement in accordance with its terms.
4.2. Conduct of Business of the Company and Its Subsidiaries. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Closing Date (the "Pre-Closing Period"),
the Company agrees (except as otherwise provided in the last sentence of this
Section 4.2), and shall (except as otherwise provided in the last sentence of
Section 4.2) cause its Subsidiaries: (i) to carry on their business in all
material respects in the usual, regular and ordinary course in substantially the
same manner as heretofore conducted, (ii) to use their reasonable efforts to
preserve substantially intact their present business organizations, (iii) to use
their reasonable efforts consistent with past practice to keep available the
services of their present officers and key employees, (iv) to use reasonable
efforts consistent with past practice to preserve their relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with them, and (v) to promptly notify the Purchaser in
writing, after obtaining knowledge, of any event or occurrence which would be
likely to cause any representation or warranty contained in this Agreement and
made by it to be untrue or inaccurate at any time from the date of this
Agreement to the Closing Date, such that the condition set forth in the first
sentence of Section 7.1 hereof would not be satisfied as a result thereof.
Without limitation of the foregoing, the Company agrees that during the
Pre-Closing Period (except as otherwise provided in the last sentence of this
Section 4.2), it will not take any of the following actions:
(a) Charter Documents. Amend its Memorandum of Association or Articles
of Association;
(b) Issuance of Securities. Issue, deliver or sell any shares of its
capital stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or enter into any agreements or commitments of any
character obligating it to issue, any such shares or other convertible
securities;
(c) Dividends; Changes in Capital Stock. Declare or pay any dividends
on, or make any other distributions (whether in cash, stock or property) in
respect of, any shares of its capital stock, or split, combine or reclassify any
shares of its capital stock, or issue any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or repurchase or
otherwise acquire any shares of its capital stock;
22
(d) Extraordinary Transactions. Enter into any material transaction
outside the ordinary course of business;
(e) Stock Option Plans, Etc. Adopt any stock option plan;
(f) Intellectual Property. Transfer to any person or entity any rights
to the Company Intellectual Property other than in connection with the sale of
its products in the ordinary course of business consistent with past practice;
(g) Exclusive Rights. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing or other exclusive rights
of any type or scope with respect to any Material Company Products or the
Company Intellectual Property; or
(h) Other. Agree in writing to take any of the actions described in
clauses "(a)" through "(g)" of this sentence.
Notwithstanding anything to the contrary contained in this Section 4.2 or
elsewhere in this Agreement, the Company and its Subsidiaries shall not be
prohibited from taking, and shall be permitted to take, any of the following
actions (without being deemed to have breached or violated this Agreement): (i)
any action that is contemplated or permitted by, or otherwise consistent with
the terms of, this Agreement, (ii) any action that is referred to in the Company
Schedule or is contemplated or required by the terms of any agreement or other
document identified in the Company Schedule, (iii) any action that is reasonably
determined by the Company to be necessary or desirable for the purpose of
facilitating the consummation of any of the transactions contemplated by this
Agreement or for the purpose of facilitating the compliance by the Company or
any of its Subsidiaries with any applicable law, rule or regulation, or (iv) any
action that is approved in writing by the Purchaser (it being understood that
the Purchaser shall not unreasonably withhold its approval of any such action
that is proposed to be taken by the Company).
4.3. Conduct of Business of Purchaser. The Purchaser agrees that during the
Pre-Closing Period (except as otherwise provided in the last sentence of this
Section 4.3), it will not take or permit any Purchaser Subsidiary to take any of
the following actions:
(a) Charter Documents. Amend its Articles of Incorporation or Bylaws;
(b) Issuance of Securities. Issue, deliver or sell any shares of its
capital stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or enter into any agreements or commitments of any
character obligating it to issue, any such shares or other convertible
securities, other than (1) the issuance, delivery and/or sale of options to
purchase a reasonable number of shares of Purchaser Common Stock in connection
with the hiring, retention and/or promotion of employees of the Purchaser or the
Purchaser Subsidiaries, or (2) the issuance of shares of Purchaser Common Stock
pursuant to the exercise of stock options or other rights outstanding as of the
date of this Agreement or issued after the date of this Agreement in accordance
with clause "(1)" of this Section 4.3(b);
23
(c) Dividends; Changes in Capital Stock. Declare or pay any dividends
on, or make any other distributions (whether in cash, stock or property) in
respect of, any shares of its capital stock, or split, combine or reclassify any
of its capital stock, or issue any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or repurchase or otherwise
acquire any shares of its capital stock except from former employees, directors
and consultants in accordance with agreements existing as of the date of this
Agreement providing for the repurchase of shares in connection with any
termination of service to it or its subsidiaries;
(d) Extraordinary Transactions. Enter into any material transaction
outside the ordinary course of business; or
(e) Other. Agree in writing to take any of the actions described in
clauses "(a)" through "(d)" of this Section 4.3.
Notwithstanding anything to the contrary contained in this Section 4.3 or
elsewhere in this Agreement, the Purchaser and the Purchaser Subsidiaries shall
not be prohibited from taking, and shall be permitted to take, (i) any action
that is contemplated or permitted by, or otherwise consistent with the terms of,
this Agreement, (ii) any action that is referred to in the Purchaser Schedule or
is contemplated or required by the terms of any agreement or other document
identified in the Purchaser Schedule, (iii) any action that is reasonably
determined by the Purchaser to be necessary or desirable for the purpose of
facilitating the consummation of any of the transactions contemplated by this
Agreement or for the purpose of facilitating the compliance by the Purchaser or
any Purchaser Subsidiary with any applicable law, rule or regulation, or (iv)
any action that is approved in writing by the Company (it being understood that
the Company shall not unreasonably withhold its approval of any such action that
is proposed to be taken by the Purchaser).
4.4. Access to Information.
(a) During the Pre-Closing Period, the Seller will cause the Company
to grant the Purchaser and its accountants, legal counsel and other
representatives access, during normal business hours and upon reasonable advance
notice throughout the period prior to the Closing, to all of the properties,
books, contracts, commitments and records relating to the business, assets and
liabilities of the Company; provided, however, that (i) the Purchaser shall not
contact, and the Purchaser shall ensure that none of its accountants, legal
counsel or other representatives contacts, any employee of the Company or any of
the Subsidiaries without the prior authorization of one of the Individual Parent
Shareholders, and (ii) the Purchaser shall ensure that none of its employees,
legal counsel or other representatives interferes with or otherwise disrupts the
business or operations of the Company or any of its Subsidiaries while
exercising the rights provided under this Section 4.4(a).
(b) The Purchaser will grant the Seller and the Company and their
respective accountants, legal counsel and other representatives access, during
normal business hours and upon reasonable advance notice throughout the period
prior to the Closing, to all of the properties, books, contracts, commitments
and records relating to the business, assets and liabilities of the Purchaser;
provided, however, that (i) neither the Company nor the Seller shall contact,
and the Company and
24
the Seller shall ensure that none of their respective accountants, legal counsel
or other representatives contacts, any employee of the Purchaser (other than
those who will be engaged in the negotiation of this Agreement), without the
prior authorization of Robert F. Fougner, and (ii) the Company and the Seller
shall ensure that none of their respective employees, legal counsel or other
representatives interferes with or otherwise disrupts the business or operations
of the Purchaser while exercising the rights provided in this Section 4.4(b).
4.5. No Solicitation. During the Pre-Closing Period, neither the Company
nor the Seller will, and the Company and the Seller will not authorize any of
its officers, directors, employees or other agents to: (i) take any action to
solicit, initiate or knowingly encourage any offer or proposal by any third
party for, or any indication of interest by any third party in, a merger or
business combination by such third party with, the acquisition by such third
party of any voting power in, or the sale or transfer (outside the ordinary
course of business) to such third party of a significant portion of the assets
of, the Company or any material Subsidiary, or (ii) engage in negotiations with,
or disclose any nonpublic information relating to the Company to, or afford
access to the properties, books or records of the Company or any Subsidiary to,
any third party that has advised the Company that it may be considering making,
or that it has made, an offer or proposal for, or any indication of interest in,
a merger or business combination with, the acquisition of any of the voting
power in, or the sale or transfer (outside the ordinary course of business) of a
significant portion of the assets of, the Company or any material Subsidiary,
other than the transactions contemplated by this Agreement.
4.6. Seller's Agreement. On or before the Closing Date, the Seller and each
of its shareholders (the "Parent Shareholders") shall execute and deliver to the
Purchaser, and the Purchaser shall execute and deliver to the Seller and to each
of the Parent Shareholders, that certain Seller's Agreement in substantially the
form attached hereto as Exhibit 4.6 ("Seller's Agreement") providing (among
other things) for certain resale restrictions and registration rights following
the Closing as to the shares of Purchaser Common Stock issued to the Seller
hereunder.
4.7. Further Assurances. Each of the parties hereto agrees that it will,
from time to time after the date of this Agreement, execute and deliver such
other certificates, documents and instruments and take such other action as may
be reasonably requested by any of the other parties to carry out the actions and
transactions contemplated by this Agreement. Each of the parties hereto shall
use all reasonable efforts to take, or cause to be taken, all actions necessary
to consummate the transactions contemplated by this Agreement. Without limiting
the generality of the foregoing, each party to this Agreement (i) shall make all
filings (if any) and give all notices (if any) required to be made and given by
such party in connection with the transactions contemplated by this Agreement,
(ii) shall use all reasonable efforts to obtain each consent and approval (if
any) required to be obtained (pursuant to any applicable legal requirement or
contract, or otherwise) by such party in connection with the transactions
contemplated by this Agreement, (iii) shall cooperate with each other party
hereto in connection with any filings required to be made or any consents or
approvals required to be obtained by such other party, and (iv) shall use all
reasonable efforts to lift any restraint, injunction or other legal bar to the
consummation of the transactions contemplated by this Agreement.
25
4.8. Listing of Additional Shares. Prior to the Closing Date, the Purchaser
shall file with the Nasdaq National Market a Notification Form for Listing of
Additional Shares with respect to those shares of Purchaser Common Stock to be
issued in connection with the transactions contemplated by this Agreement.
4.9. Visitation. The Purchaser will afford to one representative of the
Seller or the Parent Shareholders ("Seller's Board Representative") the right as
a non-voting representative of the Seller or of the Parent Shareholders: (a) to
attend all meetings of the Purchaser's Board of Directors (the "Board") (subject
to the Purchaser's right to request in good faith that such representative
excuse himself from executive sessions of the Board where a conflict of interest
might be present and from any Board meeting or any part thereof if such
exclusion is reasonably necessary to preserve the attorney-client privilege),
and (b) upon request, to receive copies of all notices for and materials
distributed at or in connection with such meetings, as well as any proposed
written actions by the Board concurrently with the distribution of such items to
the Board. Any change in the Seller's Board Representative shall require ten
(10) days prior written notice to the Purchaser and the Purchaser's prior
written approval, which shall not be unreasonably withheld if any of the Parent
Shareholders or an officer of any of the Parent Shareholders is the newly
designated Seller's Board Representative. Commencing as of the Purchaser's 1998
annual meeting of shareholders, the Purchaser agrees, if requested by at least
three of the Parent Shareholders, to use its reasonable efforts to: (1) cause
the Seller's Board Representative to be elected to the Board; and (2) if
required to permit Purchaser to comply with the preceding clause (1), amend the
Purchaser's bylaws to increase the number of authorized positions on the Board
to ten (10). The Purchaser's obligations pursuant to this Section 4.9 shall
cease at such time as the aggregate number of shares of Purchaser Common Stock
beneficially owned by the Seller, the Parent Shareholders and the respective
relatives and affiliates of the Seller and the Parent Shareholders is less than
1,500,000 shares of Purchaser Common Stock (as adjusted for stock splits, stock
dividends and the like).
4.10. Employee Benefits. For a period of not less than two years after the
Closing Date and subject to such adjustments as are reasonably required to
reflect local laws and commercial customs relating to employee benefits, the
Purchaser shall, and shall cause the Company and its Subsidiaries to, provide
each employee of the Company and its Subsidiaries with benefits, including
health and welfare and paid-time off benefits, which either are equivalent to
those currently provided by the Company or, if changed, are no less favorable in
the aggregate than those provided by the Purchaser to its existing employees of
equal rank and seniority. To the extent that any employee of the Company or any
of its Subsidiaries becomes eligible to participate in any employee benefit plan
of the Purchaser after the Closing Date, the Purchaser shall, and shall cause
the Company and its Subsidiaries to: (i) credit such employee's service with the
Company or its Subsidiaries (to the same extent as such service was credited
under the similar employee benefit plans of the Company and its Subsidiaries
immediately prior to the Closing Date) for purposes of determining eligibility
to participate in and vesting under, and for purposes of calculating the
benefits under, such employee benefit plan of the Purchaser, (ii) waive any
pre-existing condition limitations, waiting periods or similar limitations under
such employee benefit plan of the Purchaser and (iii) provide such employee with
credit for any co-payments previously made and any deductibles previously
satisfied.
26
4.11. Indemnification.
(a) For a period of at least seven years from the Closing Date, the
Purchaser shall, and shall cause the Company to, fulfill and honor in all
respects all rights to indemnification existing in favor of the current
directors and officers of the Company (the "Indemnified Parties"), as provided
in the Company's Articles of Association (as in effect as of the date of this
Agreement) and as provided in any indemnification agreements between the Company
and such Indemnified Parties (as in effect as of the date of this Agreement) and
as otherwise existing in favor of the Indemnified Parties; provided that nothing
contained herein shall obligate the Purchaser to maintain any directors' and
officers' liability insurance in favor of the Indemnified Parties.
(b) Without limiting the generality of the foregoing, the Purchaser
shall ensure that adequate funds are available (either directly from the
Purchaser or through the Company) to the Indemnified Parties in order to ensure
that the indemnification obligations referred to in this Section 4.11 are fully
satisfied. In the event any claim, action or proceeding is asserted or commenced
against any Indemnified Party, (1) after the Closing Date, the Purchaser shall
advance and pay the reasonable fees and expenses of any counsel retained by such
Indemnified Party in connection with such claim, action or proceeding promptly
after receipt of a request therefor from such Indemnified Party, and (2) the
Purchaser shall cooperate with such Indemnified Party and such Indemnified
Party's counsel, and shall cause the Company to cooperate with such Indemnified
Party and such Indemnified Party's counsel, in the defense of such claim, action
or proceeding.
(c) This Section 4.11 shall survive the consummation of the
transactions contemplated hereby, is intended to benefit and may be enforced by
the Indemnified Parties, and shall be binding on all successors and assigns of
the Purchaser and the Company.
(d) The Purchaser shall pay all expenses, including attorneys' fees,
that may be incurred by any Indemnified Party in enforcing the indemnity and
other obligations provided for in this Section 4.11.
(e) Notwithstanding any term or condition of this Section 4.11, no
indemnification shall be made by the Company or the Purchaser pursuant to
Section 4.11(a) (or pursuant to any indemnification agreement or instrument
referenced in Section 4.11(a)) to any Indemnified Party if the facts or
circumstances that would otherwise give rise to such right of indemnification
further give the Purchaser a valid and meritorious basis for obtaining
indemnification (exclusive of the limits set forth in Sections 5.5, 5.6 and 5.7
hereof) under Article V hereof.
4.12. Compliance with Chief Scientist Regulation. The Purchaser shall
provide any undertakings as are reasonably required by the Chief Scientist of
the Ministry of Industry and Commerce with regard to maintaining ownership of
the Company Intellectual Property in the State of Israel and with regard to
such other matters as are reasonably required by the Chief Scientist of the
Ministry of Industry and Commerce, in order to obtain the consent referred to in
Sections 7.4(a) and 8.3(b) hereof.
27
4.13. Section 338 Election. At or following the Closing, the Seller agrees,
if requested in writing by the Purchaser, to make an election under Internal
Revenue Code Section 338 ("Section 338 Election") with respect to the
transactions contemplated hereby and to execute and deliver to the Company such
elections, approvals and other documents and to otherwise take such action as
the Purchaser shall reasonably request to effect the Section 338 Election for
U.S. income tax purposes.
ARTICLE V
INDEMNIFICATION; REMEDIES
5.1. Survival. All pre-Closing covenants of the parties shall terminate and
expire as of the Closing Date, and all liability of the parties with respect to
such covenants shall thereupon be extinguished. All representations and
warranties contained in this Agreement (each as modified by the Company Schedule
and the Purchaser Schedule, as the case may be, and any update or supplement to
the Company Schedule or the Purchaser Schedule delivered to Purchaser or the
Company, as the case may be, as provided in this Agreement) shall survive the
Closing until the second anniversary of the Closing Date (the "Expiration
Date"), at which time such representations and warranties shall terminate and
expire and shall cease to be of any force or effect, and all liability of the
parties with respect to such representations and warranties shall thereupon be
extinguished; provided, however, that (i) if, prior to the Expiration Date, the
Purchaser shall have duly delivered a Claim Notice to both the Seller's
Representative and the Escrow Agent in conformity with all of the applicable
procedures set forth in the Escrow Agreement and in Section 5.7 hereof then the
specific indemnification claim set forth in such Claim Notice shall survive the
Expiration Date (and shall not be extinguished thereby), and (ii) if, prior to
the Expiration Date, the Seller's Representative shall have duly delivered a
Claim Notice to the Purchaser in conformity with all of the applicable
procedures set forth in Section 5.7 herof, then the specific indemnification
claim set forth in such Claim Notice shall survive the Expiration Date (and
shall not be extinguished thereby).
5.2. Indemnification by the Seller. Subject to the limitations on
indemnification set forth in Sections 5.5, 5.6 and 5.7 hereof and elsewhere in
this Agreement, from and after the Closing Date, the Seller shall, from and to
the extent of the Escrow Fund (as defined in the Escrow Agreement), indemnify
and hold harmless the Purchaser and each of the Purchaser Subsidiaries (which
shall be deemed to include the Company after the Closing Date) and its agents,
representatives, employees, officers, directors, successors, controlling persons
and affiliates (in their capacities as such) (collectively, the "Purchaser
Indemnitees"), and shall reimburse the Purchaser Indemnitees, for any loss,
liability, damage, expense (including, but not limited to, reasonable costs of
investigation and defense and reasonable attorneys' fees), whether or not
involving a third-party claim (collectively, "Damages"), incurred by the
Purchaser Indemnitees as a result of (a) any inaccuracy in any of the
representations and warranties of the Seller in Article II of this Agreement (as
modified by the Company Schedule and any update or supplement to the Company
Schedule delivered to the Purchaser prior to the Closing Date but only to the
extent such update or supplement relates to events occurring or discovered after
the date of this Agreement), (b) any failure of the Company or the Seller to
perform or comply with any post-
28
Closing agreement or covenant to be performed or complied with by it under this
Agreement, or (c) any claim by any person for brokerage or finder's fees or
similar payments in connection with any of the transactions contemplated
hereunder as the result of brokers, finders or investment bankers retained by
the Company or the Seller or any Parent Shareholder.
5.3. Indemnification by the Purchaser. Subject to the limitations on
indemnification set forth in Sections 5.5, 5.6 and 5.7 hereof and elsewhere in
this Agreement, from and after the Closing Date, the Purchaser shall indemnify
and hold harmless the Seller, the Parent Shareholders and the respective agents,
representatives, employees, officers, directors, successors, controlling persons
and affiliates of the Seller and the Parent Shareholders (in their capacities as
such) (the "Seller Indemnitees"), and shall reimburse the Seller Indemnitees,
for any Damages arising as a result of (a) any inaccuracy in any of the
representations and warranties of the Purchaser in Article III of this Agreement
(as modified by the Purchaser Schedule and any update or supplement to the
Purchaser Schedule delivered to the Company and the Seller prior to the Closing
Date but only to the extent such update or supplement relates to events
occurring or discovered after the date of this Agreement), (b) any failure by
the Purchaser to perform or comply with any post-Closing agreement or covenant
to be performed or complied with by the Purchaser in this Agreement, or (c) any
claim by any person for brokerage or finder's fees or similar payments in
connection with any of the transactions contemplated hereunder as the result of
brokers, finders or investment bankers retained by the Purchaser.
5.4. Notification; Control of Proceedings. The party entitled to
indemnification pursuant to this Article V ("Indemnified Party") shall, with
reasonable promptness, give to the party obligated to provide such
indemnification hereunder (an "Indemnifying Party") written notice if the
Indemnified Party becomes aware of any loss, liability, damage, or expense with
respect to which a claim for indemnification may be asserted; provided, however,
that for the sole purpose of determining whether written notice must be provided
to an Indemnifying Party under this Section 5.4 (and for the purpose of
determining whether the Indenmifying Party will have the right to defend a
particular claim action or proceeding), the limitation set forth in Section 5.5
hereof shall not be taken into account; provided, further, however, that the
failure of an Indemnified Party to deliver such written notice with reasonable
promptness shall not be deemed to bar or otherwise limit the rights of the
Indemnified Party hereunder unless such failure materially prejudices the rights
or defenses of the Indemnifying Party. If any claim is made by a third person or
an action or proceeding commenced for which the Indemnified Party shall seek
indemnity from the Indemnifying Party, the Indemnified Party shall give to such
Indemnifying Party reasonable written notice of such claim, action or proceeding
and request the Indemnifying Party to defend the same. The Indemnifying Party
shall have the right to defend such claim, action or proceeding at its own
expense, and (if the Indemnifying Party elects to accept the defense of such
claim, action or proceeding) shall give written notice to the Indemnified Party
of the commencement of such defense with reasonable promptness after the giving
of the written notice of the claim, action or proceeding by the Indemnified
Party. The Indemnified Party shall be entitled to participate at its own expense
with the Indemnifying Party in such defense (subject to the right of the
Indemnifying Party to control such defense), but shall not be entitled in any
way to release, waive, settle, modify or pay such claim, action or proceeding
without the written consent of the Indemnifying Party (which consent shall not
be unreasonably withheld), if the Indemnifying Party has assumed such defense.
In the event the Indemnifying Party does not accept the defense of such claim,
action or proceeding, as provided above, or
29
does not notify the Indemnified Party of its election to defend such claim,
action, or proceeding, within 30 days after the Indemnifying Party's receipt of
written notice of such claim, action, or proceeding, from the Indemnified Party,
the Indemnified Party shall have the full right to defend against such claim,
action or proceeding in such manner as it may deem appropriate, but the
Indemnifying Party shall not have any liability with respect to any compromise
or settlement effected without its prior written consent (which consent shall
not be unreasonably withheld). In the event the Indemnifying Party shall assume
the defense of such claim, action, or proceeding, the Indemnified Party shall
cooperate in the defense of such claim, action or proceeding and the records of
each shall be available to the other with respect to such defense; provided,
however, that the Indemnifying Party shall not, in the defense of any such
claim, action or proceeding, consent to the entry of any judgment or enter into
any settlement where such entry of judgment or settlement does not include a
provision releasing the Indemnified Party from all liability with respect to
such claim, action, or proceeding, except with the written consent of the
Indemnified Party (which consent shall not be unreasonably withheld).
5.5. Limitation on Indemnification. Notwithstanding the provisions of
Sections 5.2 and 5.3 hereof, no Indemnifying Party shall be liable to any
Indemnified Party with respect to: (a) any claim by an Indemnified Party
pursuant to clause (a) of Section 5.2 hereof or clause (a) of Section 5.3 hereof
except to the extent that the cumulative amount of the indemnifiable Damages
actually incurred by the Indemnified Party as a result of all inaccuracies in
the Indemnifying Party's representations and warranties actually exceeds
$250,000; and the Indemnifying Party shall only be required to pay, and shall
only be liable for, the amount by which the cumulative amount of the
indemnifiable Damages actually incurred by the Indemnified Party as a result of
all such inaccuracies in such representations and warranties actually exceeds
$250,000; or (b) any claim based on the inaccuracy of any warranty and
representation of the Indemnifying Party if the Indemnified Party (or any of its
officers and directors in the case of an Indemnified Party that is a corporation
or a limited liability company) had actual knowledge of the inaccuracy of such
representation and warranty (or of any facts or circumstances constituting or
resulting in such inaccuracy) prior to the Closing, provided, that, the
limitation provided by this clause (b) shall not be available to an Indemnifying
Party if that Indemnifying Party also had such actual knowledge of the
inaccuracy of such representation and warranty (or of any facts or circumstances
constituting or resulting in such inaccuracy) prior to the signing of this
Agreement by the Indemnifying Party.
5.6. Exclusive Remedy.
(a) Except as provided in the Parent Shareholders Agreement, the
indemnification provided for in this Article V shall be the exclusive right and
remedy with respect to any claim by an Indemnified Party pursuant to clause (a)
of Section 5.2 hereof or clause (a) of Section 5.3 hereof, and, except as
provided in this Section 5.6, no claim or cause of action with respect to any
misrepresentation or any inaccuracy, breach or default as to any representation
or warranty contained in Article II or Article III of this Agreement shall be
enforceable unless made in accordance with the procedures, and within the time
periods, set forth in this Article V. Without limiting the generality of the
foregoing, and except as provided in this Section 5.6(a), (i) any payments
required to be made by the Seller under this Article V shall be made exclusively
from the Escrow Shares under the Escrow Agreement, and the Purchaser shall have
no recourse against the Seller or
30
the Parent Shareholders, or against any of the assets of the Seller or the
Parent Shareholders, in connection with any indemnification claim, and (ii) any
payments required to be made by the Purchaser under this Article V (other than
for breaches occurring after the Closing of any covenant contained in Article I,
IV, IX or XI hereof) shall be limited to an aggregate amount equal to
U.S.$16,540,000;
(b) Nothing contained in the Parent Shareholders Agreement shall
require the Purchaser to first assert its rights and remedies under this Article
V or the Escrow Agreement or the Parent Shareholders Agreement as to any claim
by the Purchaser that is based on the inaccuracy of any representation or
warranty in both this Agreement and the Parent Shareholders Agreement. To the
extent that the Purchaser shall first recover Damages from one or more of the
Parent Shareholders pursuant to the Parent Shareholders Agreement prior to any
recovery pursuant to Article V of this Agreement or the Escrow Agreement, the
amounts recovered from such Parent Shareholder(s) shall be deducted from amounts
payable to the Purchaser Indemnitees pursuant to Article V of this Agreement or
the Escrow Agreement.
5.7. Indemnification Claims.
(a) If an Indemnified Party wishes to assert an indemnification claim
against any Indemnifying Party, the Indemnified Party shall deliver or cause to
be delivered to the entity or entities specified below a written notice (a
"Claim Notice") setting forth (a) the specific representation, warranty or
post-Closing covenant alleged to have been breached by such Indemnifying Party,
(b) a summary of the facts and circumstances giving rise to the alleged breach
of such representation, warranty or post-Closing covenant, and (c) a description
of, and a reasonable estimate of the total amount of, the Damages actually
incurred or expected to be incurred by the Indemnified Party as a direct result
of such alleged breach. If the Indemnified Party is a Purchaser Indemnitee, such
Purchaser Indemnitee shall deliver a copy of the Claim Notice simultaneously to
the Seller's Representative and the Escrow Agent. If the Indemnified Party is a
Seller Indemnitee, such Seller Indemnitee shall deliver a copy of the Claim
Notice to the Purchaser.
(b) Notwithstanding anything to the contrary contained in this
Agreement or in the Escrow Agreement, no Purchaser Indemnitee shall be permitted
to deliver any Claim Notice (and no Purchaser Indemnitee shall be entitled to
assert any indemnification claim set forth in any Claim Notice) unless such
Purchaser Indemnitee reasonably believes that a representation or warranty has
been breached by the Seller in a manner that would entitle such Purchaser
Indemnitee to be indemnified under this Article V.
(c) Notwithstanding anything to the contrary contained in this
Agreement, no Seller Indemnitee shall be permitted to deliver any Claim Notice
(and none of the no Seller Indemnitee shall be entitled to assert any
indemnification claim set forth in any Claim Notice) unless such Seller
Indemnitee reasonably believes that a representation, warranty or covenant has
been breached by the Purchaser in a manner that would entitle such Seller
Indemnitee to be indemnified under this Article V.
(d) Notwithstanding anything to the contrary contained in this
Agreement, if a Claim Notice shall not have been delivered to the Indemnifying
Party (and, if the Indemnifying
31
Party is the Seller, also to the Escrow Agent) prior to the Expiration Date,
then such Claim Notice shall not be deemed to have been delivered and shall be
of no force or effect.
(e) Only the Purchaser itself shall be entitled to assert
indemnification claims against the Seller under this Article V; any claim for
indemnification by any other Purchaser Indemnitee must be asserted by the
Purchaser on behalf of such Purchaser Indemnitee. Only the Seller's
Representative (as defined below) shall be entitled to assert indemnification
claims against the Purchaser under this Article V; any claim for indemnification
by any Seller Indemnitee must be asserted by the Seller's Representative on
behalf of such Seller Indemnitee.
5.8. Subrogation. To the extent that any Indemnifying Party makes or
is required to make any indemnification payment to an Indemnified Party, (i) the
Indemnifying Party shall be entitled to exercise, and shall be subrogated to,
any rights and remedies (including rights of indemnity, rights of contribution
and other rights of recovery) that the Indemnified Party or its affiliates may
have against any other person or entity (other than the Indemnified Party or its
affiliates) with respect to any Damages, circumstances or matter to which such
indemnification payment is directly or indirectly related; (ii) the Indemnified
Party shall permit the Indemnifying Party to use the name of the Indemnified
Party or the Indemnified Party's affiliates, in any transaction or in any
proceeding or other matter involving any of such rights or remedies; and (iii)
the Indemnified Party shall take and shall cause each of its affiliates to take
such actions as the Indemnifying Party may reasonably request for the purpose of
enabling the Indemnifying Party to perfect or exercise the Indemnifying Party's
right of subrogation hereunder. Any rights of an Indemnifying Party to
subrogation pursuant to this Section 5.8 shall not be exercisable until such
Indemnifying Party shall have fully performed its obligations pursuant to this
Article V as to the indemnification of the Indemnified Party (with respect to
the particular indemnification claim involved); provided, however, that, prior
to the full performance of such indemnification obligations and to the extent
reasonably required to preserve the rights of the Indemnifying Party to
subrogation, the Indemnifying Party shall be permitted to take any action so
required to preserve such subrogation rights.
5.9. Seller's Representative.
(a) Zeev May shall be constituted and appointed as agent ("Seller's
Representative") for and on behalf of the Seller and the Parent Shareholders to
give and receive notices and communications, to authorize the Escrow Agent to
deliver funds out of escrow to the Purchaser, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to indemnification claims, and to
take all actions necessary or appropriate in the judgment of the Seller's
Representative for the accomplishment of the foregoing. Such agency may be
changed from time to time upon not less than five days' prior written notice
from the Seller or, if the Seller has been liquidated, from any three Parent
Shareholders, to the Purchaser. Notices or communications to or from the
Seller's Representative shall constitute notice to or from the Seller.
(b) The Seller's Representative shall have reasonable access to information
about the Company and the assistance of the Seller and the Purchaser for
purposes of performing his duties and exercising his rights hereunder, provided
that the Seller's Representative shall treat
32
confidentially and not disclose to anyone (other than the Seller and the Parent
Shareholders) any priorietory nonpublic information obtained from the Purchaser
after the Closing to the extent such proprietory information belongs to, and
relates to the conduct of the business of, the Company; provided, however, that
the Seller's Representative may disclose such proprietary information: (i) on a
need to know basis to individuals who agree, in writing, to treat such
information as confidential, and (ii) as required by law or regulation.
(c) A decision, act, consent or instruction of the Seller's Representative
shall constitute a decision of the Seller or the Parent Shareholders and shall
be final, binding and conclusive upon the Seller and the Purchaser, and the
Escrow Agent may rely upon any written instruction of the Seller's
Representative as being the decision, act, consent or instruction of the Seller.
The Purchaser is hereby relieved from any liability to any person for any acts
done by it in accordance with such written instructions of the Seller's
Representative.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE PURCHASER AND THE SELLER
The obligations of the Purchaser and the Seller to consummate the
stock purchase contemplated by this Agreement on the Closing Date shall be
subject to the satisfaction of the following condition, except to the extent
such condition is waived in writing by the Purchaser and the Seller:
6.1. Government Approvals. All requisite governmental approvals and
authorizations necessary for the consummation of the stock purchase contemplated
hereby shall have been duly issued or granted, except where the failure to
obtain such approvals and authorizations would not have a Material Adverse
Effect on the Purchaser. No unfavorable governmental decree or court order shall
exist that would prevent the consummation of the stock purchase contemplated by
this Agreement.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE PURCHASER
The obligation of Purchaser to consummate the stock purchase
contemplated by this Agreement on the Closing Date shall be subject to the
following conditions, except to the extent such conditions are waived by the
Purchaser in writing:
7.1. Representations and Warranties; Performance. The representations and
warranties of the Seller set forth in this Agreement (excluding any
representation or warranty that refers specifically to "the date of this
Agreement," "the date hereof" or any other date other than the Closing Date)
shall be accurate in all material respects as of the Closing Date as if made on
and as of the Closing Date (it being understood that, for purposes of
determining the accuracy of such representations and warranties as of the
Closing Date (i) any inaccuracies that, in the aggregate, do not have a Material
Adverse Effect on the Company shall be disregarded, (ii) any inaccuracy that
33
results from or relates to general business, economic or industry conditions
shall be disregarded, and (iii) any inaccuracy that results from or relates to
the taking of any action contemplated or permitted by this Agreement or the
announcement or pendency of the transactions contemplated by this Agreement
shall be disregarded). The Seller and the Company shall have each performed and
complied in all material respects with all agreements or covenants required by
this Agreement to be performed or complied with by such parties prior to or at
the Closing (except where the failure to have performed or complied with such
agreements would not have a Material Adverse Effect on the Purchaser or the
Company).
7.2. Amendments to Employment Agreements. Each of the Individual Parent
Shareholders shall have entered into an amendment to his Employment Agreement
with the Company substantially in the form set forth on Exhibit 7.2 hereto.
7.3. Opinion of Counsel. The Purchaser shall have received an opinion of
Advocate, Zeev May, counsel to the Company and the Seller, in substantially the
form of Exhibit 7.3 hereto.
7.4. Approvals. The following approvals, orders or permits shall have been
received in form and substance reasonably satisfactory to the Purchaser:
(a) Israel Chief Scientist. Approval of the Chief Scientist for change
in control of the Company; and
(b) Israel Investment Center. Approval of the Investment Center for
change in control of the Company.
7.5. Escrow Agreement. The Escrow Agent, the Seller's Representative and
the Seller shall have executed and delivered the Escrow Agreement.
7.6. Seller's Agreement. The Seller and each of the Parent Shareholders
shall have executed and delivered to the Purchaser the Seller's Agreement.
7.7. Parent Shareholders Indemnity Agreement. Each of the Parent
Shareholders shall have executed and delivered to the Purchaser a Parent
Shareholders Indemnity Agreement substantially in the form set forth on Exhibit
7.7 hereto (the "Parent Shareholders Agreement").
7.8. No Litigation. No material action or proceeding by any governmental
authority in the United States or the State of Israel that challenges the stock
purchase contemplated by this Agreement shall be pending against the Purchaser
or the Company.
7.9. Change in Condition. Since the date of this Agreement, there shall not
be any change in the Company's financial condition or results of operations
which has had or would reasonably be expected to have a Material Adverse Effect
on the Company; provided, however, that any change that results from or relates
to general business, economic or industry conditions, the taking of any action
contemplated or permitted by this Agreement or the announcement or
34
pendency of the transactions contemplated by this Agreement shall not be taken
into account in determining whether there has been or would reasonably be
expected to be a "Material Adverse Effect" on the Company.
7.10. Resignations. All directors of the Company and its Subsidiaries and
Holdings shall have executed and delivered to the Purchaser resignations as
directors.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE SELLER
The obligations of the Seller to consummate the stock purchase
contemplated by this Agreement on the Closing Date shall be subject to the
following conditions, except to the extent such conditions are waived by the
Seller in writing:
8.1. Representations and Warranties; Performance. The representations and
warranties of the Purchaser set forth in this Agreement (excluding any
representation or warranty that refers specifically to "the date of this
Agreement," "the date hereof" or any other date other than the Closing Date)
shall be accurate in all material respects as of the Closing Date as if made on
and as of the Closing Date (it being understood that, for purposes of
determining the accuracy of such representations and warranties as of the
Closing Date (i) any inaccuracy that does not have a Material Adverse Effect on
the Purchaser shall be disregarded, (ii) any inaccuracy that results from or
relates to general business, economic or industry conditions shall be
disregarded, and (iii) any inaccuracy that results from or relates to the taking
of any action contemplated or permitted by this Agreement or the announcement or
pendency of the transactions contemplated by this Agreement shall be
disregarded). The Purchaser shall have performed and complied in all material
respects with all agreements or covenants required by this Agreement to be
performed or complied with by it prior to or at the Closing. Without limitation
of the foregoing, the Seller shall have received the cash amount referred to in
Section 1.4(b)(ii)(A) hereof and the shares of Purchaser Common Stock referred
to in Section 1.4(b)(ii)(B) hereof, and the Escrow Agent shall have received the
shares of Purchaser Common Stock referred to in Section 1.4(b)(ii)(C) hereof.
8.2. Opinion of Counsel. The Seller shall have received an opinion of
Morrison & Foerster LLP, counsel to the Purchaser, in substantially the form of
Exhibit 8.2 hereto.
8.3. Approvals. The following approvals, orders and permits shall have been
received in form and substance reasonably satisfactory to the Company:
(a) Bank of Israel. Bank of Israel permit (i) for the Seller to
exchange the Transferred Company Shares and Holdings Shares for shares of
Purchaser Common Stock and to hold shares of Purchaser Common Stock, and (ii)
for the Seller and the Parent Shareholders to deposit in a foreign currency
deposit account ("PAMACH") the consideration received from the sale of shares of
Purchaser Common Stock;
(b) Israel Chief Scientist. Approval of the Chief Scientist for the
change in control of the Company; and
35
(c) Israel Investment Center. Approval of the Investment Center for
the change in control of the Company.
8.4. Escrow Agreement. The Escrow Agent and the Purchaser shall have
executed and delivered to the Seller and the Seller's Representative the Escrow
Agreement.
8.5. Seller's Agreement. The Purchaser shall have executed and delivered to
the Seller and the Parent Shareholders the Seller's Agreement.
8.6. No Litigation. No material action or proceeding by any governmental
authority in the United States or the State of Israel that challenges the stock
purchase contemplated by this Agreement shall be pending against the Seller, the
Company or any of the Parent Shareholders.
8.7. Change in Condition. Since the date of this Agreement, there shall not
be any change in the Purchaser's financial condition or results of operations
which has had or would reasonably be expected to have a Material Adverse Effect
on the Purchaser; provided, however, that any change that results from or
relates to general business, economic or industry conditions, the taking of any
action contemplated or permitted by this Agreement or the announcement or
pendency of the transactions contemplated by this Agreement shall not be taken
into account in determining whether there has been or would reasonably be
expected to be a "Material Adverse Effect" on the Purchaser.
ARTICLE IX
FEES AND EXPENSES
9.1. Expenses. Each of the Company, the Purchaser and the Seller shall bear
its own expenses incurred in connection with the negotiation and consummation of
the transactions contemplated by this Agreement; provided, however, that if the
Closing takes place, (i) the Purchaser shall pay $1,701,230 of any such expenses
payable by the Company to Hambrecht & Quist LLC and payable to the Seller's U.S.
attorneys, (ii) the Company shall pay $200,000 of other transaction expenses of
the Seller and/or the Company, and (iii) the Seller shall pay all remaining
transaction expenses of the Company.
ARTICLE X
TERMINATION
10.1. Termination of Agreement. This Agreement and the transactions
contemplated hereby may be terminated at any time before the Closing Date, as
follows, and in no other manner:
(a) by written consent of the Purchaser, the Company and the Seller;
36
(b) by the Purchaser, the Company or the Seller if the Closing shall
not have occurred on or before 5:00 p.m., Tel Aviv Time, on September 9, 1997;
provided that the right to terminate this Agreement under this Section 10.1(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or results in, the failure of the
Closing to have occurred by such time;
(c) by the Purchaser, if (i) there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of the Seller such that the conditions set forth in Section 7.1 hereof
could not be satisfied, and (ii) such breach has not been cured within thirty
(30) days after the delivery to the Seller by the Purchaser of written notice of
such breach; provided, however, that the right to terminate this Agreement under
this Section 10.1(c) shall not be available to the Purchaser if the Purchaser
shall have materially breached this Agreement;
(d) by the Company or the Seller if (i) there has been a material
breach of any representation, warranty, covenant or agreement contained in this
Agreement on the part of the Purchaser such that the conditions set forth in
Section 8.1 hereof could not be satisfied, and (ii) such breach has not been
cured within thirty (30) days after the delivery to the Purchaser by the Seller
of written notice of such breach; provided, however, that the right to terminate
this Agreement under this Section 10.1(d) shall not be available to the Company
or the Seller if the Company or the Seller shall have materially breached this
Agreement; or
(e) by the Purchaser, the Company or the Seller if (i) there shall be
a final, non-appealable order or temporary order (which temporary order shall
only provide a basis for termination if not reversed, vacated or otherwise
expired prior to September 9, 1997) of any court in effect preventing
consummation of the transaction, or (ii) there shall be any action taken after
the date of this Agreement, or any statute, rule, regulation or order enacted,
promulgated or issued by any governmental entity and reasonably determined,
after the date of this Agreement, to be applicable to the stock purchase herein
contemplated which would make such stock purchase illegal.
10.2. Effect of Termination. In the event of a termination of this
Agreement by any party pursuant to Section 10.1, this Agreement shall become
void and have no effect, and there shall be no obligations or liability on the
part of any party or their respective officers and directors, except (a) Article
XI hereof shall survive the termination of this Agreement and (b) nothing herein
shall relieve any party from liability for any willful breach of this Agreement
or any representation or warranty contained herein. No termination of this
Agreement shall affect the obligations of the parties contained in the
Confidentiality Agreement, which shall survive any termination of this Agreement
in accordance with its terms.
ARTICLE XI
MISCELLANEOUS
11.1. Time of the Essence. Time is of the essence of this Agreement.
37
11.2. Entire Agreement. This Agreement and the other written agreements
contemplated or described herein contain the entire agreement of the parties
hereto, and supersede any prior written or oral agreements between them
concerning the subject matter contained herein and therein. There are no
representations, agreements, arrangements or understandings, oral or written,
between the parties to this Agreement and such other written agreements,
relating to the subject matter contained in this Agreement and in such other
written agreements, which are not fully expressed herein and therein.
11.3. Press Releases and Public Announcements. None of the Company, the
Seller and the Purchaser shall issue any press release or make any public
announcement concerning the matters set forth in this Agreement (other than as
required by applicable disclosure rules or regulations of any governmental body)
without the consent of the other party. If any party hereto is required by
disclosure rules or regulations to issue a press release or make a public
announcement concerning the matters set forth in this Agreement, such party
shall provide notice to the other parties of such rule or regulation and shall
consult with such other parties prior to issuing such press release or making
such public announcement. The Company, the Seller and the Purchaser will
cooperate to jointly prepare and issue any press release which may be issued to
announce the signing of this Agreement and/or the Closing of the transaction
contemplated by this Agreement.
11.4. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
11.5. Descriptive Headings. The Article and Section headings in this
Agreement are for convenience only and shall not affect the meanings or
construction of any provision of this Agreement.
11.6. Notices. Any notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed sufficiently given (a) when
delivered in person, (b) three business days after delivery to an "overnight"
courier, (c) 24 hours after delivery by facsimile transmission (to the extent
receipt of such facsimile is evidenced by a transmission report or other
reasonable evidence of the successful and accurate transmission of such notice),
in each case addressed as follows:
If to the Purchaser: Cylink Corporation
` 910 Hermosa Court
Sunnyvale, California 94086
Attention: Robert F. Fougner
Fax: (408) 774-4952
With a copy to: Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, California 94304-1018
Attention: Michael C. Phillips
38
Fax: (650) 494-0792
With a further copy to: I. Fischer & Co.
3 Daniel Frisch Street
Tel Aviv, Israel
Attention: Ezra Katzen
Fax: 972-3-525-0141
And if to the Seller: A.R. Data Security Ltd.
c/o Algorithmic Research Ltd.
15 Gush Etzion Street
Givat Shmuel, Israel
Attention: Yossi Tulpan
Fax: 972-3-532-2650
With a copy to: Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Richard E. Climan
Keith A. Flaum
Fax: (650) 857-0663
With a further copy to: Shinar, Shachor, Weissberger
5 Beit Hillel St., 3rd Floor
Tel Aviv 67017, Israel
Attention: Doron Shinar
Fax: 972-3-562-1905
or to such other address or addresses as a party shall have previously
designated by notice to the sender given in accordance with this Section.
11.7. Choice of Law; Arbitration. This Agreement shall be construed in
accordance with and governed by the laws of the State of California, except
insofar as Israeli corporate laws, securities laws or tax laws apply to the
Company, its Israeli Subsidiaries, the Seller, their governance, and issuance of
securities. Any dispute arising out of or relating to this Agreement shall be
resolved through binding arbitration under the Rules of Conciliation and
Arbitration of the International Chamber of Commerce. The venue for such
arbitration proceedings shall be London, England. The arbitrator's fees and
other related expenses of any arbitation (such as transcript fees) shall be
borne by the Seller and the Purchaser in such proportions as shall be determined
by the arbitrator, or if there is no such determination, such fees and other
related expenses shall be borne equally by the Seller and the Purchaser. The
resolution of a dispute by the arbitrator shall be conclusive and binding upon
the parties hereto and judgment may be entered thereon in any court having
jurisdiction thereof. The arbitrator shall have the authority to make an award
of actual compensatory damages incurred by a party in connection with a dispute,
but shall have no right to grant special, punitive or exemplary damages or
indirect or consequential damages or to grant any form of equitable relief.
39
11.8. Binding Effect; Benefits. This Agreement shall inure to the benefit
of and be binding upon the parties and their respective successors and permitted
assigns. Nothing in this Agreement, express or implied, is intended to confer on
any person other than the parties or their respective successors and permitted
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except that the provisions of Sections 4.9 and 4.11 hereof and
Article V hereof are intended to confer rights and remedies on the persons
referred to therein.
11.9. Assignability. Neither this Agreement nor any of the parties' rights
hereunder shall be assignable by any party without the prior written consent of
the other parties and any attempted assignment without such consent shall be
void; provided, however, that this Agreement may be assigned by the Purchaser to
an affiliate of the Purchaser which shall have been formed for the purpose of
consummating the transactions contemplated hereby, but no such assignment shall
relieve the Purchaser of any of its obligations under this Agreement.
11.10. Waiver and Amendment. Any term or provision of this Agreement may be
waived at any time by the party which is entitled to the benefits thereof. The
waiver by any party of a breach of any provision of this Agreement shall not
operate or be construed as a waiver of any subsequent breach. The parties may,
by mutual agreement in writing, amend this Agreement in any respect without the
consent or approval of any other person (including any other beneficiary of any
rights or remedies under this Agreement).
11.11 Attorneys' Fees. In the event of any action or proceeding to enforce
the terms and conditions of this Agreement, the prevailing party shall be
entitled to an award of reasonable attorneys' and experts' fees and costs, in
addition to such other relief as may be granted.
11.12. Knowledge. For purposes of this Agreement, any reference to the
"knowledge" of the Purchaser shall mean the actual knowledge of Fernand Sarrat,
John V. Kalb or Robert B. Fougner of (i) an actual inaccuracy in any warranty or
representation of the Purchaser that is subject to a "knowledge" qualification,
or (ii) facts or circumstances that would reasonably be expected to constitute
or to have given rise to an inaccuracy in any such warranty or representation.
For purposes of this Agreement, any reference to the "knowledge" of the Company
shall mean the actual knowledge of Amos Fiat, Yossi Tulpan or Yossi Cohen of (i)
an actual inaccuracy in any warranty or representation of the Company that is
subject to a "knowledge" qualification, or (ii) facts or circumstances that
would reasonably be expected to constitute or to have given rise to an
inaccuracy in any such warranty or representation.
11.13. Other Definitions. "Material Adverse Effect," when used in
connection with the Company, means any effect that is materially adverse to the
business or financial condition of the Company and its Subsidiaries, taken as a
whole; provided, however, that (i) any adverse effect that results from or
relates to general business, economic or industry conditions shall not be deemed
to constitute, and shall not be taken into account in determining whether there
has been, a "Material Adverse Effect" on or with respect to the Company, and
(ii) any adverse effect that results from or relates to the taking of any action
contemplated or permitted by this Agreement or the announcement or pendency of
the transactions contemplated by this Agreement shall not be deemed to
constitute, and shall not be taken into account in determining whether there has
been, a
40
"Material Adverse Effect" on or with respect to the Company. "Material Adverse
Effect," when used in connection with the Purchaser, means any effect that is
materially adverse to the business or financial condition of the Purchaser and
the Purchaser Subsidiaries, taken as a whole; provided, however, that (i) any
adverse effect that results from or relates to general business, economic or
industry conditions shall not be deemed to constitute, and shall not be taken
into account in determining whether there has been, a "Material Adverse Effect"
on or with respect to the Purchaser, and (ii) any adverse effect that results
from or relates to the taking of any action contemplated or permitted by this
Agreement or the announcement or pendency of the transactions contemplated by
this Agreement shall not be deemed to constitute, and shall not be taken into
account in determining whether there has been, a "Material Adverse Effect" on or
with respect to the Purchaser . An "agreement," "arrangement," "contract,"
"commitment," "plan," "understanding," or "undertaking" when used in this
Agreement shall mean a legally binding, written or oral agreement, arrangement,
contract, commitment, plan, purchase order, understanding or undertaking, as the
case may be.
11.14. No Implied Representations. The Purchaser and the Seller acknowledge
that, except as expressly provided in Articles II and III hereof, and except as
expressly provided in any agreement executed and delivered by a party hereto to
any other party hereto pursuant to this Agreement, none of the parties has made
or is making any representations or warranties whatsoever, implied or otherwise.
Without limiting the generality of the foregoing, none of the parties has made
or is making any representations or warranties with respect to any information
or documents made available by a party or its representatives to another party
or its representatives, except as expressly covered by a representation or
warranty in Articles II or III hereof or in any other agreement executed and
delivered by a party to another party pursuant to this Agreement.
11.15. Liquidation of the Seller. The Purchaser acknowledges and agrees
that nothing contained in this Agreement or in any document delivered in
connection with the transactions contemplated hereby shall be construed or shall
operate to prevent the Seller from dissolving, winding up, liquidating or
terminating its existence at any time after the Closing. Notwithstanding
anything to the contrary contained in this Agreement, in the event of the
dissolution or liquidation of the Seller, the Parent Shareholders and their
successors and assigns shall succeed to, and shall be entitled to exercise and
enforce, all of the rights of the Seller under this Agreement and the other
documents delivered in connection with the transactions contemplated hereby. The
Parent Shareholders will, as a condition to such dissolution and liquidation, be
bound by Sections 1.2(b), 4.7, 4.13, 9.1, 11.3, 11.6, and 11.7 of this Agreement
as, and only to the extent, provided in Section 10 of the Parent Shareholders
Agreement.
11.16. Post-Closing Access. At all times after the Closing Date, the
Purchaser shall give the Seller and the Seller's Representative reasonable
access to the books and records of the Company and its Subsidiaries (to the
extent such books and records relate to the period prior to the Closing Date),
and the Purchaser shall cause such books and records to be retained for a period
of at least seven years following the Closing.
41
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the day and year first above written.
PURCHASER:
Cylink Corporation
By: /s/ John V. Kalb, Jr.
---------------------------------
John V. Kalb, Jr.
Vice President, Strategy and Development
THE COMPANY:
Algorithmic Research Ltd.
By: /s/ Yossi Tulpan
---------------------------------
Yossi Tulpan
Chief Executive Officer
By: /s/ Yossi Cohen
---------------------------------
Yossi Cohen
Chief Operating Officer
THE SELLER:
A.R. Data Security Ltd.
By: /s/ Yossi Tulpan
---------------------------------
Yossi Tulpan
Director
By: /s/ Yossi Cohen
---------------------------------
Yossi Cohen
Director
By: /s/ Amos Fiat
---------------------------------
Amos Fiat
Director
By: /s/ Oded Koritshoner
---------------------------------
Oded Koritshoner
Director
By: /s/ Zohar Tal
---------------------------------
Zohar Tal
Director
42