Document:

Exhibit
4.1

CERTIFICATE
OF INCREASE

 

OF
THE

 

FLOATING
RATE CUMULATIVE PREFERRED STOCK, SERIES G

($2,500.00
initial liquidation preference per share)

 

OF

 

LEHMAN
BROTHERS HOLDINGS INC.

_________________________________

 

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

_________________________________

 

 

LEHMAN
BROTHERS HOLDINGS INC., a Delaware corporation (the “Corporation”), HEREBY
CERTIFIES that the following resolution was duly adopted by the Executive
Committee of the Board of Directors of the Corporation in accordance with
Section 151(g) of the General Corporation Law of the State of Delaware pursuant
to the authority conferred upon the Board of Directors of the Corporation by
the provisions of the Restated Certificate of Incorporation of the Corporation
and pursuant to the authority conferred upon the Executive Committee by the By-Laws
of the Corporation and pursuant to the authority duly delegated thereto by the
Board of Directors of the Corporation:

RESOLVED,
that the number of shares of the series of preferred stock of the Corporation
designated as Floating Rate Cumulative Preferred Stock, Series G, be, and
hereby is, increased from 52,000 shares to 120,000 shares; and that the
appropriate officers of the Corporation be, and hereby are, authorized and
directed in the name and on behalf of the Corporation to execute and file a
Certificate of Increase with the Secretary of State of the State of Delaware
increasing the number of shares constituting the Floating Rate Cumulative
Preferred Stock, Series G, from 52,000 to 120,000 and to take any and all other
actions deemed necessary or appropriate to effectuate this resolution.

[REMAINDER OF THIS PAGE
INTENTIONALLY LEFT BLANK]

 

 

IN
WITNESS WHEREOF, the Company has caused this Certificate of Increase to be
executed by its duly authorized officer on this 12th day of August
2004.

 

LEHMAN BROTHERS HOLDINGS
INC.

 

 

	
  By:

  	
  /s/
  Karen Corrigan

  	
   

  
	
   

  	
  Name:
  Karen Corrigan

  
	
   

  	
  Title:
  Vice PresidentExhibit 10.100

 

 

 

ASSET PURCHASE AGREEMENT

 

AMONG

 

UTSTARCOM, INC.,

 

TELOS TECHNOLOGY,
INC.,

 

TELOS TECHNOLOGY (CANADA), INC.,

 

TELOS TECHNOLOGY (BERMUDA) LTD. AND

 

TELOS ENGINEERING LIMITED

 

 

APRIL 21, 2004

 

 

 

 

 

ASSET
PURCHASE AGREEMENT

 

This ASSET PURCHASE
AGREEMENT (this “Agreement”) is
made and entered into as of April 21, 2004 (the “Agreement Date”) by and among UTStarcom,
Inc., a Delaware corporation (“Buyer”),
TELOS Technology, Inc., a Delaware corporation (the “Seller”), TELOS Technology (Canada), Inc., a company
incorporated in British Columbia, Canada (“TELOS
Canada”), TELOS Technology (Bermuda) Ltd., an exempted limited
liability company organized under the laws of Bermuda (“TELOS Bermuda”), TELOS Engineering Limited,
a company incorporated under the laws of Hong Kong (“TELOS Hong Kong”, and together with Seller, TELOS Canada and
TELOS Bermuda, the “Telos Sellers”
and each such entity, individually, a “Telos
Seller”).

 

RECITALS

 

A.                                   The
parties intend that, subject to the terms and conditions hereinafter set forth,
Buyer or one or more direct or indirect wholly-owned subsidiaries of Buyer
shall purchase from the Telos Sellers and each of the Telos Sellers shall sell,
transfer and assign to Buyer or such subsidiaries of Buyer, substantially all of
the assets of the Telos Sellers, and in connection therewith, Buyer has agreed
to assume certain specified liabilities of the Telos Sellers (the “Asset Purchase”), all pursuant to the terms
and conditions of this Agreement and Applicable Law (as defined in
Article 1).  

 

B.                                     The
Board of Directors of Seller has determined that the Asset Purchase is in the
best interests of Seller and Seller’s stockholders, has approved and declared
advisable this Agreement and, accordingly, has agreed to effect the Asset Purchase
provided for herein upon the terms and conditions of this Agreement.

 

C.                                     Concurrently
with the execution and delivery of this Agreement, and as a condition and
inducement to Buyer’s willingness to enter into this Agreement, those Seller
Stockholders (as defined in Article 1) that are listed on Exhibit A-1
are executing and delivering to Buyer a Voting Agreement substantially in the
form attached hereto as Exhibit A-2 (the “Stockholder Agreement”).

 

D.                                    Prior
to the Closing Date (as defined in Article 1), certain employees of Telos
Sellers will receive from Buyer an Employment Offer Letter substantially in the
form attached hereto as Exhibit B (the “Employment Offer Letter”).

 

E.                                      Buyer
and Seller desire to make certain representations, warranties, covenants and
agreements in connection with the Asset Purchase and to prescribe various
conditions to the Asset Purchase.

 

NOW, THEREFORE, in
consideration of the foregoing and the mutual promises, covenants and
conditions contained herein, the parties hereby agree as follows:

 

 

ARTICLE 1

CERTAIN DEFINITIONS

 

As used in this
Agreement, the following terms shall have the meanings set forth below.  Unless indicated otherwise, all mathematical
calculations contemplated hereby shall be made to the fifth decimal place.

 

“Additional Indebtedness”
means Indebtedness incurred after the date hereof under Seller’s existing
credit lines or with existing investors (or their Affiliates) in an aggregate
amount not to exceed $1,000,000.

 

“Affiliate” shall have the
meaning set forth in Rule 405 of Regulation C promulgated under the
Securities Act.

 

“Applicable Law” means,
collectively, all foreign, federal, state, local or municipal laws, statutes,
ordinances, regulations, and rules, and all orders, writs, injunctions, awards,
judgments and decrees applicable to Seller or any of its assets, properties and
business or its Subsidiaries or any of their assets, properties and business
(and any regulations promulgated thereunder).

 

“Assumed Liabilities”
means (i) all Liabilities of any Telos Seller under, or resulting from, any
Assumed Contract (as defined in Article 2) (other than Liabilities for
damages as a result of any breach by any Telos Seller prior to the Closing that
is not disclosed in the Schedules hereto), (ii) all Liabilities incurred
in, relating to, or arising as a result of or in connection with, the operation
of the Purchased Assets (as defined in Article 2) and/or the Business
after the Closing, (iii) all Liabilities incurred in, relating to, or
arising as a result of or in connection with, the operation of the Purchased
Assets and/or the Business that are (or should be) accounted for as current
liabilities under GAAP as of the Closing, including accounts payable and
accrued expenses, and which are either (A) reflected on the Seller Balance
Sheet or (B) incurred after the date of the Seller Balance Sheet in the
ordinary course of business, other than Indebtedness, Transaction Expenses,
Taxes and the Liabilities set forth in Section 2.1(d)(i)-(vii), (iv) all
Liabilities for Taxes and charges to be paid by Buyer pursuant to
Section 7.6, (v) all Liabilities that constitute warranty obligations
or service obligations relating to as a result of or in connection with, the
operation of the Purchased Assets and/or the Business sold by any Telos Seller,
(vi) all Liabilities of the Telos Sellers for accrued compensation payable
to Jack Mar and Ron McLeod, including accrued interest thereon; (vii) all
Liabilities relating to each Transferring Employee (as defined in Section 6.10)
arising from termination of their employment by any Telos Seller pursuant to
Section 6.10 (other than, subject to subparagraph (vi) above, accrued
compensation and accrued vacation of each Transferring Employee through the
date of such termination) or arising from termination of their employment by
Buyer or any of its Subsidiaries after the Closing (including any severance
obligations of any Telos Seller pursuant to employment or severance agreements
between such Telos Seller and a Transferring Employee arising as a result of
termination of such Transferring Employee by Buyer or its Subsidiaries after
the Closing), or as a result of any revocation of the offer of employment to
any Transferring Employee prior to Closing; 
(viii) the accrued Liability of the Telos Sellers to ComScape
Telecommunications of Charleston, Inc. (“ComScape”)
pursuant to that certain Settlement Agreement and Mutual Release by and between
ComScape and Telos

 

2

 

Engineering, Inc. dated March 17, 2004 and
in respect of the 3Com Litigation; (ix) all Liabilities representing or
relating to deferred revenue of any Telos Seller; and (x) all Liabilities
of the Telos Sellers under the SVB Credit Agreement.

 

“Balance Sheet Date” means
December 31, 2003, the date of the Seller Balance Sheet.

 

“Bill of Sale and Assumption
Agreement” means a Bill of Sale and Assumption Agreement in
substantially the form attached hereto as Exhibit C. 

 

“Business” means the
business of Seller or any of its Subsidiaries as conducted as of the date of
this Agreement.

 

“Buyer Ancillary Agreements”
means, collectively, each certificate to be delivered on behalf of Buyer by an
officer or officers of Buyer at the Closing pursuant to Article 8
and each agreement or document (other than this Agreement) that Buyer is to
enter into as a party thereto pursuant to this Agreement.

 

“Closing” means the
closing of the transactions to consummate the Asset Purchase.

 

“Closing Balance Sheet”
means a balance sheet as of the Closing Date reflecting the Purchased Assets
and the Assumed Liabilities, to the extent such Purchased Assets and Assumed
Liabilities are required by GAAP to be reflected on a balance sheet, prepared
in a manner consistent with the 2003 Audited Financial Statements and with
respect to which the independent auditors of Seller have conducted a review in
accordance with customary practice.

 

“Closing Date” means a
time and date to be specified by the parties, which shall be no later than the
second business day after the satisfaction or waiver of the conditions set
forth in Article 8 and Article 9, or at such other time, date and
location as the parties hereto agree in writing.

 

“Code” means the Internal
Revenue Code of 1986, as amended.

 

“Contract” means any
written or legally binding contract, agreement, instrument, arrangement,
commitment or undertaking (including leases, licenses, mortgages, notes,
guarantees, sublicenses, subcontracts and purchase orders).

 

“Current Assets”
means the following line items of Seller Balance Sheet, calculated on a basis
consistent with past practice of Seller: 
Cash & Investments, Restricted Cash, Accounts Receivable, Prepaid
& Advances and Inventory.

 

“Current Liabilities”
means the following line items of Seller Balance Sheet, calculated on a basis
consistent with past practices of Seller: 
Trade Accounts Payable, Accrued Liabilities, Comscape Contingency, Bank
Line of Credit, Other Accounts Payable, Salary & Related and Interest
Payable.

 

“Delaware Law” means the
General Corporation Law of the State of Delaware.

 

3

 

“Documentation” means,
collectively, programmers’ notes or logs, source code annotations, user guides,
manuals, instructions, software architecture designs, layouts, any know-how, and
any other designs, plans, drawings, documentation, materials, supplier lists,
software source code and object code, net lists, photographs, development
tools, blueprints, media, memoranda and records that are primarily related to
or otherwise necessary for the use and exploitation of any products of Seller
or its Subsidiaries used in the Business, whether in tangible or intangible
form, whether owned by Seller or its Subsidiaries or held by Seller or its
Subsidiaries under any licenses or sublicenses (or similar grants of rights).

 

“Encumbrance” means, with
respect to any asset, any mortgage, deed of trust, lien, pledge, charge,
security interest, title retention device, collateral assignment, adverse
claim, restriction or other encumbrance of any kind (excluding, with respect to
Seller IP Rights (as defined in Section 4.13(b)), non-exclusive licenses
of such Seller IP Rights) in respect of such asset (including any restriction
on the voting of any security, any restriction on the transfer of any security or
other asset, any restriction on the receipt of any income derived from any
asset, any restriction on the use of any asset and any restriction on the
possession, exercise or transfer of any other attribute of ownership of any
asset).

 

“ERISA” means the Employee
Retirement Income Security Act of 1974, as amended.

 

“ERISA Affiliate” means
any entity which is a member of: 
(A) a “controlled group of corporations,” as defined in
Section 414(b) of the Code; (B) a group of entities under “common
control,” as defined in Section 414(c) of the Code; or (C) an 
“affiliated service group,” as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of
which includes Seller.

 

“Escrow Agreement” means
the escrow agreement relating to the Escrow Cash and the Working Capital
Adjustment Cash (as defined in Section 2.4), between the Seller, Buyer and
an escrow agent to be selected by mutual agreement of Seller and Buyer prior to
the Closing, in substantially the form attached hereto as Exhibit D.

 

“Escrow Cash” means an
amount of cash equal to ten percent (10%) of the Initial Payment, together
with the interest, earnings and income that accrues thereon.

 

“Exchange Act” means the
Securities Exchange Act of 1934, as amended.

 

“Excluded Contracts” means
(i) any Contract with stockholders of Seller in their capacity as such or
as lenders to any Telos Seller, including any shareholder agreements,
registration rights agreements, voting agreements, proxies, warrants, note
purchase agreements, promissory notes and share purchase agreements,
(ii) any agreements with lenders to any Telos Seller relating to (or
evidencing) any Indebtedness (other than the SVB Credit Agreement) or any
Additional Indebtedness, including any loan agreements and promissory notes,
and (iii) the Contracts set forth in Schedule 1A.

 

“GAAP” means United States
generally accepted accounting principles applied on a consistent basis.

 

4

 

“Governmental Authority” means
any court or tribunal, governmental or regulatory body, administrative agency,
commission or other governmental authority.

 

“Holdback Cash” means
$2,500,000, together with the interest, earnings and income that accrues
thereon. 

 

“Indebtedness” means the
principal of, and accrued interest on (and other amounts payable to lenders
with respect to) any debt for money borrowed (including Seller’s borrowings
under bank loans, convertible notes, senior notes and loans payable to
officers, directors and other affiliates) other than the principal of, and
accrued interest on, or other amounts payable to Silicon Valley Bank (“SVB”) with respect to, Seller’s
indebtedness to SVB under the SVB Credit Agreement.

 

“Intellectual Property”
means, collectively, all worldwide industrial and intellectual property rights,
including patents, patent applications, patent rights, trademarks, trademark
registrations and applications therefor, trade dress rights, trade names,
service marks, service mark registrations and applications therefor, Internet
domain names, Internet and World Wide Web URLs or addresses, copyrights,
copyright registrations and applications therefor, mask work rights, mask work
registrations and applications therefor, franchises, licenses, inventions, trade
secrets and know-how. 

 

“Knowledge” means, with
respect to Seller or Buyer, the actual knowledge of a particular fact,
circumstance, event or other matter in question of the executive officers and
directors of the Seller or Buyer, as the case may be, as of the date hereof and
as of the Closing.

 

“Liabilities” means debts,
liabilities, accounts payable and obligations, whether accrued or fixed,
absolute or contingent, matured or unmatured, determined or determinable, known
or unknown, including those arising under any law, action or governmental order
and those arising under any Contract.

 

“Material Adverse Change”
and “Material Adverse Effect” when
used in connection with an entity means any change, event, circumstance,
condition or effect that is or is reasonably likely to be, individually or in
the aggregate, materially adverse to the condition (financial or otherwise),
capitalization, properties, assets (including intangible assets), liabilities,
business, operations or results of operations of such entity and its
subsidiaries, taken as a whole, except to the extent that any such change,
event, circumstance, condition or effect primarily and directly results
from:  (a) any change in conditions
in the United States, foreign or global economy or capital or financial markets
generally, including any change in interest or exchange rates, (b) any
change in conditions (including any change in general legal, regulatory,
political, economic or business conditions or any change in GAAP) in or
otherwise generally affecting the wireless communication industry or other
industries in which such entity or group of entities conducts business that
does not have a materially disproportionate effect on such entity and its
subsidiaries taken as a whole, (c) the announcement, pendency or
consummation of this Agreement and the transactions contemplated hereby, and
(d) any act of terrorism or war (whether or not threatened, pending or
declared) in Nigeria, and any other act of terrorism or war (whether or not
threatened, pending or declared) that does not have a materially
disproportionate effect on such entity and its subsidiaries taken as a whole.

 

5

 

“Permitted Encumbrances”
means:  (A) statutory liens for
Taxes that are not yet due and payable, for which reserves have been
established in accordance with GAAP; (B) statutory liens to secure
obligations to landlords, lessors or renters under leases or rental agreements;
(C) deposits or pledges made in connection with, or to secure payment of,
workers’ compensation, unemployment insurance or similar programs mandated by
Applicable Law; and (D) statutory liens in favor of carriers,
warehousemen, mechanics and materialmen, to secure claims for labor, materials
or supplies and other like liens.

 

“Person” means any
individual, corporation, company, limited liability company, partnership,
limited liability partnership, trust, estate, proprietorship, joint venture,
association, organization, entity or Governmental Authority.

 

“Post-Closing Tax Period” means any taxable
period (or portion thereof) beginning after the date of the Closing.

 

“Pre-Closing Tax Period” means any taxable
period (or portion thereof) ending on or prior to the date of the Closing.

 

“Property Taxes” means real and personal ad
valorem property Taxes and any other Taxes imposed on a periodic basis and
measured by the value of any item.

 

“SEC” means the Securities
and Exchange Commission.

 

“Securities Act” means the
Securities Act of 1933, as amended.

 

“Seller Ancillary Agreements”
means, collectively, each certificate to be delivered on behalf of any Telos
Seller by an officer or officers of such Telos Seller at the Closing pursuant
to Article 9 and each agreement (other than this Agreement) that any Telos
Seller is to enter into as a party thereto pursuant to this Agreement.

 

“Seller Balance Sheet”
means Seller’s unaudited balance sheet as of December 31, 2003
included in the Seller Financial Statements.

 

“Seller Capital Stock”
means the capital stock of Seller.

 

“Seller Common Stock”
means the Common Stock, par value $0.001 per share, of Seller.

 

“Seller Senior Convertible Notes”
means senior secured promissory notes in the aggregate principal amount of
$4,850,000 exchangeable for shares of Series E Stock pursuant to its terms.

 

“Seller Convertible Notes”
means the Seller Senior Convertible Notes.

 

“Seller Financial Statements”
means (A) Seller’s audited balance sheet dated December 31, 2002
and balance sheet (which is unaudited as of the date hereof) dated
December 31, 2003 and (B) Seller’s audited statements of
operations, statements of cash flows and statements of changes in stockholders’
equity for the year ended December 31, 2002, and

 

 

6

 

statements of operations, statements of cash flows and statements of
changes in stockholders’ equity for the year ended December 31, 2003,
and any notes to the foregoing financial statements. 

 

“Seller Option Plan” means
the 1998 Equity Incentive Plan of Seller.

 

“Seller Optionholders” means
the holders of Seller Options.

 

“Seller Options” means
options to purchase shares of Seller Common Stock.

 

“Seller Product or Service”
(and, with correlative meaning, “Seller
Products or Services”) means any product, system or service
currently produced, manufactured, marketed, licensed, sold, furnished or
distributed by Seller or any of its Subsidiaries, including all CDMA and GSM
networks, systems and products, and all bundled components thereof, and each
product, system or service currently under development by Seller (which
products, systems or services that are under development are in the nature of
upgrades, enhancements and new features and not new products); provided, that
for purposes of calculation of the Earnout (as defined in Section 3.1):

 

(i)                                     all
components of the Seller Products or Services (whether supplied by Seller or
any of its Subsidiaries, or by Buyer or any of its Affiliates, or by any third
party), when sold as part of a CDMA or GSM network, system or product or, in
the case of sales by the Seller Product Division, as replacement or additional
components of a CDMA or GSM network, system or product, shall be considered
Seller Products or Services; and

 

(ii)                                  all
CDMA or GSM networks, systems or products sold by Buyer or any Affiliate of
Buyer, that incorporate Seller Technology, shall be considered as Seller
Product or Services for purposes of calculation of the Earnout.

 

“Seller Preferred Stock”
means the Series A Stock, Series B Stock, Series C Stock,
Series D Stock and Series E Stock.

 

“Seller Securityholders”
means the Seller Stockholders, Seller Optionholders and holders of Seller
Convertible Notes, collectively.

 

“Seller Stockholders”
means the holders of shares of Seller Capital Stock.

 

“Seller Technology” means
any technology, Software or Intellectual Property developed by or owned by a
Telos Seller.

 

“Seller Warrants” means
Series B Warrants, Series C Warrants and Series E Warrants.

 

“Series A Stock”
means the Series A Convertible Preferred Stock, par value $0.001 per
share, of Seller.

 

“Series B Stock”
means the Series B Convertible Preferred Stock, par value $0.001 per
share, of Seller.

 

7

 

“Series B Warrants”
means warrants to purchase shares of Series B Stock.

 

“Series C Stock” means
the Series C Convertible Preferred Stock, par value $0.001 per share, of
Seller. 

 

“Series C Warrants”
means warrants to purchase shares of Series C Stock.

 

“Series D Stock”
means the Series D Convertible Preferred Stock, par value $0.001 per
share, of Seller.

 

“Series E Stock”
means the Series E Convertible Preferred Stock, par value $0.001 per
share, of Seller.

 

“Series E Warrants”
means warrants to purchase shares of Series E Stock.

 

“Software” means any and
all past and current versions of the software (including all software programs,
databases, objects, modules, routines, algorithms and code, in both Source Code
and object code form) that is: 
(A) embodied in or used by any product licensed or sold by a Telos
Seller in connection with the Business, (B) comprising part of any Seller
Product or Service, (C) used in the development or the utilization of the
software described in clauses (A) and (B) of this paragraph; and
(D) all derivative works of any of the software described in
clauses (A) through (C) of this paragraph.

 

“Source Code” means the
software programming code expressed in human readable language including
complete maintenance documentation, procedures, flow charts, schematic diagrams
and annotations which comprise the precoding detail design specification, and
all other material necessary by industry standards to allow a reasonably
skilled programmer or analyst to maintain and enhance the Software. 

 

“Straddle Period” means any taxable period
beginning on or prior to and ending after the date of the Closing.

 

“Subsidiary” of an entity
means a corporation or other business entity in which such entity owns,
directly or indirectly, at least a 50% interest or that is otherwise, directly
or indirectly, controlled by such entity.

 

“SVB Credit Agreement”
means, collectively, that certain Loan and Security Agreement by and among SVB,
Seller and TELOS Bermuda, dated June 8, 2000, as amended
September 9, 2000 and those Loan Modification Agreements by and among
SVB, Seller and TELOS Bermuda, dated July 5, 2001,
May 14, 2003 and December 2, 2003.

 

“Tax” (and, with
correlative meaning, “Taxes”)
means (A) any net income, alternative or add-on minimum tax, gross income,
gross receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, environmental or windfall profit tax, custom duty or other
tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or any penalty, addition to tax or
additional amount imposed by any governmental entity responsible for the
imposition of any such tax (domestic or foreign), (B) any liability for
the 

 

8

 

payment of any amounts of the type described in clause (A) of this
sentence as a result of being a member of an affiliated, consolidated,
combined, unitary or aggregate group for any taxable period, and (C) any
liability for the payment of any amounts of the type described in clause (A)
or (B) of this sentence as a result of being a transferee of or successor to
any Person or as a result of any express or implied obligation to indemnify any
other Person.

 

“Tax Return” means any
return, declaration, report, election, claim for refund or information return
or other statement or form filed or required to be filed with any Governmental
Authority relating to Taxes, including any schedule or attachment thereto
or any amendment thereof.

 

“Transaction Expenses”
means all costs and expenses incurred by Seller or Buyer, as applicable, in
connection with the Asset Purchase and this Agreement and the transactions
contemplated hereby (including any fees and expenses of legal counsel,
financial advisors, investment bankers and accountants).

 

“3Com Litigation” means
the default judgment of $125,525.85 plus costs and interest rendered in 3Com
Corp v. TELOS Technology (Canada), Inc. (Cal. Sup.Ct.).

 

Other capitalized
terms defined elsewhere in this Agreement and not defined in this
Article 1 shall have the meanings assigned to such terms in this
Agreement.

 

ARTICLE 2

THE ASSET PURCHASE

 

2.1                                 Purchase
and Sale.

 

(a)                                  Upon
the terms and subject to the conditions of this Agreement, Buyer agrees to
purchase, or cause to be purchased, from each Telos Seller and each Telos
Seller agrees to sell, transfer, convey, assign and deliver, or cause to be
sold, transferred, conveyed, assigned and delivered, to Buyer or a Person
designated by Buyer at Closing all of its right, title and interest in and to
all of its respective assets, properties and business of every kind and
description, wherever located, real, personal or mixed, tangible or intangible,
free and clear of any Encumbrances whatsoever (other than Permitted
Encumbrances), other than any Excluded Assets (as defined below), including,
without limitation, the following (collectively, the “Purchased Assets”):

 

(i)                                     All of the tangible assets
of each Telos Seller, including:

 

(1)          All inventory (consisting of raw materials, work in
process and finished goods);

 

(2)          All furniture, fixtures, equipment, furnishings,
office supplies, servers, networking equipment and other tangible personal
property; and

 

(3)          All tangible embodiments of Software,
specifications, schematics, designs, drawings, blue prints, models, sketches,
technical manuals, operating

 

9

 

manuals, flow charts and related files for the Seller Product or
Services owned by or in possession of any Telos Seller.

 

(ii)                                  All transferable licenses,
permits and authorizations relating to any governmental authorization
(including any general business licenses to conduct business in a particular
jurisdiction and the like) (the “Permits”) (or to the
extent such Permits are not freely transferable by the holder thereof, all
rights, title and interest of the Telos Sellers in such Permits to the full
extent such right, title or interest may be transferred), and any pending
applications for any Permits, and copies of all reports and certifications
related to the Permits or to other similar licenses, permits and authorizations
that are not transferable;

 

(iii)                               All cash, cash equivalents,
bank accounts, securities and investments;

 

(iv)                              The Seller-Owned IP Rights
that are owned by each Telos Seller, copies and tangible embodiments thereof in
whatever form or medium, all rights in any of the foregoing provided by
international treaties or conventions, and all rights to sue and recover for
damages for past, present and future infringement, dilution, misappropriation,
violation, unlawful imitation or breach thereof;

 

(v)                                 All goodwill of each Telos
Seller;

 

(vi)                              All prepaid expenses,
security deposits or advances paid by any Telos Seller;

 

(vii)                           To the extent assignable,
all rights of each Telos Seller under all warranties, representations and
guarantees made by suppliers, distributors, manufacturers or contractors;

 

(viii)                        All transferable rights of
each Telos Seller under all Contracts to which such Telos Seller is a party and
which is related to the Business and/or the Purchased Assets, including each
listed on Schedule 2.1(a)(viii) including any amendments, supplements and
modifications thereto but excluding the Excluded Contracts (collectively, the “Assumed
Contracts”);

 

(ix)                                All accounts receivable of
the Telos Sellers and related deposits, security or collateral therefor,
including recoverable customer deposits;

 

(x)                                   All rights under any
purchase orders to purchase any inventory, or to sell any Seller Product or
Service;

 

(xi)                                All marketing, sales and
promotional literature relating to any Seller Product or Service owned by or in
the possession of any Telos Seller;

 

(xii)                             Copies of all books,
records, files or correspondence, whether in hard copy or computer format,
relating in any manner to the Business in the possession of any Telos Seller,
including (A) engineering information, manuals and data, (B) (to the
extent permitted by Applicable Law) personnel and payroll records of the
employees of each Telos

 

10

 

Seller, (C) all customer and vendor records, (D) all records
of present and former suppliers, (E) copies of any information relating to
Taxes imposed on the Purchased Assets, and (F) copies of all lists of
leads, and the right to use all of the foregoing in this paragraph (xii); provided, however,
that Seller shall retain the right to retain copies of, and use, the
information contained in the items in this paragraph (xii) solely for purposes
of liquidating the Telos Sellers and for Tax purposes;

 

(xiii)                          all rights, privileges, claims,
demands, refunds, indemnification agreements in favor of each Telos Seller
with, and indemnification and similar rights against, third parties; 

 

(xiv)                         all insurance proceeds or
claims under insurance policies in effect as of the date hereof arising out of
any claims made or damages to any Purchased Assets on or after the date hereof;
and

 

(xv)                            all rights or claims against
former employees or consultants.

 

(b)                                 Excluded
Assets.  The following assets and
properties of the Telos Sellers (the “Excluded
Assets”) shall be excluded from the Purchased Assets:

 

(i)                                     Any rights related to, and
any rights or claims against any third party related to, any Excluded Liability
(including any rights or claims that may be asserted as a defense to, or
counterclaim or offset against, any Excluded Liability); 

 

(ii)                                  Any amounts payable to, or
claims or causes of action of, any of the Telos Sellers in respect of Taxes,
including duty drawbacks, Tax credits and Taxes refundable to any Telos Seller
in respect of transactions completed prior to the Closing or in respect of any
period or portion thereof ending on or prior to the Closing;

 

(iii)                               Any refunds due from, or
payments due on, claims with insurers in respect of losses, Liabilities or
damages arising prior to the date hereof and for which a claim has been made
with the insurer prior to the date hereof;

 

(iv)                              All books, documents,
records and files prepared in connection with or relating to the transactions
contemplated by this Agreement;

 

(v)                                 All income Tax Returns and
financial statements of Telos Sellers, and all minute books, stock record books
and other corporate records of Telos Sellers;

 

(vi)                              Any capital stock of any
Subsidiaries of any Telos Seller;

 

(vii)                           The Excluded Contracts;

 

(viii)                        Any rights or claims with respect
to intercompany debt or Liabilities between or among the Telos Sellers; and

 

(ix)                                Those assets listed on
Schedule 2.1(b).

 

11

 

(c)                                  Assumption
of Liabilities.  Subject to the
terms and conditions of this Agreement, upon the Closing, Buyer will assume,
and promptly pay, perform and discharge when due, the Assumed Liabilities,
including payment and discharge of those Assumed Liabilities listed on
Schedule 2.1(c) upon the Closing.

 

(d)                                 Excluded
Liabilities.  Notwithstanding any
provision in this Agreement, or any schedule or exhibit hereto and
regardless of any disclosure to Buyer, the Telos Sellers shall retain, and
shall promptly pay, perform and discharge when due, and Buyer shall not assume
or have any responsibility for (i) except as set forth in subparagraphs
(vi) and (vii) of the definition of “Assumed Liabilities” in Article 1
hereof, any Liabilities of any Telos Seller that may have accrued prior to
Closing with respect to directors, officers, employees or consultants of such
Telos Seller (including, without limitation, in respect of accrued vacation and
accrued compensation) and, except as set forth in Section 6.10, any
Liabilities of any Telos Seller that may accrue on or after the Closing with
respect to any such person who is not a Transferring Employee (as defined in
Section 6.10) as of the Closing, (ii) any Liabilities of any Telos
Seller for Taxes, (iii) any Liabilities of any Telos Seller for contingent
payments to interWAVE Communications International, Limited pursuant to the
Technology Licensing Agreement by and between interWAVE Communications
International Ltd., interWAVE Advanced Communications, Inc. and Seller on
October 10, 2002; (iv) any Liabilities of any Telos Seller pursuant
to any claims, judgments or arbitration awards against such Telos Seller with
respect to any tort, breach of contract (other than warranties with respect to
Seller Products or Services and which are Assumed Liabilities) or violation of
law prior to the Closing by such Telos Seller (other than with respect to
Comscape or the 3Com Litigation), (v) all Liabilities relating to or
arising out of the Excluded Assets or the Excluded Contracts, (vi) all
Liabilities of Seller arising under the Management Incentive Plan–M&A of
Seller and all Liabilities of Seller arising under the Technical Personnel
Retention Bonus Program of Seller; (vii) all Liabilities relating to or
arising out of the matters listed on Schedule 2.1(d) or
(viii) any other Liabilities of any Telos Seller other than the Assumed
Liabilities (such Liabilities of the Telos Sellers other than the Assumed
Liabilities, the “Excluded Liabilities”).

 

(e)                                  Conveyance
of Assets.  The sale, conveyance,
assignment, transfer and delivery of the Purchased Assets, and assumption by
Buyer of the Assumed Liabilities, will be effected by execution and delivery by
each Telos Seller and Buyer (or one or more Subsidiaries of Buyer designated by
Buyer), as applicable, at the Closing of (i) a duly executed Bill of Sale
and Assumption Agreement in the attached hereto as Exhibit C,
(ii) instruments of assignment assigning each Telos Seller’s interest in
and to the Seller-Owned IP Rights owned by it, including all registered
Intellectual Property and pending applications with respect thereto pursuant to
the form of Assignment of Patent Rights attached hereto as Exhibit E
(the “Patent Assignment”) and the
form of Assignment of Trademarks attached hereto as Exhibit G (the
“Trademark and Domain Name Assignments”),
(iii)  such other good and sufficient instruments of sale, conveyance,
transfer and assignment  as the parties
shall reasonably agree as necessary to vest in Buyer (or Buyer’s designee) good
and valid title to the Purchased Assets free and clear of all Encumbrances,
except for Permitted Encumbrances (collectively, the “Other Instruments”).

 

(f)                                    Non-Assignable Assets.  Notwithstanding
anything contained herein to the contrary, this Agreement shall not require the
assignment or sublicense of any of the Contracts or

 

12

 

Permits where such assignment would constitute a breach thereof but
which would otherwise be included in the Purchased Assets (the “Non-Assignable Assets”).  Each Telos Seller shall, prior to and after
the Closing Date, use its reasonable best efforts, and Buyer shall cooperate in
all reasonable respects with such Telos Seller, to obtain all consents and
waivers necessary to convey and assign (or sublicense, in the case of Contracts
consisting of licenses) any Non-Assignable Assets to the Buyer; provided,
however, that neither any Telos Seller nor Buyer shall be required to make any
material payments to any third parties to obtain any such consents.  If any such Non-Assignable Assets are not
able to be assigned or transferred (whether because a consent in respect of any
Non-Assignable Assets could not be obtained or otherwise), (i) the
relevant Telos Seller holding such Non-Assignable Asset shall use its
commercially reasonable efforts (without the expenditure, in the aggregate, of
material personnel resources or any out-of-pocket payments to third parties) to
provide or cause to be provided to Buyer, to the extent permitted by Applicable
Law, the benefits of any such Non-Assignable Asset and shall cooperate with
Buyer in any reasonable arrangement designed to provide Buyer the material
benefits intended to be assigned under such Non-Assignable Asset, including
enforcement at the cost and for the account of Buyer of any and all rights of
such Telos Seller against the other party thereto arising out of the breach or
cancellation thereof by such other party or otherwise; (ii) each Telos
Seller shall (to the extent Buyer has undertaken and performed the
responsibilities thereunder) promptly pay or cause to be paid to Buyer all monies
received by such Telos Seller with respect to any such Non-Assignable Asset;
and (iii) (to the extent that Buyer has been provided the benefit of such
Non-Assignable Asset) the Buyer shall perform and discharge on behalf of the
applicable Telos Seller, and defend and indemnify such Telos Seller against,
and hold harmless such Telos Seller from, all of such Telos Seller’s
Liabilities, if any, with respect to such Non-Assignable Asset subject to and
in accordance with the provisions thereof. 
Except as set forth in Article 9, the failure by any Telos Seller
to assign at Closing any Contract or Permit shall not relieve any of the
parties hereto from its respective obligations to consummate the transactions
contemplated by this Agreement; provided however that any Non-Assignable Assets
that are not assigned to Buyer within a reasonable period of time after the
Closing and with respect to which the material benefits of such Non-Assignable
Asset have not been provided to Buyer shall be deemed Excluded Assets and all
Liabilities relating to or arising in connection with such Excluded Assets
shall be deemed Excluded Liabilities (except to the extent that such Liability
constitutes an Assumed Liability that has previously been taken into account in
the working capital adjustment contemplated by Section 2.8 hereof, in
which event such Liability shall remain an Assumed Liability to be discharged
by Buyer).

 

2.2                                 Purchase
Price.

 

(a)                                  Purchase
Price.  The aggregate purchase price
for the Purchased Assets shall be cash in the amount of twenty-nine million
United States dollars (US$29,000,000) (the “Purchase
Price”), subject to the holdback of certain amounts as provided in
Section 2.2(b) and Section 2.3 plus the right to receive the Earnout
(as defined in Section 3.1) as set forth in Article 3, in each case,
as further modified by Section 2.4, Section 11.4 and
Section 11.10.

 

(b)                                 Initial
Payment.  On the terms and subject
to the conditions set forth in this Agreement, Buyer shall, at the Closing, pay
cash in the aggregate amount equal to twenty-nine million United Sates dollars
(US$29,000,000) (the “Initial Payment”)
less the Escrow Cash and the Holdback Cash by wire transfer of immediately
available funds to (i)

 

13

 

creditors of the Telos Sellers on behalf of the Telos Sellers as set
forth in Schedule 2.2(b) and (ii) the remainder to the Telos
Sellers in such proportions as directed by Seller in writing delivered to Buyer
no less than three days prior to the Closing Date to a bank account or bank
accounts designated by Seller in writing prior to the Closing.  

 

(c)                                  Allocation
of Purchase Price.  After the
Closing, Buyer and Seller shall, in good faith, use reasonable best efforts to
allocate the sum of the Purchase Price and the Assumed Liabilities among the
Purchased Assets in accordance with the principles of Section 1060 of the
Code and the Treasury Regulations thereunder (the “Purchase Price Allocation”) and cooperate in the preparation
of IRS Form 8594 (the “Asset Acquisition
Statement”) in accordance with the Purchase Price Allocation for
timely filing with their respective federal income Tax Returns.  Any subsequent adjustments to the sum of the
Purchase Price and Assumed Liabilities shall be reflected in the Purchase Price
Allocation in a manner consistent with Section 1060 of the Code and the
applicable Treasury Regulations.  If
Buyer and Seller shall have agreed on a Purchase Price Allocation and an Asset
Acquisition Statement, then Buyer and Seller shall file the Asset Acquisition
Statement in the form so agreed with the IRS and neither Buyer nor Seller shall
take a position that is inconsistent with the Purchase Price Allocation in any
filings, declarations or reports with the IRS and such parties hereby agree to
make consistent use of such allocation for all Tax purposes, provided that, if
Buyer and Seller cannot agree to a Purchase Price Allocation, each party may
report a Purchase Price Allocation that, in its sole discretion, is consistent
with Section 1060 of the Code and the Regulations thereunder.

 

(d)                                 Application
of Proceeds.  Seller shall cause the
Telos Sellers to use the proceeds received by the Telos Sellers pursuant to
Section 2.2(b) to be used, on or after the Closing Date, the payments and
distributions as set forth in Schedule 2.2(d).  Seller shall cause the Telos Sellers to use the proceeds received
by the Telos Sellers from the Escrow Cash, the Working Capital Adjustment Cash
and the Earnout to make the payments and distributions set forth in
Schedule 2.2(d) in the event the payments pursuant to Section 2.2(b)
were not sufficient to satisfy all obligations set forth on
Schedule 2.2(d).

 

(e)                                  Withholding.  The Buyer may deduct from the Purchase Price
(including any payment of Escrow Cash or Earnout payment) any amount which is
required to be withheld and deducted under the Code (or other applicable Tax
law).  Any amount so withheld and
deducted shall be remitted by the Buyer to the appropriate Governmental
Authority on a timely basis.  The Buyer
shall provide to the Seller, on a timely basis, evidence that any such amount
has in fact been remitted to the appropriate Governmental Authority.

 

2.3                                 Escrow.  At the Closing, Buyer shall withhold the
Escrow Cash from the cash payable pursuant to Section 2.2(b) to the Telos
Sellers (in an allocation to be provided in writing by Seller to Buyer prior to
Closing) and deposit the Escrow Cash in an account (the “Escrow Account”) with an escrow agent (the
“Escrow Agent”), in each case as
set forth in the Escrow Agreement, to be held and administered according to the
Escrow Agreement.  The Escrow Agent will
hold and distribute the Escrow Cash in accordance with the terms and conditions
of the Escrow Agreement.  The costs and
expenses relating to the Escrow Agent will be borne solely by Buyer.  For Tax reporting and withholding purposes,
all investment income earned upon the Escrow Cash shall be allocated as
provided in the Escrow Agreement.

 

14

 

2.4                                 Working
Capital Adjustment Cash.  At the
Closing, Buyer shall withhold the Holdback Cash from the cash payable pursuant
to Section 2.2(b) to the Telos Sellers and deposit the Holdback Cash plus
an additional two million five hundred thousand United States dollars
(US $2,500,000) (such sum, the “Working
Capital Adjustment Cash”) in the Escrow Account with the Escrow
Agent, to be held and administered according to the Escrow Agreement.  The Escrow Agent will hold and distribute
the Working Capital Adjustment Cash in accordance with the terms and conditions
of the Escrow Agreement.  For Tax
reporting and withholding purposes, all investment income earned upon the
Working Capital Adjustment Cash shall be allocated as provided in the Escrow
Agreement.

 

2.5                                 The
Closing.  Subject to termination of
this Agreement as provided in Article 10, the closing of the transactions
to consummate the Asset Purchase (the “Closing”)
will take place at the offices of Fenwick & West LLP, 801 California
Street, Mountain View, California at 10:00 a.m., Pacific Time as soon as
practicable, and in any event within two business days, after all of the
conditions to Closing set forth in Article 8 and Article 9 (other
than those conditions that, by their nature, can only be satisfied at the
Closing) have been satisfied and/or waived in accordance with this Agreement,
or at such other place, time or date as Buyer and Seller may mutually agree
(the “Closing Date”).

 

2.6                                 Delivery
of Purchased Assets.  At the
Closing, each Telos Seller shall deliver the Purchased Assets to be transferred
by such Telos Seller hereunder to Buyer (or one or more subsidiaries of Buyer
designated by Buyer) at such Telos Seller’s principal place of business or at
such other location and times and by such other means as are agreed by the
parties.  Each Telos Seller agrees to
deliver and Buyer agrees to accept delivery of the Purchased Assets in any
manner reasonably acceptable to the parties which would legally minimize the
incurrence of transfer, and sales and use Taxes, including the delivery of any
Software solely in electronic form.

 

2.7                                 Post-Closing
Arrangements.  Except as set forth
in any other agreement between the parties hereto, at the Closing all data
processing, accounting, insurance, banking, personnel, legal, communications
and other products and services provided to the Business by Telos Sellers or
any of its Affiliates, including any agreements or understandings (written or
oral) with respect thereto, will terminate without any further action or
liability on the part of the parties thereto.

 

2.8                                 Post-Closing
Purchase Price Adjustment.

 

(a)                                  On
the tenth (10th) business day following the completion and acceptance by each
party hereto, in accordance with this Section 2.8, of a Final Statement
(as defined below) of the Working Capital of the Business (as defined below) as
of the close of business on the Closing Date:

 

(i)                                     if the Working Capital of
the Business is less than $0 as of the Closing, then Buyer and Seller shall
instruct Escrow Agent to pay to the Seller (or such other Telos Seller as
Seller may designate) cash in the amount of (A) the Holdback Cash less
(B) the amount by which the Working Capital of the Business is less than
$0; or

 

15

 

(ii)                                  if the Working Capital of
the Business is equal to or greater than $0 as of the Closing, then Buyer and
Seller shall instruct Escrow Agent to pay to the Seller (or such other Telos
Seller as Seller may designate) cash in an amount equal to the sum of
(A) the Holdback Cash plus (B) the amount by which the Working
Capital of the Business is more than $0, which sum shall not exceed the total
amount of the Working Capital Adjustment Cash.

 

Any portion of the
Working Capital Adjustment Cash not required to be distributed to the Telos
Sellers pursuant to this Section 2.8 shall be returned to Buyer and Buyer
and Seller shall instruct Escrow Agent to return such funds.

 

(b)                                 The
Final Statement shall be prepared by Seller in the following manner:

 

(i)                                     within thirty (30) days
after the Closing Date, Seller shall deliver to Buyer the Final Statement,
fairly and accurately presenting the Working Capital of the Business as of the
close of business on the Closing Date. 
The Final Statement shall be accompanied by a report setting forth a
calculation, in reasonable detail, of the Working Capital of the Business, as
reflected in the Final Statement, setting forth the value, determined in
accordance with GAAP, of each Current Asset and Current Liability (as such
terms are modified by Section 2.8(b)(iv));

 

(ii)                                  following the Closing, each
party shall give the other party hereto and any independent auditors and
authorized representatives of such other party full access at all reasonable
times to the properties, books, records and personnel of the Business in their
possession, custody or control relating to periods prior to the Closing Date
for purposes of preparing, reviewing and resolving any disputes concerning the
Final Statement.  Within
forty-five (45) days following the delivery to Buyer of the Final
Statement, Buyer shall notify Seller of any dispute of any item contained in
the Final Statement, which notice shall set forth in reasonable detail the
basis for such dispute (which may be based on the failure of any asset or
liability to be valued accurately or in accordance with GAAP or the omission of
any asset, or inclusion of any liability, that Buyer in good faith believes
should be included or omitted in accordance with GAAP).  If Buyer fails to notify Seller of any such
dispute within such forty-five (45) day period, the Final Statement shall
be deemed to be accepted by Buyer.  In
the event that Buyer shall so notify Seller of any dispute, Buyer and Seller
shall cooperate in good faith to resolve such dispute as promptly as possible;
and

 

(iii)                               if Buyer and Seller are
unable to resolve any such dispute within thirty (30) days of Buyer’s
delivery of such notice (the “Resolution Period”), then all
amounts remaining in dispute shall be submitted to a “big four” independent
accounting firm (the “Independent Accounting Firm”) selected by
Seller and Buyer within ten (10) days after the expiration of the
Resolution Period.  If Seller and Buyer
are unable to agree on the Independent Accounting Firm, then Buyer and Seller
shall each have the right to request the American Arbitration Association to
appoint the Independent Accounting Firm, which shall be a firm that has not had
a material relationship with Telos Sellers or Buyer and/or its Affiliates
within the past two (2) year period prior to the Closing.  Each party agrees to execute, if requested
by the Independent Accounting Firm, an engagement letter containing customary
terms.  All fees and expenses relating
to the work, if any, to be performed by the Independent Accounting Firm shall
be borne equally by Seller and Buyer.  The Independent Accounting Firm

 

16

 

shall act as an arbitrator to determine only those issues still in
dispute and shall be limited to those adjustments, if any, that need be made to
the Final Statement to comply with GAAP and the standards referred to in this
Agreement.  The Independent Accounting
Firm’s determination shall be requested to be made within thirty (30) days
of its selection, shall be set forth in a written statement delivered to Seller
and Buyer and shall be final, binding and conclusive.  The Final Statement, as may be modified by the resolution of any
disputes by Buyer and Telos Sellers or by the Independent Accounting Firm, as
applicable, shall be the “Final Statement.”

 

(iv)                              The term “Working
Capital of the Business” means the value of Current Assets less the
value of Current Liabilities; provided, that, for purposes of the calculation
of Working Capital of the Business (A) interest not related to the SVB
Credit Agreement or accrued salary of Jack Mar and Ron McLeod shall be excluded
from Interest Payable, (B) the effect of the payment or accrual of
Transaction Expenses shall be excluded from the value of each line item
affected thereby, (C) the value of the Cash and Investments line item shall be
increased by the amount of the out-of-pocket cost, up to a maximum of $120,000
to Seller of the directors’ and officers’ Liability Insurance purchased in
accordance with Section 7.5 and (D) the value of any Current Liability or
portion thereof that is deemed an Excluded Liability pursuant to
Section 2.1(f) shall be excluded from Current Liabilities.

 

(v)                                 The amounts, if any,
referred to in Section 2.8(a) shall be delivered by the Escrow Agent by
wire transfer to the Telos Sellers and/or Buyer, as applicable, in immediately
available funds to an account or accounts as designated in writing by Seller
and/or Buyer as applicable.

 

ARTICLE 3

EARNOUT

 

3.1                                 Earnout.  Earnout.  On the forty fifth (45th) calendar day (or next business day if
such calendar day is not a business day) (“Earnout
Distribution Date”) after June 30, 2005, Buyer shall pay
to Seller (or such other Tiger Sellers as Seller may designate) an amount in
cash (the “Earnout”) equal to
$2.00 for each $1.00 of revenue recognized by Buyer or any of its Affiliates or
Subsidiaries, as determined in accordance with GAAP and, to the extent
consistent therewith, Buyer’s revenue recognition policies applied to similar
products and services, from the sale, license or provision of Seller Products
or Services in excess of ten million dollars ($10,000,000) during the
period beginning on the Closing Date and ending June 30, 2005 (the “Earnout  Period”);
provided  that no Earnout payment shall be due or payable if the
recognized revenue from the sale, license or provision of Seller Products or
Services during the Earnout Period is less than ten million
dollars ($10,000,000); and provided, further, that in no
event shall the Earnout exceed nineteen million United States dollars
(US$19,000,000).  Solely for purposes of
determining the amount of recognized revenues for the purpose of determining
the Earnout and not for GAAP reporting purposes, Buyer will be deemed to have
recognized additional revenue, in an amount not to exceed US$250,000, equal to
the amount of cash received by Buyer following the Closing Date relating to
Seller Products or Services shipped prior to the Closing Date and with respect
to which neither Seller nor Buyer recognized revenue (in accordance with their
respective revenue recognition policies). 
The following shall be specifically excluded from the calculation of
recognized revenue from the sale, license or provision of Seller Product or
Services for the purposes of calculating the Earnout:

 

17

 

(a) intercompany sales (sales to entities controlled by Buyer) and
(b) all recognized revenue attributable to the sale, license or provision
of Buyer product or services, other than the Seller Products or Services.  With respect to any Seller Product or Service
recalled prior to June 30, 2005, such recognized revenue shall be
calculated net of any costs, and reductions in recognized revenue, or reversals
of recognized revenue resulting from such recall; provided that the foregoing
shall not apply to components returned by customers in the ordinary course of
business for repair or replacement pursuant to the warranty provided to such
customers.  For the purpose of
calculation of the Earnout, recognized revenues with respect to the sale,
license or provision of Seller Products or Services shall be calculated on the
basis of the accounting policies in effect at Buyer at the time of the
recognition of the revenue to the extent consistent with GAAP.

 

3.2                                 Books
and Records; Audit or Review by Seller. 
During the period that the Earnout is being determined, Buyer shall
maintain books and records, internal controls and accounting systems reasonably
sufficient for the purpose of determining the sale, license or provision of
Seller Products or Services, the revenue earned or accrued with respect
thereto, and making all other determinations necessary for the determination of
the Earnout.  During the Earnout Period,
Seller, or a duly appointed representative of the stockholders of Seller (the “Representative”), may conduct a single
audit or review of the consolidated books of Buyer, its Affiliates and its
Subsidiaries in which the information regarding revenue attributable to sales,
licensing or provision of Seller Product or Services is recorded, and Buyer’s
records supporting its entries in those books, provided that such audit or
review shall be performed during normal business hours and at the place where
those books and records are normally kept, provided that following receipt of
the Earnout Notice (as defined in Section 3.4) until the final and binding
determination of the Earnout Amount in accordance with Section 3.4,
Seller, or the Representative, and its respective advisers and agents shall be
given all such access as they may reasonably require to such books and records
during Buyer’s normal business hours, and access to any personnel or
representatives of Buyer and any of its Affiliates or Subsidiaries, as they may
reasonably require for the purposes of resolving any disputes regarding the
determination of revenues during the Earnout Period and/or the calculation of
the Earnout.  Seller, or the
Representative, as applicable, shall bear all costs incurred by it in
connection with any such audit or review unless such audit or review reveals a
deficiency in the amount of the Earnout payable to the Tiger Sellers set out in
the Earnout Notice of greater than five (5%) percent as agreed by Seller,
or the Representative, as applicable, and Buyer in the resolution of any
dispute pursuant to Section 3.4(b), in which event Buyer shall pay for the
costs of such audit or review, and provided further that, in the event any
dispute is referred to arbitration pursuant to Section 3.4(b) and Seller,
or the Representative, as applicable, is the prevailing party in such arbitration,
the costs recoverable by Seller, or the Representative, as applicable, from
Buyer shall include such audit or review costs.

 

3.3                                 Buyer
Sales Support.  Buyer hereby
covenants to act in good faith throughout the Earnout Period and thereafter for
the purposes of determining the Earnout Payment and to use its commercially
reasonable efforts to sell, license and provide Seller Products or Services
during the Earnout Period consistent with the long-term business plan of Buyer
in a manner that is intended to generate GAAP reportable recognized revenues
during the Earnout Period of up to $19,500,000, provided that Buyer shall have
full freedom and flexibility with respect to decisions made in a commercially
reasonable manner concerning marketing and development of Seller

 

18

 

Products or Services applying those standards generally employed by
Buyer when making similar decisions with respect to other product and service
lines of Buyer.  In particular, during
the Earnout Period:

 

(i)                                     Buyer
shall use commercially reasonable efforts to cause the division or business
unit of Buyer primarily responsible for the operation of the Purchased Assets
(the “Seller
Product
Division”),
or any successor thereto, to continue to manufacture, sell and provide post
sales support for each of the Seller Products or Services, as such Seller
Products or Services may be modified from time to time;

 

(ii)                                  Buyer
shall not adopt a sales commission structure for Seller Products or Services
that disincentivises the sale of Seller Products or Services relative to Buyer
products or services by the Buyer’s sales employees; and

 

(iii)                               Buyer shall commit
working capital, marketing, research and development and other information
resources, personnel and facilities of Buyer or any of its Affiliates or
Subsidiaries to the Seller Product Division to support the sale, licensing and
provision of Seller Products or Services on at least the same basis as such
resources are provided to other divisions, business units or product lines
within the Buyer group.

 

3.4                                 Buyer
shall use commercially reasonable efforts to preserve the relationships of the
Business with respect to customers, suppliers, licensors, licensees, and
distributors, employees and others having business dealings with any Tiger
Seller as of the Closing Date.

 

3.5                                 Earnout
Distributions.

 

(a)                                  Earnout
Notice.  Subject to the terms of
this Article 3, within thirty (30) calendar days following the end of
the Earnout Period, Buyer shall deliver to Seller (1) a memorandum (the “Earnout Notice”) (A) stating the
dollar value of the cash to be paid pursuant to the Earnout, if any, and
(B) specifying in reasonable detail Buyer’s calculation of such dollar
value, and (C) attaching documentation demonstrating the basis for such
calculation, and (2) payment of such amount of cash with respect to the
Earnout.

 

(b)                                 Seller
Objection.  Seller shall, within
thirty (30) calendar days after delivery of the Earnout Notice, deliver to
Buyer in writing any objection thereto. 
Any such objection shall be in reasonable detail and include the
specific component or components of Buyer’s Earnout calculation in
dispute.  To the extent not specifically
and expressly disputed in a timely manner, Buyer’s Earnout calculation shall be
conclusive and binding on Seller absent manifest error.  If Seller objects in writing to Buyer’s
Earnout calculation prior to the expiration of such thirty (30) calendar
day period, Buyer and Seller shall use their reasonable best efforts to resolve
such dispute as promptly as possible. 
If Buyer and Seller are unable to resolve any such dispute within
thirty (30) business days of Seller’s delivery of such written objection,
then all amounts remaining in dispute shall be submitted to binding arbitration
in accordance with the terms and provisions of Section 11.8(c).

 

3.6                                 Earnout
as Asset Purchase Consideration. 
Any Earnout payable to Seller pursuant to this Article 3 will not
constitute compensation for services but rather will constitute part of the
consideration for the Purchased Assets acquired by Buyer in the Asset Purchase.

 

19

 

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF SELLER

 

Subject to the
exceptions set forth in the disclosure letter of Seller addressed to Buyer,
dated as of the Agreement Date and delivered to Buyer concurrently with the
parties’ execution of this Agreement (the “Seller
Disclosure Letter”), Seller represents and warrants to Buyer as set
forth below in this Article 4.  The
Seller Disclosure Letter shall be arranged in separate parts corresponding to
the numbered and lettered sections contained in this Agreement, and the
information disclosed in any numbered or lettered part shall be deemed to
relate to and to qualify the particular provision set forth in the
corresponding numbered or lettered section in this Agreement, as
applicable, and all other provisions of this Agreement to which the relevance
of such information is reasonably apparent from the text of such disclosure.

 

4.1                                 Organization
and Good Standing.  Seller is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has continuously been in good standing under
the laws of the State of Delaware at all times since its inception.  Each of Seller’s Subsidiaries is a
corporation duly organized, validly existing and, where the concept is
applicable, in good standing, under the laws of the jurisdiction of its
incorporation.  Telos Sellers have the
corporate power and authority to own, operate and lease its properties and to
carry on the Business.  Each Telos
Seller is duly qualified or licensed to do business, and is in good standing,
in each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its activities makes such qualification or
licensing necessary (each such jurisdiction being listed on Schedule 4.1
of the Seller Disclosure Letter). 
Seller has delivered or made available to Buyer’s legal counsel true and
complete copies of the currently effective Certificate of Incorporation and
Bylaws of Seller and the equivalent charter documents of each of its
Subsidiaries, each as amended to date. 
Neither Seller nor any of its Subsidiaries is in violation of its
Articles of Association or Memorandum of Association or Certificate of
Incorporation or Bylaws, as applicable, each as amended to date.

 

4.2                                 Subsidiaries.  Schedule 4.2(b) of the Seller
Disclosure Letter lists each of Seller’s Subsidiaries as of the date hereof,
each of which is wholly-owned, directly or indirectly, by Seller.  Except as set forth in Schedule 4.2(b)
of the Seller Disclosure Letter, neither Seller nor any of its Subsidiaries
directly or indirectly owns any equity or similar interest in or any interest
convertible, exchangeable or exercisable for, any equity or similar interest
in, any Person.

 

4.3                                 Power,
Authorization and Validity.

 

(a)                                  Power
and Authority.  Subject to approval
of the Asset Purchase and the adoption of this Agreement by (i) holders of
a majority of the outstanding shares of Seller Common Stock and Seller
Preferred Stock (voting together as a single voting class on an as-converted to
Seller Common Stock basis), (ii) holders of a majority of the outstanding
shares of Series B Stock (voting as a separate voting class),
(iii) holders of at least seventy-five percent of the outstanding shares
of Series C Stock (voting as a separate voting class), (iv) holders
of a majority of the outstanding shares of Series D Stock (voting as a
separate voting class), (v) holders of at least two-thirds of the
outstanding shares of Series E Stock (voting as a separate voting class),
(vi) holders of Seller Senior Convertible Notes representing at least
two-thirds of the aggregate principal amount of all outstanding Seller Senior
Convertible Notes, (collectively,

 

20

 

the “Seller Stockholder Approval”),
and subject to obtaining the corporate approvals of each other Telos Seller
described in Schedule 4.3(a) of the Seller Disclosure Letter all of
which have been obtained as of the date hereof, each Telos Seller has all
requisite corporate power and authority to enter into, execute, deliver and
perform its obligations under this Agreement and each of the Seller Ancillary
Agreements and to consummate the Asset Purchase.  The Asset Purchase and the execution, delivery and performance by
each Telos Seller of this Agreement, each of the Seller Ancillary Agreements to
which such Telos Seller is a party and all other agreements, transactions and
actions contemplated to be entered into hereby or thereby by such Telos Seller,
have been duly and validly approved and authorized by such Telos Seller’s Board
of Directors by unanimous vote or written consent of the entire membership of
such Telos Seller’s Board of Directors. 
Seller and the Seller Stockholders listed on Exhibit A-1
have executed and delivered to Buyer the Voting Agreement under which such
Seller Stockholders have delivered a written consent under which such Seller
Stockholders have voted their shares of Seller Stock in favor of the Asset
Purchase and the execution, delivery and performance by the Telos Sellers of
this Agreement, each of the Seller Ancillary Agreements and all other
agreements, transactions and actions contemplated hereby or thereby, which
votes are sufficient to obtain the Seller Stockholder Approval.

 

(b)                                 No
Consents.  No consent, approval,
order or authorization of, or registration, declaration or filing with, any
Governmental Authority, or any other Person, governmental or otherwise, is
necessary or required to be made or obtained by any Telos Seller to enable such
Telos Seller to lawfully execute and deliver, enter into, and perform its
obligations under this Agreement and each of the Seller Ancillary Agreements to
which it is a party or to consummate the Asset Purchase, except for the Seller
Stockholder Approval.

 

(c)                                  Enforceability.  This Agreement has been duly executed and
delivered by each Telos Seller.  This
Agreement and each of the Seller Ancillary Agreements are, or when executed by
each Telos Seller, as applicable, shall be, valid and binding obligations of
such Telos Seller, enforceable against such Telos Seller in accordance with
their respective terms, subject to the effect of (i) applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors generally and
(ii) rules of law and equity governing specific performance, injunctive
relief and other equitable remedies.

 

4.4                                 Capitalization
of Seller.

 

(a)                                  The
authorized capital stock of Seller consists solely of 150,000,000 shares of
Seller Common Stock and 112,700,000 shares of Seller Preferred Stock consisting
of 1,200,000 shares designated as Series A Stock, 4,500,000 shares
designated as Series B Stock, 7,000,000 shares designated as Series C
Stock, 30,000,000 shares designated as Series D Stock and 70,000,000
shares designated as Series E Stock. 
A total of 9,171,307 shares of Seller Common Stock; 1,200,000 shares of
Series A Stock, 3,520,061 shares of Series B Stock, 5,342,771 shares
of Series C Stock, 19,352,802 shares of Series D Stock and no shares
of Series E Stock are issued and outstanding as of the date hereof.  Each share of Seller Preferred Stock is
convertible into one share of Seller Common Stock.  Schedule 4.4(a) of the Seller Disclosure Letter sets
forth, for issued and outstanding shares of Seller Capital Stock (i) the
name of each Seller Stockholder and (ii) the numbers and kind of shares of
Seller Capital Stock held by each Seller Stockholder.  No shares of Seller Capital Stock are issued or outstanding as

 

21

 

 of the date hereof that are not
set forth on Schedule 4.4(a) of Seller Disclosure Letter.  Seller holds no treasury shares.  All issued and outstanding shares of Seller
Capital Stock have been duly authorized and validly issued and are fully paid
and nonassessable.

 

(b)                                 Application
of Proceeds.  The application of the
proceeds received by each Telos Seller set forth in Schedule 2.2(d) does
not conflict with any provision of the Certificate of Incorporation or Bylaws
of Seller, each as currently in effect, or the rights of any holders of Seller
Capital Stock or securities, notes or other instruments convertible into or exchangeable
for Seller Capital Stock.

 

(c)                                  No
Appraisal Rights.  No holder of
Seller Capital Stock has, or after the Closing Date will have, any dissenter’s
or appraisal rights under Applicable Law with respect to the transactions
contemplated by this Agreement.

 

4.5                                 No
Conflict.  Except as set forth in Schedule 4.5
of the Seller Disclosure Letter, neither the execution and delivery of this
Agreement or any of the Seller Ancillary Agreements by each Telos Seller, as
applicable, nor the consummation of the Asset Purchase or any other transaction
contemplated hereby or thereby, shall conflict with, or (with or without notice
or lapse of time, or both) result in a termination, breach, impairment or
violation of, or constitute a default under, or require any consent under, or
give to others any rights of termination, amendment or acceleration under:  (a) any provision of the Certificate of
Incorporation or Bylaws of Seller, in the case of Seller or the charter
documents of such Telos Seller, in the case of any other Telos Seller, each as
currently in effect; (b) in any material respect any Applicable Law
applicable to such Telos Seller or any of the Purchased Assets being
transferred by such Telos Seller hereunder; or (c) any Seller Material
Contract (as defined in Section 4.11) or any shareholder agreements or
voting agreements with respect to Seller Capital Stock to which the Seller is a
party, except, in the case of clause (c) where such conflict, termination,
breach, impairment, violation, default, failure to obtain consent, or rights of
termination, amendment or acceleration, would not have a material adverse
effect on the Purchased Assets.

 

4.6                                 Litigation.  Except as set forth in Schedule 4.6
of the Seller Disclosure Letter, there is no action, suit, arbitration,
mediation, proceeding, claim or investigation pending against Seller or its
Subsidiaries (or, to Seller’s knowledge, against any officer, director or
employee of Seller or its Subsidiaries in their capacity as such or relating to
their employment, services or relationship with Seller or its Subsidiaries)
before any Governmental Authority, arbitrator or mediator, other than
complaints which may have been filed with a Governmental Authority but not yet
served on Seller or its Subsidiaries, nor, to the knowledge of Seller, has any
such action, suit, arbitration, mediation, proceeding, claim or investigation
been threatened or filed with a Governmental Authority but not yet served on
Seller or its Subsidiaries.  Except as
set forth in Schedule 4.6 of the Seller Disclosure Letter, there is
no judgment, decree, injunction, rule or order of any Governmental Authority,
arbitrator or mediator outstanding against Seller or its Subsidiaries.  Except as set forth in Schedule 4.6
of the Seller Disclosure Letter, neither Seller nor any Subsidiary has any
action, suit, arbitration, mediation, proceeding, claim or investigation
pending against any Governmental Authority or other Person.

 

4.7                                 Taxes.  Except as set forth in Schedule 4.7
of the Seller Disclosure Schedule, each Telos Seller (a) has properly
completed and timely filed all foreign, federal, state, local and 

 

22

 

municipal Tax Returns required to be filed by it, (b) has timely
paid all material amounts of Taxes required to be paid by such Seller,
(c) has established an adequate accrual or reserve in accordance with GAAP
for the payment of all material amounts of Taxes payable in respect of the
periods or portions thereof prior to the Balance Sheet Date (which accrual or
reserve as of the Balance Sheet Date is fully reflected on the Seller Balance
Sheet), (d) has made all necessary material estimated Tax payments, and
(e) has no Liability for material amounts of Taxes in excess of the amount
so paid or accruals or reserves so established except for Taxes subsequent to
the Balance Sheet Date incurred in the ordinary course of business.  Each Telos Seller has not been a member of a
consolidated, combined, unitary or aggregate group for Tax purposes (other than
the group for which Seller is currently the common parent).  All Tax Returns in respect of which material
amounts of Taxes are shown to be payable are true, correct and complete in all
material respects, and Seller has provided Buyer with copies of such Tax
Returns.  Neither Seller nor any of its
Subsidiaries is delinquent in the payment of any material Tax or in the filing
of any Tax Returns, and no deficiencies for any Tax have been threatened,
claimed, proposed or assessed against Seller or any of its Subsidiaries or any
of its respective officers, employees or agents in their capacity as such.  Neither Seller nor any of its Subsidiaries
has received any written notification from the Internal Revenue Service or any
other taxing agency or Governmental Authority regarding any material issues
that (a) are currently pending before the Internal Revenue Service or any
other taxing agency or Governmental Authority (including any sales or use
taxing agency) regarding Seller or its Subsidiaries, or (b) have been raised
by the Internal Revenue Service or other taxing agency or Governmental
Authority and not yet finally resolved. 
No Tax Return of Seller or its Subsidiaries is under audit by the
Internal Revenue Service or any other taxing agency or Governmental Authority
and any such past audits (if any) have been completed and fully resolved to the
satisfaction of the applicable taxing agency or Governmental Authority
conducting such audit and all Taxes determined by such audit to be due from
Seller or its Subsidiaries have been paid in full to the applicable taxing
agencies or Governmental Authorities. 
No Tax liens are currently in effect against any of the Purchased Assets
other than liens that arise by operation of law for Taxes not yet due and
payable, for which reserves have been established in accordance with GAAP.  There is not in effect any waiver by Seller
or its Subsidiaries of any statute of limitations with respect to any Taxes nor
has Seller agreed to any extension of time for filing any Tax Return that has
not been filed.  Each Telos Seller has
complied (and until the Closing Date will comply) with all Applicable Law
relating to the payment and withholding of Taxes (including withholding of
Taxes pursuant to Sections 1441, 1442, 1445 and 1446 of the Code or
similar provisions under any foreign law), has, within the time and in the
manner prescribed by law, withheld from employee wages and paid over to the
proper taxing agencies and Governmental Authorities all amounts required to be
so withheld and paid over under all Applicable Law (including Federal Insurance
Contribution Act, Medicare, Federal Unemployment Tax Act and relevant state
income and employment Tax withholding laws), including federal and state income
Taxes, and has timely filed all withholding Tax Returns.

 

4.8                                 Seller
Financial Statements; Undisclosed Liability.

 

(a)                                  Seller
Financial Statements.  Schedule 4.8(a)
of the Seller Disclosure Letter includes the Seller Financial Statements.  The Seller Financial Statements:  (i) derived from and are in accordance with
the books and records of Seller; (ii) fairly present the consolidated financial condition of Seller at the dates
therein indicated and the consolidated

 

23

 

results of operations and cash flows of Seller for the periods therein
specified (subject, in the case of unaudited interim period financial
statements, to normal recurring year-end audit adjustments), and
(iii) have been prepared in accordance with GAAP applied on a basis
consistent with prior periods (except that any Seller Financial Statements that
are unaudited do not have notes thereto and are subject to normal recurring
year-end audit adjustments).  All
reserves established by Seller that are set forth in or reflected in the Seller
Balance Sheet have been established in accordance with GAAP.  The 2003 Audited Financial Statements (as
defined in Section 6.13):  (i) will
be derived from and will be in accordance with the books and records of Seller;
(ii) will fairly present the consolidated financial condition of Seller at
the dates therein indicated and the consolidated results of operations and cash
flows of Seller for the periods therein specified and (iii) will be
prepared in accordance with GAAP applied on a basis consistent with prior periods.

 

(b)                                 Undisclosed
Liabilities.  Except as set forth in
Schedule 4.8(b) of the Seller Disclosure Letter, no Telos Seller
has any Liability, except for those (i) shown on the Seller Balance Sheet,
(ii) that were incurred after the Balance Sheet Date in the ordinary
course of such Telos Seller’s business consistent with its past practices and
which have not had and would not reasonably be expected to have a Material
Adverse Effect on Seller, (iii) that are not required to be set forth in
the Seller Balance Sheet under GAAP, or (iv) as otherwise disclosed herein
or on the Seller Disclosure Letter or the Seller Financial Statements.

 

(c)                                  Accounts
Receivable.  All accounts receivable
of the Telos Sellers included in the Purchased Assets are, to the Seller’s knowledge,
valid receivables subject to no setoffs, and are, to the Seller’s knowledge,
current and collectible subject in each case only to the reserve for bad debts
set forth on the face of the Seller Balance Sheet as such reserve may be
adjusted with respect to operation of the Business and transactions entered
into through the Closing Date in accordance with past practice of the Telos
Sellers.

 

(d)                                 Inventories.  The inventories of the Telos Sellers are in
good and merchantable condition in all material respects, are suitable and
usable for the purposes for which they are intended and are in a condition such
that they can be sold in the ordinary course of the business of the Telos
Sellers consistent with past practice. 
Each Telos Seller has good and marketable title to its inventories, if
any, free and clear of all Encumbrances other than Permitted Encumbrances.

 

(e)                                  Competition.  Seller hereby represents and warrants that
(i) Seller does not have (1) annual net sales of $10 million or
more as stated on Seller’s last regularly prepared annual statement of income
and expense or (2) total assets of $10 million or more as stated on
the last regularly prepared balance sheet of Seller; (ii) the annual
statement and balance sheet referenced in this paragraph include the annual net
sales and total assets of all entities included within the Seller; and
(iii) such annual statement and balance sheet have been prepared
consistent with past practice (including without limitation, with respect to
accounting principles) of Seller and have been prepared within 15 months prior
to the date of execution of this agreement.

 

4.9                                 Title to
Properties.  Except as set forth in Schedule 4.9(i)
of the Seller Disclosure Letter, Telos Sellers have good and marketable title
to all of the Purchased Assets, free and clear of all Encumbrances, other than
Permitted Encumbrances.  Except as set
forth in Schedule 4.9(i)  

 

24

 

of the Seller Disclosure Letter, the Telos Sellers have the complete
and unrestricted corporate power and unqualified right to sell, transfer,
convey, assign and deliver the Purchased Assets to the Buyer without monetary
penalty.  Except as set forth in Schedule 4.9(i)
of the Seller Disclosure Letter, following the consummation of the transactions
contemplated by this Agreement and the execution of the instruments of transfer
contemplated by this Agreement, the Buyer will acquire good and marketable
title to all of the Purchased Assets, free and clear of all Encumbrances, other
than Permitted Encumbrances, and without incurring any monetary penalty.  Notwithstanding the foregoing in this
Section 4.9, the representations and warranties of this Section 4.9
do not extend to Encumbrances arising out of or relating to any Intellectual
Property, or rights related thereto, which Intellectual Property and related
rights shall instead be governed by the representations and warranties of
Seller set forth in Section 4.13 below. 
All properties used in the operations of the Business are reflected on
the Seller Balance Sheet to the extent required under GAAP to be so
reflected.  All Purchased Assets
consisting of machinery, vehicles, equipment and other tangible personal
property are in good condition and repair, normal wear and tear excepted.  Schedule 4.9(ii) of the Seller
Disclosure Letter lists all real property leased by the Seller and its
Subsidiaries.  Seller or one of its
Subsidiaries is in peaceful and undisturbed possession of each such parcel of
leased real property and there are no contractual or legal restrictions that
preclude or restrict the ability to use such leased real property for the
purposes for which it is currently being used. 
All leases of real or personal property to which Seller or any of its
Subsidiaries is a party are, to Seller’s knowledge, in full force and
effect.  To Seller’s knowledge, neither
Seller nor any of its Subsidiaries is in violation of any zoning, building,
safety or environmental ordinance, regulation or requirement or other law or
regulation applicable to the operation of the Purchased Assets, nor has Seller
received any written notice of violation of law with which it or any of its
Subsidiaries has not complied.  Neither
Seller nor any of its Subsidiaries owns any real property.  Schedule 4.9(iii) of the Seller
Disclosure Letter sets forth all tangible Purchased Assets owned or leased by
Seller or its Subsidiaries with an individual value of $50,000 or greater.  To Seller’s knowledge, Telos Sellers have
access, on commercially reasonable terms, to all products and services
reasonably necessary to carry on the Business. 
The Purchased Assets and the Excluded Assets constitute all of the
assets and properties used by Seller in the conduct of the Business.

 

4.10                           Absence
of Certain Changes.  Except as set forth
in Schedule 4.10 of the Seller Disclosure Letter, since the Balance
Sheet Date, Seller has operated its business in the ordinary course consistent
with its past practices, and since such date there has not been with respect to
Seller (together with its Subsidiaries) any:

 

(a)                                  Material
Adverse Change;

 

(b)                                 amendment
or change in Seller’s Certificate of Incorporation or Bylaws or the
organizational documents of any other Telos Seller;

 

(c)                                  incurrence,
creation or assumption of (i) any Encumbrance on any of its material
assets or properties (other than Permitted Encumbrances), (ii) any
material Liability or any indebtedness for borrowed money (other than the
issuance of Seller Convertible Notes), or (iii) any Liability as a
guarantor or surety with respect to the obligations of others;

 

25

 

(d)                                 payment or discharge
of any Encumbrance on any of its material assets or properties, or payment or
discharge of any of its material Liabilities (other than the issuance of Seller
Convertible Notes), in each case that was not either shown on the Seller
Balance Sheet or incurred in the ordinary course of its business after the
Balance Sheet Date in an amount not in excess of $75,000 for any single
Liability to a particular creditor;

 

(e)                                  purchase,
license, sale, grant, assignment or other disposition or transfer, or any
agreement or other arrangement for the purchase, license, sale, assignment or
other disposition or transfer, of any of its material assets (including Seller
IP Rights (as defined in Section 4.13(a)) and other intangible assets),
properties or goodwill other than the sale or nonexclusive license of its
products to its customers in the ordinary course of its business consistent
with its past practices;

 

(f)                                    damage,
destruction or loss of any material property or material asset, whether or not
covered by insurance, having a Material Adverse Effect;

 

(g)                                 declaration,
setting aside or payment of any dividend on, or the making of any other
distribution in respect of, its capital stock, or any split, combination or
recapitalization of its capital stock or any direct or indirect redemption,
purchase or other acquisition of any of its capital stock or any change in any
rights, preferences, privileges or restrictions of any of its outstanding
securities (other than repurchases of stock in accordance with the Seller
Option Plan or applicable Contracts in connection with the termination of
service of employees or other service providers or as contemplated herein);

 

(h)                                 change
or increase in the compensation payable or to become payable to any of its
officers or employees, or in any bonus, pension, severance, retention,
insurance or other benefit payment or arrangement (including stock awards,
stock option grants, stock appreciation rights or stock option grants) made to
or with any of such officers or employees (other than increases in the base
salaries that do not exceed 20% of such base salaries);

 

(i)                                     change
with respect to its management, supervisory or other key personnel, or any
labor dispute or claim of unfair labor practices;

 

(j)                                     entering
into, amendment of, relinquishment, termination or nonrenewal by it of any
material Contract, other than in the ordinary course of its business consistent
with its past practices, or any default by it under any such material Contract;

 

(k)                                  entering
into by it of any transaction, contract, agreement, arrangement, commitment or
undertaking that by its terms requires or contemplates a current and/or future
financial commitment, expense (inclusive of overhead expense) or obligation on
its part that involves in excess of $75,000 or that is not entered into in the
ordinary course of its business consistent with its past practices;

 

(l)                                     except
for the letter of intent between Buyer and Seller and dated as of
April 6, 2004 relating to the transactions contemplated by this
Agreement, making or entering into any Contract with respect to any
acquisition, sale or transfer of any Purchased Asset or any stock of any Telos
Seller;

 

26

 

(m)                               announcement
of or any entry into any Contract to do any of the things described in the
preceding clauses (a) through (m) (other than agreements with Buyer and
its representatives regarding the transactions contemplated by this Agreement).

 

4.11                           Contracts,
Agreements, Arrangements, Commitments and Undertakings.  Schedules 4.11(a)-(k) of the Seller
Disclosure Letter set forth a list of each of the following Contracts to which
Seller or any of its Subsidiaries is a party or to which Seller or any of its
assets or properties is bound and that is currently in effect (each a “Seller Material Contract”):

 

(a)                                  any
Contract providing for payments (whether fixed, contingent or otherwise) by or
to it in an aggregate amount of $50,000 or more in 2004 or any year thereafter;

 

(b)                                 any
Contract for or relating to the employment by it of any director, officer,
employee or consultant, or any other type of Contract with any of its
directors, officers, employees or consultants that is not terminable by it
within 60 days without cost or other Liability other than severance in
accordance with Seller’s severance policies as set forth in Schedule 4.11(b);

 

(c)                                  any
indenture, mortgage, trust deed, promissory note, loan agreement, security agreement,
guarantee or other Contract for or with respect to the borrowing of money, a
line of credit, any currency exchange, commodities or other hedging
arrangement, or a leasing transaction of a type required to be capitalized in
accordance with Statement of Financial Accounting Standards No. 13 of the
Financial Accounting Standards Board;

 

(d)                                 any
lease or other Contract under which it is lessee of or holds or operates any
material items of tangible personal property or real property owned by any
third party;

 

(e)                                  any
Contract with a Significant Customer (as defined in Section 4.23(a)) or
Significant Supplier (as defined in Section 4.23(b));

 

(f)                                    any
Contract for the future purchase, sale, license, provision or manufacture of
products, materials, supplies, equipment or services requiring payment to or
from it in an amount in excess of $50,000;

 

(g)                                 any
material dealer, distributor, OEM (original equipment manufacturer), VAR (value
added reseller), sales representative or similar Contract under which any third
party is authorized to sell, sublicense, lease, distribute, market or take
orders for any of its products, services or technology;

 

(h)                                 any
Contract that restricts it from engaging in the Business; from participating or
competing in any line of business or market; from freely setting prices for its
products, services or technologies (including most favored customer pricing
provisions) or from engaging in the Business in any market or geographic area;

 

(i)                                     any
Seller IP Rights Agreement (as defined in Section 4.13(b));

 

27

 

(j)                                     any
material Contract in which any of its officers or directors, or any
stockholders of Seller, or any member of their immediate families, is directly
or indirectly interested; or

 

(k)                                  any
Contract with a Governmental Authority or any Governmental Permit (as defined
in Section 4.14(b)).

 

A true and
complete copy of each agreement or document required by these subsections
(a)-(k) of this Section 4.11 to be listed on Schedule 4.11 of
the Seller Disclosure Letter has been delivered or made available to Buyer’s
legal counsel.  All Seller Material
Contracts are in written form.

 

4.12                           No
Default; No Restrictions.

 

(a)                                  (i) Each
Seller Material Contract is a legal, valid and binding agreement in accordance
with its respective terms; (ii) except as set forth in Schedule 4.12(a)(ii)
of the Seller Disclosure Letter, no Telos Seller has received any claim of
material default under or cancellation of any Seller Material Contract and no
Telos Seller is in breach or violation of, or default under, any Seller
Material Contract in any material respect; (iii) to the Seller’s
knowledge, as of the date of this Agreement, no other party is in breach or
violation of, or default under, any Seller Material Contract in any material
respect; and (iv) neither the execution of this Agreement nor the
consummation of any transactions contemplated by this Agreement shall
constitute a default under, give rise to cancellation rights under, or
otherwise materially adversely affect any of the rights of the Telos Sellers
under any Seller Material Contract.

 

(b)                                 Except
as listed in Schedule 4.11(h) of the Seller Disclosure Letter,
neither Seller nor any of its Subsidiaries is a party to, and no material
Purchased Asset is bound or affected by, any judgment, injunction, order,
decree, Contract (noncompete or otherwise) that restricts or prohibits, or
purports to restrict or prohibit, Seller or, following the Closing, Buyer, from
freely engaging in the Business or from competing anywhere in the world
(including any judgments, injunctions, orders, decrees, Contracts restricting
the geographic area in which Seller or its Subsidiaries may sell, license,
market, distribute or support any products or technology or provide services or
restricting the markets, customers or industries that Seller or its
Subsidiaries may address in operating the Business or restricting the prices
that Seller or its Subsidiaries may charge for its products, technology or
services (including most favored customer pricing provisions)).

 

4.13                           Intellectual
Property.

 

(a)                                  Except
as set forth in Schedule 4.13(a) of the Seller Disclosure Letter,
to Seller’s knowledge, Seller or one of its Subsidiaries (i) owns and has
independently developed or (ii) has the valid right or license to use, possess,
develop, sell, license, copy, distribute, market, advertise and/or dispose of
all Intellectual Property used in the conduct of the Business in the same
manner as such Intellectual Property is used in the Business as of Closing
(such Intellectual Property being hereinafter collectively referred to as the “Seller IP Rights”).  Other than rights related to third party
patents, trademarks, service marks and applications therefor, the Seller IP
Rights include all of the Intellectual Property used in the conduct of the
business as of the

 

28

 

Closing, and to the Seller’s knowledge, there is no other Intellectual
Property (including rights related to third party patents, trademarks, service
marks and applications therefor) necessary for such conduct of the Business as
of the Closing.  As used in this
Agreement, “Seller-Owned IP Rights”
means Seller IP Rights that are owned or exclusively licensed to Seller; and “Seller-Licensed IP Rights” means Seller IP
Rights that are not Seller-Owned IP Rights and are licensed to Seller by a
third party on a non-exclusive basis.

 

(b)                                 Except
as set forth in Schedule 4.13(b) of the Seller Disclosure Letter,
neither the execution, delivery and performance of this Agreement or the Seller
Ancillary Agreements nor the consummation of the Asset Purchase and the other
transactions contemplated by this Agreement and/or by the Seller Ancillary
Agreements shall, in accordance with their terms:  (i) constitute a material breach of or default under any
instrument, license or other Contract governing any Seller IP Right
(collectively, the “Seller IP Rights
Agreements”); (ii) cause the forfeiture or termination of, or
give rise to a right of forfeiture or termination of, any Seller IP Right; or
(iii) pursuant to the terms of any Assumed Contract, materially impair the
right of Seller or, following the Closing, of Buyer to use, possess, sell or
license any Seller IP Right or portion thereof.  Except as set forth in Schedule 4.13(b) of the Seller
Disclosure Letter, there are no royalties, honoraria, fees or other payments
payable by Seller in excess of $10,000 to any particular third person (other
than salaries payable to employees and independent contractors not contingent
on or related to use of their work product) under any Seller IP Rights
Agreements as a result of the ownership, use, possession, license-in, sale,
marketing, advertising or disposition of any Seller IP Rights by Seller and
none shall become payable as a result of the consummation of the transactions
contemplated by this Agreement.  Except
as set forth in Schedule 4.13(b) of the Seller Disclosure Letter,
after the Closing, all Seller-Owned IP Rights will be fully transferable,
alienable or licensable by Buyer without restriction and without payment of any
kind to any third party.

 

(c)                                  Schedule 4.13(c)-1
of the Seller Disclosure Letter sets forth a list (by name and version number)
of each of the Seller Products or Services. 
Except as set forth in Schedule 4.13(c)-2 of the Seller
Disclosure Letter, to the knowledge of Seller, neither the operation of the
Business nor the use, development, manufacture, marketing, license, sale,
furnishing or intended use of any Seller Product or Service within the scope of
the Business (i) violates any Assumed Contract or (ii) infringes,
misappropriates or otherwise violates any Intellectual Property right of any
other party.  Except as set forth in Schedule 4.13(c)-3
of the Seller Disclosure Letter, there is no pending (other than complaints
that may have been filed with a Governmental Authority, have not yet been
served on Seller or its Subsidiaries and with respect to which Seller and its
Subsidiaries have no knowledge), or to the knowledge of Seller, threatened
claim or litigation brought against Seller or its Subsidiaries
(i) contesting the validity, ownership or right of Seller or its
Subsidiaries to exercise any Seller IP Right; (ii) asserting that any
Seller IP Right, or the use, sale, license or disposition thereof in the
Business, conflicts with, misappropriates, infringes or otherwise violates, or
shall conflict with, or misappropriate, infringe or otherwise violate, the
Intellectual Property rights of any other party, and neither Seller nor any of
its Subsidiaries has received any written notice from any third party alleging
any of the foregoing or offering a license under any such third party
patents.  Except as set forth in Schedule 4.13(c)-4
of the Seller Disclosure Letter, neither Seller nor any of its Subsidiaries is
subject to any pending proceeding or outstanding order, contract or stipulation
restricting in any manner the use, distribution, transfer, or licensing by
Seller or its Subsidiaries of any

 

29

 

 Seller-Owned IP Rights or any
Seller Product or Service or any Seller-Licensed IP Rights or that may affect
the validity, use or enforceability of any such Seller-Owned IP Rights, or
restricting the conduct of the Business in order to accommodate Intellectual Property
rights of a third party.

 

(d)                                 Except
as set forth in Schedule 4.13(d) of the Seller Disclosure Letter,
to the knowledge of Seller, no current or former employee, consultant or
independent contractor of Seller or its Subsidiaries:  (i) is in material violation of any term or covenant of any
employment contract, patent disclosure agreement, invention assignment
agreement, nondisclosure agreement, noncompetition agreement or any other
Contract with any other party by virtue of such employee’s, consultant’s or
independent contractor’s being employed by, or performing services for, Seller
or using trade secrets or proprietary information of others without permission;
or (ii) has developed any technology, software or other copyrightable,
patentable or otherwise proprietary work for Seller or its Subsidiaries that is
subject to any Contract under which such employee, consultant or independent
contractor has assigned or otherwise granted to any third party any rights
(including Intellectual Property) in or to such technology, software or other
copyrightable, patentable or otherwise proprietary work.  To Seller’s knowledge, neither the
employment of any employee of Seller or its Subsidiaries, nor the use by Seller
or its Subsidiaries of the services of any consultant or independent contractor
subjects Telos Sellers to any Liability to any third party for improperly
soliciting such employee, consultant or independent contractor to work for
Seller or such Subsidiary, whether such Liability is based on contractual or other
legal obligations to such third party.

 

(e)                                  Telos
Sellers have taken all reasonable steps consistent with industry practices to
protect, preserve and maintain the secrecy and confidentiality of the Seller IP
Rights and to preserve and maintain all trade secrets in the Seller IP
Rights.  Except as set forth in Schedule 4.13(e)-1
of the Seller Disclosure Letter, all current and former officers, employees,
consultants and independent contractors of Telos Sellers having access to
proprietary information of Seller or its Subsidiaries, its customers or
business partners have executed and delivered to Seller an agreement regarding
the protection of such proprietary information (in the case of proprietary
information of Seller’s customers and business partners, to the extent required
by such customers and business partners); and copies of all such agreements
have been delivered to Buyer’s legal counsel. 
Except as set forth in Schedule 4.13(e)-1 of the Seller
Disclosure Letter, Seller has secured valid written assignments from all of
Seller’s and its Subsidiaries’ current and former consultants, independent
contractors and employees who were involved in, or who materially contributed
to, the creation or development of any Seller-Owned IP Rights, of the rights to
such contributions that may be owned by such persons or that Seller or its
Subsidiaries does not already own by operation of law.  No current or former employee, officer,
director, consultant or independent contractor of Seller or its Subsidiaries
has any right, license, claim or interest whatsoever in or with respect to any
Seller-Owned IP Rights.  Except as set
forth in Schedule 4.13(e)-2 of the Seller Disclosure Letter, to the
extent that any technology, software or Intellectual Property developed or otherwise
owned by a third party is incorporated into, integrated or bundled by Seller or
its Subsidiaries with any of the Seller Products or Services (“Third Party Product Technology”), Seller
has a valid, written agreement with such third party with respect thereto
pursuant to which Seller either (i) has obtained complete, unencumbered
and unrestricted ownership of, and is the exclusive owner of, or (ii) has
obtained perpetual, irrevocable, non terminable licenses (sufficient for the
conduct of the Business) to, all such third party’s Intellectual Property in
such Third Party Product Technology.

 

30

 

Schedule 4.13(e)-3 of the Seller
Disclosure Letter sets forth a list and description of all Third Party Product
Technology.

 

(f)                                    Schedule 4.13(f)
of the Seller Disclosure Letter contains a true and complete list of
(i) all Seller-Owned IP Rights in the form of worldwide registrations made
by or on behalf of any Telos Seller of any patents, copyrights, mask works, trademarks,
service marks, Internet domain names or Internet or World Wide Web URLs or
addresses with any Governmental Authority or quasi-governmental authority,
including Internet domain name registries, (ii) all Seller-Owned IP Rights
in the form of applications, registrations, filings and other formal written
governmental actions made or taken pursuant to Applicable Law by any Telos
Seller to secure, perfect or protect its interest in the Seller IP Rights,
including all patent applications, copyright applications, mask work
applications and applications for registration of trademarks and service marks,
and where applicable the jurisdiction in which each of the items of the Seller
IP Rights has been applied for, filed, issued or registered, and (iii) all
inter parties proceedings or actions before any court or tribunal (including
the United States Patent and Trademark Office) or equivalent authority anywhere
else in the world) related to any of the Seller-Owned IP Rights that are owned
by Seller.  One of the Telos Sellers is
the record owner of each registered patent, trademark, service mark, Internet
domain name, Internet or World Wide Web URL or address, copyright and mask work
right held by Seller or its Subsidiaries and such registrations are subsisting
and, to the Seller’s knowledge, are valid and enforceable.

 

(g)                                 Telos
Sellers exclusively own all right, title and interest in and to all
Seller-Owned IP Rights free and clear of all Encumbrances and licenses (other
than licenses and rights listed in Schedule 4.13(g)-1 of the Seller
Disclosure Letter and Permitted Encumbrances). 
The right, license and interest of Seller or its Subsidiaries in and to
all Seller-Licensed IP Rights are free and clear of all Encumbrances and
licenses (except as set forth in the applicable terms and conditions of the
agreements under which the corresponding Seller-Licensed IP Rights were
licensed to Seller or its Subsidiaries and such other than licenses and rights
listed in Schedule 4.13(g)-2 of the Seller Disclosure Letter and Permitted
Encumbrances).

 

(h)                                 Schedule 4.13(h)-1
of the Seller Disclosure Letter contains a true and complete list of all
licenses, sublicenses and other Contracts as to which Seller or its
Subsidiaries is a party and pursuant to which any Person is authorized to use
any Seller-Owned IP Rights.  Schedule 4.13(h)-2
of the Seller Disclosure Letter contains a true and complete list of all
licenses, sublicenses and other Contracts as to which Seller or its
Subsidiaries is a party and pursuant to which Seller or its Subsidiaries is
authorized to use the Seller-Licensed IP Rights (other than licenses of
software generally available to the public at a per copy license fee of less
than $1,000 per copy).

 

(i)                                     Neither
Seller nor any other party acting on its behalf has disclosed or delivered to
any party, or permitted the disclosure or delivery to any escrow agent or other
party of, any Seller Source Code (as defined below).  No event has occurred, and no circumstance or condition exists,
that (with or without notice or lapse of time, or both) shall result in the
disclosure or delivery by Seller or any other party acting on its behalf to any
party of any Seller Source Code.  Schedule 4.13(i)
of the Seller Disclosure Letter identifies each Contract pursuant to which Seller
has deposited, or is or may be required to deposit, with an escrow agent or
other party, any Seller Source Code and further describes whether the execution
of this Agreement or

 

31

 

the consummation of the Asset Purchase or any of the other transactions
contemplated by this Agreement, in and of itself, would result in the release
from escrow of any Seller Source Code. 
As used in this Section 4.13(i), “Seller
Source Code” means, collectively, any human readable software source
code, or any material portion or aspect of the software source code, that
constitutes Seller-Owned IP Rights.

 

(j)                                     Except
as set forth in Schedule 4.13(j)-1 of the Seller Disclosure Letter,
to Seller’s knowledge, there is no unauthorized use, disclosure, infringement
or misappropriation of any Seller-Owned IP Rights by any third party, including
any current or former employee of Seller or its Subsidiaries.  Except as set forth in Schedule 4.13(j)-2
of the Seller Disclosure Letter, neither Seller nor its Subsidiaries has agreed
to indemnify any person for any infringement, misappropriation, dilution,
conflict with or other violation of any Intellectual Property of any third
party with respect to any Seller Product or Service that has been sold,
licensed to third parties, leased to third parties, supplied, marketed,
distributed or provided by Seller or its Subsidiaries (other than pursuant to
its standard customer agreement, the form of which is included in Schedule 4.13(j)-2
of the Seller Disclosure Letter).

 

(k)                                  Except
as set forth in Schedule 4.13(k) of the Seller Disclosure Letter,
all software developed by Seller or its Subsidiaries and licensed by Seller or
its Subsidiaries to customers and all Seller Products or Services provided by or
through Seller or its Subsidiaries to customers on or prior to the Closing Date
conform in all material respects to applicable contractual commitments, express
and implied warranties (to the extent not expressly disclaimed in Contracts
with such customers), product specifications and product Documentation and to
any representations provided to customers, and neither Seller nor any of its
Subsidiaries has any material Liability for replacement or repair thereof or
other damages in connection therewith in excess of any reserves therefor
reflected on the Seller Balance Sheet. 
Seller has not had any of its products returned by a purchaser thereof
except for normal warranty returns consistent with past history and those
returns that would not result in a reversal of any material revenue by Seller.

 

(l)                                     Except
as set forth in Schedule 4.13(l) of the Seller Disclosure Letter,
no government funding, facilities of a university, college, other educational
institution or research center, was used in the development of the Seller
Products or Services, computer software programs or applications owned by
Seller.  To Seller’s knowledge, no
current or former employee, consultant or independent contractor of Seller or
its Subsidiaries who was involved in, or who contributed to, the creation or
development of any Seller-Owned IP Rights has performed services for the
government, for a university, college or other educational institution or for a
research center during a period of time during which such employee, consultant or
independent contractor was also performing services for Seller or its
Subsidiaries.

 

(m)                               Except
as set forth in Schedule 4.13(m) of the Seller Disclosure Letter,
no software developed by Seller or its Subsidiaries or covered by any
Seller-Owned IP Right that is owned by Seller has been distributed in whole or
in part or developed with or used with any Public Software by Seller or its
Subsidiaries in a manner that would require such software to be disclosed or
distributed in source code form or made available at no charge.  As used in this Section 4.13(m), “Public Software” means any software that
(i) contains, or is derived in any manner (in whole or in part) from, any
software that is distributed as free software, open source

 

32

 

software (e.g., Linux) or (ii) requires as a condition of its use,
modification or distribution that it be disclosed or distributed in source code
form or made available at no charge. 
Public Software includes without limitation software licensed under the
GNU’s General Public License (GPL) or Lesser/Library GPL, the Mozilla Public
License, the Netscape Public License, the Sun Community Source License, the Sun
Industry Standards License, the BSD License, and the Apache License.

 

4.14                           Compliance
with Laws.

 

(a)                                  Each
Telos Seller has complied, and is now and at the Closing Date shall be in
compliance, in all material respects with all Applicable Law.

 

(b)                                 Each
Telos Seller hold all material permits, licenses and approvals from, and has made
all material filings with, government (and quasi-governmental) agencies and
authorities, that are necessary and/or legally required to be held by it to
conduct the Business without any violation of Applicable Law (“Governmental Permits”), the lack of which
would have a Material Adverse Effect. 
Neither Seller nor any of its Subsidiaries has received any written
notice from any Governmental Authority regarding (i) any violation of law
or any Governmental Permit or any failure to comply with any term or requirement
of any Governmental Permit or (ii) any revocation, withdrawal, suspension,
cancellation, termination or modification of any Governmental Permit.

 

(c)                                  Neither
Seller nor, to Seller’s knowledge, any Subsidiary, director, officer or
employee of Seller has, for or on behalf of Seller, (i) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity, (ii) made any unlawful payment to foreign
or domestic government officials or employees or to foreign or domestic
political parties or campaigns or violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended, or (iii) made any other payment in
violation of Applicable Law.

 

4.15                           Certain
Transactions and Agreements.  Except
as set forth in Schedule 4.15 of the Seller Disclosure Letter, to
the knowledge of Seller, none of the officers, directors or employees of Seller
nor any member of their immediate families has any direct ownership interest in
any firm or corporation that competes with, or does business with, or has any
contractual arrangement with, Seller or any of its Subsidiaries (except with
respect to any interest in less than 1% of the stock of any corporation whose
stock is publicly traded).  Except as
set forth in Schedule 4.15 of the Seller Disclosure Letter, none of
said officers, directors, employees or stockholders or any member of their
immediate families, is a party to, or otherwise directly or indirectly
interested in, any Contract with Seller or any Subsidiary, except for normal
compensation for services as an officer, director or employee thereof that have
been disclosed to Buyer.  None of said
officers, directors, employees, stockholders or immediate family members has any
interest in any property, real or personal, tangible or intangible (including
any Seller IP Rights or any other Intellectual Property), that is used in, or
that pertains to, the Business, except for the rights of a stockholder under
Applicable Law.

 

33

 

4.16                           Employees,
ERISA and Other Compliance.

 

(a)                                  Each
Telos Seller is in compliance in all material respects with all Applicable Law
and Contracts relating to employment, employment practices, immigration, wages,
hours, and terms and conditions of employment, including employee compensation
matters.  A complete list of all
employees, officers and consultants of Telos Sellers and their current title
and/or job description, compensation has been delivered to Buyer and its
counsel.  All employees of Telos Sellers
are legally permitted to be employed by Seller in the jurisdiction in which
such employee is employed in their current job capacities for the maximum
period allowed under Applicable Law. 
Except as set forth in Schedule 4.16(a)-2 of the Seller Disclosure
Letter, neither Seller nor any of its Subsidiaries has any employment or
consulting Contracts currently in effect that are not terminable within 60 days
without penalty (other than agreements with the sole purpose of providing for
the confidentiality of proprietary information or assignment of inventions).

 

(b)                                 No
Telos Seller (i) is now, or has ever been, subject to a union organizing
effort, (ii) is subject to any collective bargaining agreement with
respect to any of its employees, and (iii) is subject to any other
Contract with any trade or labor union, employees’ association or similar
organization, and (iv) has current labor disputes with any trade or labor
union, employees’ association or similar organization.  Telos Sellers have good labor relations, and
Seller has no knowledge of any facts indicating that the consummation of the
Asset Purchase or any of the other transactions contemplated hereby shall have
a material adverse effect on such labor relations.

 

(c)                                  No
Telos Seller (or ERISA Affiliate thereof) maintains or contributes to, or has
ever maintained or contributed to, any “pension plan” within the meaning of
Section 3(2) of ERISA or any retiree welfare plan.

 

(d)

 

(i)                                     Schedule 4.16(d)
of the Seller Disclosure Letter lists each material employment, consulting,
severance or other similar Contract, each “employee welfare benefit plan” as
defined in Section 3(1) of ERISA and each plan or arrangement (written or
oral) providing for insurance coverage, workers’ benefits, vacation benefits, severance
benefits, disability benefits, death benefits, hospitalization benefits,
retirement benefits, deferred compensation, profit-sharing, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms of
incentive compensation or post-retirement insurance, compensation or benefits
for employees, consultants or directors that is entered into, maintained or
contributed to by any Telos Seller or any ERISA Affiliate and covers any
employee of Seller or its Subsidiaries. 
Such Contracts, plans and arrangements as are described in this
Section 4.16(d) are hereinafter collectively referred to as “Seller Benefit Arrangements.”

 

(ii)                                  Each
Seller Benefit Arrangement has been maintained in compliance in all material
respects with its terms and with the requirements prescribed by any and all
Applicable Law that is applicable to such Seller Benefit Arrangement.

 

(iii)                               Seller
has delivered to Buyer and its legal counsel a complete and correct copy of
each Seller Benefit Arrangement.

 

34

(iv)                              Seller
has timely filed and delivered or made available to Buyer and its legal counsel
all material written communications within the last year with participants, the
Internal Revenue Service, the U.S. Department of Labor or any other
Governmental Authority, administrators, trustees, beneficiaries and alternate
payees relating to any Seller Benefit Arrangement.

 

(v)                                 No
suit, administrative proceeding, action or other litigation has been brought,
or to the knowledge of Seller, is threatened in writing against or with respect
to any Seller Benefit Arrangement, including any audit or inquiry by the
Internal Revenue Service or the U.S. Department of Labor.

 

(vi)                              All
material contributions due from Seller or its Subsidiaries with respect to any
of the Seller Benefit Arrangements have been made or have been accrued on
Seller’s financial statements (including the Seller Financial Statements), and
no further contributions shall be due or shall have accrued thereunder as of
the Closing Date (other than contributions accrued in the ordinary course of
business, consistent with past practices, after the Balance Sheet Date as a
result of the operations of Seller after the Balance Sheet Date).

 

(e)                                  Each
Seller Benefit Arrangement, to the extent applicable, is in compliance, in all
material respects, with the continuation coverage requirements of
Section 4980B of the Code, Sections 601 through 608 of ERISA, as
applicable, the Americans with Disabilities Act of 1990, as amended, and the
regulations thereunder, the Health Insurance Portability and Accountability Act
of 1996, as amended, the Women’s Health and Cancer Rights Act of 1998, and the
Family Medical Leave Act of 1993, as amended, and the regulations thereunder,
as such requirements affect Seller and its employees.

 

(f)                                    Except
as set forth Schedule 4.16(f) of the Seller Disclosure Letter, no
benefit payable or that may become payable by the Seller pursuant to any Seller
Benefit Arrangement or as a result of, in connection with or arising under this
Agreement shall constitute a ”parachute payment” (as defined in
Section 280G(b)(2) of the Code) that is subject to the imposition of an
excise tax under Section 4999 of the Code or that would not be deductible
by reason of Section 280G of the Code. 
Unless otherwise indicated in Schedule 4.16(f) of the Seller
Disclosure Letter (and except for any acceleration or change contemplated by
this Agreement), Seller is not a party to any: 
(i) Contract with any “disqualified individual” (as defined in
Section 280G(c) of the Code) (A) the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence
of a transaction involving Seller in the nature of the Asset Purchase or any of
the other transactions contemplated by this Agreement or any Seller Ancillary
Agreement, (B) providing any term of employment or compensation guarantee,
or (C) providing severance benefits or other benefits after the
termination of employment of such employee regardless of the reason for such
termination of employment; or (ii) Contract or plan, including any stock
option plan, stock appreciation rights plan or stock purchase plan, any of the
benefits of which shall be increased, or the vesting of benefits of which shall
be accelerated, by the occurrence of the Asset Purchase or any of the other
transactions contemplated by this Agreement, or any event subsequent to the
Asset Purchase such as the termination of employment of any person, or the
value of any of the benefits of which shall be calculated on the basis of any
of the transactions contemplated by this Agreement.

 

35

 

(g)                                 Each
compensation and benefit plan that has been established or maintained, or that
is required to be maintained or contributed to by the law or applicable custom
or rule of the relevant jurisdiction, outside of the United States by Seller or
any of its Subsidiaries (each such plan, a “Foreign Plan”)
is listed in Schedule 4.16(g)-1 of the Seller Disclosure
Letter.  Except as set forth in Schedule 4.16(g)-2
of the Seller Disclosure Letter, as regards each Foreign Plan, (i) such
Foreign Plan is in compliance in all material respects with the provisions of
the laws of each jurisdiction in which such Foreign Plan is maintained, to the
extent those laws are applicable to such Foreign Plan, (ii) all
contributions to, and material payments from, such Foreign Plan that may have
been required to be made in accordance with the terms of such Foreign Plan,
and, when applicable, the law of the jurisdiction in which such Foreign Plan is
maintained, have been timely made or shall be made by the Closing Date, and all
such contributions to such Foreign Plan, and all payments under such Foreign
Plan, for any period ending before the Closing Date that are not yet, but will be,
required to be made, are included as an accrued liability on the Seller Balance
Sheet, (iii) Seller and each ERISA Affiliate has materially complied with
all applicable reporting and notice requirements, and such Foreign Plan has
obtained from the Governmental Entity having jurisdiction with respect to such
Foreign Plan any required determinations, if any, that such Foreign Plan is in
compliance with the laws of the relevant jurisdiction if such determinations
are required in order to give effect to such Foreign Plan, (iv) such
Foreign Plan has been administered in all material respects at all times in
accordance with its terms and applicable law and regulations, (v) to the
knowledge of Seller, there are no pending investigations by any governmental
body involving such Foreign Plan, and no pending claims (except for claims for
benefits payable in the normal operation of such Foreign Plan), suits or
proceedings against such Foreign Plan or asserting any rights or claims to
benefits under such Foreign Plan, (vi) the consummation of the
transactions contemplated by this Agreement will not by itself create or
otherwise result in any liability with respect to such Foreign Plan other than
the triggering of payment to participants, and (vii) except as required by
applicable laws, no condition exists that would prevent Seller from terminating
or amending any Foreign Plan at any time for any reason in accordance with the
terms of each such Foreign Plan (other than normal and reasonable expenses
typically incurred in a termination event).

 

4.17                           Corporate
Documents.  Seller has delivered or
made available to Buyer’s legal counsel for examination:  (a) copies of the Certificate of
Incorporation and Bylaws or Memorandum of Association or Articles of
Association, as applicable, each as currently in effect, of each of the Telos
Sellers; and (b) the minute books containing all records of all
proceedings, consents, actions and meetings of the Board of Directors and any
committees thereof and stockholders of each of the Telos Sellers.  Schedule 4.17 of the Seller
Disclosure Letter sets forth a true, correct and complete list of the names and
addresses of each Person who, as of the date hereof, may reasonably be deemed
to be an Affiliate of Seller.

 

4.18                           No
Brokers.  Except for fees payable to
Dresdner Kleinwort Wasserstein, Inc. solely by Seller, as set forth in the
engagement letter between Seller and Dresdner Kleinwort Wasserstein, Inc.,
dated November 7, 2003, neither Seller nor any affiliate of Seller is
obligated for the payment of any fees or expenses of any investment banker,
broker, finder or similar party in connection with the origin, negotiation or
execution of this Agreement or in connection with the Asset Purchase or any
other transaction contemplated by this Agreement.

 

36

 

4.19                           Books
and Records.  The books, records and
accounts of Seller (i) are in all material respects true and correct,
(ii) are stated in reasonable detail and accurately and fairly reflect the
transactions and dispositions of the assets and properties of Seller, and
(iii) accurately and fairly reflect the basis for the Seller Financial
Statements and 2003 Audited Financial Statements.

 

4.20                           Insurance.  Seller maintains the policies of insurance
and bonds set forth in Schedule 4.20 of the Seller Disclosure
Letter, including all legally required workers’ compensation insurance and
errors and omissions, casualty, fire and general liability insurance.  There is no material claim pending under any
of such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds.  Seller has delivered to Buyer correct and
complete copies of all such policies of insurance and bonds issued at the
request or for the benefit of Seller or its Subsidiaries.

 

4.21                           Environmental
Matters.

 

(a)                                  (1)  Each
Telos Seller, (ii) to the knowledge of Seller, the real property leased by
Seller and its Subsidiaries as set forth in Schedule 4.9 of the
Seller Disclosure Letter (the “Leased Property”),
and (iii) all operations on the real property leased by Seller and its
Subsidiaries are in compliance, in all material respects, with all
Environmental Laws (as defined below), which compliance includes the possession
by Seller of all permits and other governmental authorizations required under
Environmental Laws (the “Environmental Permits”)
and compliance with the terms and conditions thereof.  Each Environmental Permit is valid, subsisting and in good
standing and no proceeding is pending or threatened and no grounds exist to
revoke or limit any Environmental Permit. 
Seller has not received any written notice, whether from a Governmental
Authority, citizens groups, employee or otherwise, that alleges that Seller or
any of its Subsidiaries is not in compliance with any Environmental Law.  To the knowledge of Seller, no current or
prior owner of any property leased or possessed by Seller or any of its
Subsidiaries has received any notice, whether from a Governmental Authority,
citizens group, employee or otherwise, that alleges that such current or prior
owner or Seller is not in compliance with any Environmental Law.  All Environmental Permits held by Seller are
identified in Schedule 4.21 of the Seller Disclosure Letter.  To the knowledge of Seller, no building,
structure or improvement located on the Leased Property is insulated with urea
formaldehyde insulation, and none of such buildings or structures contain
asbestos or polychlorinated biphenyls (PBCs). 
To the knowledge of Seller, no underground storage tanks are or have
been located on the Leased Property. 
None of the Telos Sellers have caused any spill, discharge, or release
of any Materials of Environmental Concern on, in or in the vicinity of the
Leased Property.  The Telos Sellers have
delivered to Buyer all environmental audits, evaluations, assessments, studies
or tests relating to the Business, the Purchased Assets or the Leased Property
which are within the possession or control of the Telos Sellers.

 

(b)                                 For
purposes of this Section 4.21:  (i)
“Environmental Law” means any federal,
state, provincial or local statute, law, regulation or other legal requirement
relating to pollution or protection of human health or the environment
(including ambient air, surface water, ground water, land surface or subsurface
strata), including any law or regulation relating to emissions, discharges,
releases or threatened releases of Materials of Environmental Concern or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal,

 

37

 

transport or handling of Materials of
Environmental Concern or relating to the regulation of contaminated sites; and
(ii) “Materials of Environmental
Concern” include chemicals, pollutants, contaminants, wastes, toxic
substances, petroleum and petroleum products and any other substance that is
currently regulated by an Environmental Law or that is otherwise a danger to
health, reproduction or the environment.

 

4.22                           Board
Actions.  Seller’s Board of
Directors (a) has determined that the Asset Purchase is advisable and in
the best interests of the Seller Stockholders and is on terms that are fair to
the Seller Stockholders, and has determined to recommend the Asset Purchase to
the Seller Stockholders, (b) resolved to recommend this Agreement and the
Asset Purchase to its Shareholders and holders of Seller Convertible Notes for
approval and adoption and (c) shall submit the Asset Purchase, this
Agreement, each of the Seller Ancillary Agreements and all other agreements,
transactions and actions contemplated hereby and thereby, to the extent that
the approval of the Seller Stockholders and holders of Seller Convertible Notes
is required thereof under Applicable Law or the Seller’s Certificate of
Incorporation or Bylaws, each as currently in effect, to the vote and approval
of the Seller Stockholders and holders of Seller Convertible Notes.

 

4.23                           Customers
and Suppliers.

 

(a)                                  Neither
Seller nor any of its Subsidiaries has any outstanding dispute concerning its
goods and/or services with any customer who, in the year ended
December 31, 2003 was one of the 10 largest sources of revenue for
Seller, based on amounts paid or payable (each, a “Significant
Customer”).  Each Significant
Customer is listed on Schedule 4.23(a) of the Seller Disclosure
Letter.  Neither Seller nor any of its
Subsidiaries has received any notice from any Significant Customer that any
Significant Customer will not continue as a customer of the Business after the
Closing or that any such customer intends to terminate or materially modify
existing contracts with Seller or substantially reduce its purchase or use of
Seller Products or Services.  Seller has
not had any of its products returned by a purchaser thereof except for normal
warranty returns consistent with past practice.

 

(b)                                 Neither
Seller nor any of its Subsidiaries has any outstanding dispute concerning goods
and/or services provided by any supplier who, in the year ended
December 31, 2003 was one of the 10 largest suppliers of goods and/or
services to Seller, based on amounts paid or payable (each, a “Significant Supplier”). 
Each Significant Supplier is listed on Schedule 4.23(b) of
the Seller Disclosure Letter.  Neither
Seller nor any of its Subsidiaries has received any notice of termination or
interruption of any existing contracts with any Significant Supplier.

 

4.24                           Product
Warranty.  Except as set forth in Schedule 4.24 of the Seller
Disclosure Letter, the Telos Sellers have no liability for replacement or
modification of the Seller Products or Services licensed, sold, leased, and
delivered in connection with the Business (other than pursuant to customer
agreements entered into in the ordinary course of business).

 

4.25                           Solvency.  Each Telos Seller will be Solvent as of
immediately following the consummation of the transactions contemplated by this
Agreement (assuming receipt by such Telos Seller of such Telos Seller’s portion
of the Purchase Price due and payable to such Telos

 

38

 

Seller upon the Closing by Buyer and the
assumption of the Assumed Liabilities by Buyer).  “Solvent” means (a) the fair value of the property of such Telos
Seller is greater than the total amount of liabilities, including contingent
liabilities, of such Telos Seller that are known to the Board of Directors of
Seller as of the date hereof (such contingent liabilities being computed as the
amount that, in light of all the facts and circumstances existing at the time,
represents the amount that can be reasonably be expected to become an actual or
matured liability); (b) the present fair saleable value of the assets of such
Telos Seller is not less than the amount that will be required to pay the
probable liability of such Telos Seller on such Telos Seller’s debts that are
known to the Board of Directors of Seller as of the date hereof as they become
absolute and matured; and (c) such Telos Seller does not intend to, and does
not believe that it will, incur debts or liabilities beyond such Telos Seller’s
ability to pay as such debts and liabilities mature.

 

4.26                           Representations
Complete.  None of the
representations or warranties made by Seller (as modified by the Seller
Disclosure Letter), nor any statement made in any schedule or certificate
furnished by Seller pursuant to this Agreement, taken as a whole, contains or
will contain at the Closing Date, any untrue statement of a material fact, or
omits or will omit at the Closing Date to state any material fact necessary in
order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.

 

ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF BUYER

 

Subject to the exceptions
set forth in the disclosure letter of the Buyer addressed to Seller, dated as
of the Agreement Date and delivered to Seller concurrently with the parties’
execution of this Agreement (the “Buyer
Disclosure Letter” (if any)), Buyer represents and warrants to
Seller as follows:

 

5.1                                 Organization
and Good Standing.  Buyer is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority to own,
operate and lease its properties and to carry on its business as now conducted
and as presently proposed to be conducted. 
Buyer is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed would not individually or in the aggregate have a
Material Adverse Effect on the Buyer.

 

5.2                                 Power,
Authorization and Validity.

 

(a)                                  Power
and Authority.  Buyer has all
requisite corporate power and authority to enter into, execute, deliver and
perform its obligations under this Agreement and each of the Buyer Ancillary
Agreements and to consummate the Asset Purchase.  The execution, delivery and performance by Buyer of this Agreement,
each of the Buyer Ancillary Agreements and all other agreements, transactions
and actions contemplated hereby or thereby have been duly and validly approved
and authorized by all necessary corporate action on the part of Buyer.  The Board of Directors of Buyer has approved
this Agreement and the Asset Purchase and determined that this Agreement and
the Asset Purchase are fair and in the best interests of the stockholders of
Buyer.

 

39

 

(b)                                 No
Consents.  No consent, approval,
order or authorization of, or registration, declaration or filing with, any
Governmental Authority, or any other Person, governmental or otherwise, is
necessary or required to be made or obtained by Buyer to enable Buyer to
lawfully execute and deliver, enter into, and perform its obligations under
this Agreement, each of the Buyer Ancillary Agreements or to consummate the
Asset Purchase (as applicable).

 

(c)                                  Enforceability.  This Agreement has been duly executed and
delivered by Buyer.  This Agreement and
each of the Buyer Ancillary Agreements are, or when executed by Buyer shall be,
valid and binding obligations of Buyer, enforceable against Buyer in accordance
with their respective terms, subject to the effect of (i) applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors generally and
(ii) rules of law and equity governing specific performance, injunctive
relief and other equitable remedies.  No
consent, vote or approval of the stockholders of Buyer is necessary or required
to be obtained by Buyer to enable Buyer to lawfully execute and deliver, enter
into, and perform its obligations under this Agreement and each of the Buyer
Ancillary Agreements, or to consummate the Asset Purchase.

 

5.3                                 Sufficient
Funds.  Buyer has, and will have
available to it upon the consummation of the Asset Purchase, without any need
for outside financing, sufficient funds to consummate the transactions
contemplated hereby, including payment in full of the Initial Payment and the
Earnout.

 

5.4                                 No
Conflict.  Neither the execution and
delivery of this Agreement or any of the Buyer Ancillary Agreements nor the
consummation of the Asset Purchase or any other transaction contemplated hereby
or thereby, shall conflict with, or (with or without notice or lapse of time,
or both) result in a termination, breach, impairment or violation of, or
constitute a default under, or require any consent under, or give to others any
rights of termination, amendment or acceleration under:  (a) any provision of the Certificate of
Incorporation or Bylaws of Buyer, each as currently in effect; (b) in any
material respect, any Applicable Law applicable to Buyer or any of its material
assets or properties; or (c) any Contract to which Buyer is a party or by
which Buyer or any of its material assets or properties are bound, except in
the case of clause (c) where such conflict, termination, breach,
impairment, violation, default, failure to obtain consent, or rights of
termination, amendment or acceleration, would not have a Material Adverse
Effect on Buyer.

 

5.5                                 No
Brokers.  Except for fees payable to
Thomas Weisel Partners solely by Buyer, neither Buyer nor any affiliate of
Buyer is obligated for the payment of any fees or expenses of any investment
banker, broker, finder or similar party in connection with the origin,
negotiation or execution of this Agreement or in connection with the Asset
Purchase or any other transaction contemplated by this Agreement.

 

40

 

ARTICLE 6

SELLER COVENANTS

 

During the time period
from the Agreement Date until the earlier to occur of (a) the Closing or
(b) the termination of this Agreement in accordance with the provisions of
Article 10, Seller covenants and agrees with Buyer as follows:

 

6.1                                 Advice
of Changes.  Seller shall promptly
advise Buyer in writing of (a) any event occurring subsequent to the
Agreement Date that would render any representation or warranty of Seller
contained in Article 4 untrue or inaccurate such that the condition set
forth in Section 9.1 would not be satisfied, (b) any breach of any
covenant or obligation of Seller pursuant to this Agreement or any Seller
Ancillary Agreement such that the condition set forth in Section 9.2 would
not be satisfied or (c) any Material Adverse Change in Seller.

 

6.2                                 Maintenance
of Business.  Seller shall use
commercially reasonable efforts to carry on and preserve the Business and its
relationships with customers, advertisers, suppliers, employees and others with
whom Seller has contractual or business relations in substantially the same
manner as it has prior to the Agreement Date consistent with its past
practices.  If Seller becomes aware of a
material deterioration in the relationship with any key customer, key
advertiser, key supplier or key employee, it shall promptly bring such
information to Buyer’s attention in writing and, if requested by Buyer, shall
exert reasonable commercial efforts to promptly restore the relationship.  At Buyer’s request such cooperation may
include joint customer calls and cooperation in setting sales, marketing and
manufacturing strategies.

 

6.3                                 Conduct
of Business.  Seller shall continue
to conduct Business and maintain its business relationships in the ordinary and
usual course consistent with its past practices and, except as set forth in Schedule 6.3
of the Seller Disclosure Letter, Seller shall not, without Buyer’s prior
written consent, which consent shall not be unreasonably withheld or delayed:

 

(a)                                  Except
for any Additional Indebtedness, incur any indebtedness for borrowed money or
guarantee any such indebtedness of another Person or issue or sell any debt
securities or guarantee any debt securities of another Person;

 

(b)                                 (i) lend
any money, other than reasonable and normal advances to employees for bona fide
expenses that are incurred in the ordinary course of business consistent with
its past practices, (ii) make any investments in or capital contributions
to, any Person, (iii) forgive or discharge in whole or in part any
outstanding loans or advances, or (iv) prepay any indebtedness;

 

(c)                                  enter
into any Seller Material Contract (or any agreement which would be a Seller
Material Contract if in effect on the date hereof), violate, terminate, amend
or otherwise modify or waive any of the material terms of any Seller Material
Contract, or enter into any material transaction or take any other action not
in the ordinary course of business consistent with its past practices;

 

(d)                                 place
or allow the creation of any Encumbrance (other than a Permitted Encumbrance)
on any of the Purchased Assets;

 

41

 

(e)                                  enter
into any Contract involving in excess of $50,000 for the purchase, sale or
lease of any assets or property (whether real or personal, tangible or
intangible), except in the ordinary course of business;

 

(f)                                    except
as required herein, (i) pay or grant any bonus, increased salary,
severance, termination or special remuneration to any officer, director,
employee or consultant (except pursuant to the Management Incentive
Plan—M&A or any Contracts disclosed in writing to Buyer prior to the
Agreement Date and listed on Schedule 6.3 of the Seller Disclosure
Letter), (ii) amend or enter into any employment or consulting Contract
with any such person, or (iii) adopt, amend, establish or enter into any
employee or compensation benefit plan, trust, fund, policy or arrangement,
including any stock purchase, stock issuance or stock option plan, collective
bargaining, bonus, profit sharing, thrift, pension, retirement, deferred
compensation, termination or severance plan or amend any compensation, benefit,
entitlement, grant or award provided or made under any such plan (except in
each case as required under ERISA or similar foreign laws, or as necessary to
maintain the qualified status of such plan under the Code);

 

(g)                                 change
any of its accounting methods except as required by Applicable Law;

 

(h)                                 declare,
set aside or pay any cash or stock dividend or other distribution (whether in
cash, stock or property) in respect of its capital stock, or redeem, repurchase
or otherwise acquire any of its capital stock or other securities (except for
the repurchase of stock from its employees, directors, consultants or contractors
in connection with the termination of their services at the original purchase
price of such stock), or pay or distribute any cash or property to any of its
stockholders or securityholders or make any other cash payment to any of its
stockholders or securityholders;

 

(i)                                     except
for any Additional Indebtedness, issue, sell, create or authorize any shares of
its capital stock of any class or series or any other of its securities, or
issue, grant or create any warrants, obligations, subscriptions, options,
convertible securities, or other commitments to issue shares of its capital
stock or any securities that are potentially exchangeable for, or convertible
into, shares of its capital stock, other than the issuance of shares of Seller
Common Stock pursuant to the exercise of Seller Options outstanding on the
Agreement Date and the issuance of shares of Seller Preferred Stock pursuant to
the exercise of Seller Warrants outstanding on the Agreement Date, the
conversion of Seller Senior Convertible Notes or upon conversion of the Seller
Preferred Stock;

 

(j)                                     amend
Seller’s Certificate of Incorporation or Bylaws or the equivalent charter
documents of the other Telos Sellers;

 

(k)                                  sell
or license any of its technology, software or Intellectual Property (including
without limitation to customers or potential customers) other than licenses in
the ordinary course of business, or acquire any technology, software or
Intellectual Property (or any license thereto) from any third party (other than
licenses of software generally available to the public) other than in the
ordinary course of business or enter into any agreements relating to the
development of technology, software or Intellectual Property;

 

42

 

(l)                                     (i) initiate
any litigation, action, suit, proceeding, claim or arbitration (other than for
the routine collection of bills) or (ii) except for those matters set
forth on Schedule 6.3, settle or agree to settle any litigation,
action, suit, proceeding, claim or arbitration (except where the amount in
controversy does not exceed $50,000 and does not involve injunctive or other
equitable relief);

 

(m)                               (i) except
for those matters set forth on Schedule 6.3 of the Seller
Disclosure Letter, pay, discharge or satisfy, in an amount in excess of $50,000
in any one case or $250,000 in the aggregate, any Liability arising otherwise
than in the ordinary course of business, other than the payment, discharge or
satisfaction of Liabilities reflected or reserved against in the Seller Balance
Sheet, or (ii) make any capital expenditures, capital additions or capital
improvements except in the ordinary course of business consistent with its past
practices;

 

(n)                                 amend
or modify any product or service warranties in effect as of the date hereof in
any material manner that is adverse to the Telos Sellers.

 

(o)                                 enter
into any exclusive license, distribution, marketing or sales agreement;

 

(p)                                 enter
into any commitment to any person to (i) develop software without charge
or (ii) incorporate any material software of such person into any of the
products of the Telos Sellers;

 

(q)                                 permit
any Seller-Owned IP Rights to lapse or to be abandoned, dedicated, or
disclaimed, fail to perform or make any applicable filings, recordings or other
similar actions or filings, or fail to pay all required fees and Taxes required
or advisable to maintain and protect its interest in all Seller-Owned IP
Rights;

 

(r)                                    (i) agree
to do any of the things described in the preceding clauses (a)-(q),
(ii) take or agree to take any action which would make any of Seller’s
representations or warranties contained in this Agreement materially untrue or
incorrect, or (iii) take or agree to take any action which would prevent
Seller from performing or cause Seller not to perform one or more covenants
required hereunder to be performed by Seller.

 

6.4                                 Regulatory
Approvals.  Seller shall promptly
execute and file, or join in the execution and filing of, any application,
notification or other document that may be necessary in order to obtain the
authorization, approval or consent of any Governmental Authority, whether
federal, state, local or foreign, which may be reasonably required, or which
Buyer may reasonably request, in connection with the consummation of the Asset
Purchase and the other transactions contemplated by this Agreement or any
Seller Ancillary Agreement.  Seller
shall use diligent efforts to obtain, and to cooperate with Buyer to promptly
obtain, all such authorizations, approvals and consents and shall pay any
associated filing fees payable by Seller with respect to such authorizations,
approvals and consents.  Seller shall
promptly inform Buyer of any material communication between Seller and any
Governmental Authority regarding any of the transactions contemplated hereby.  If Seller or any affiliate of Seller
receives any formal or informal request for supplemental information or
documentary material from any Governmental Authority with respect to the
transactions contemplated hereby, then Seller shall make, or cause

 

43

 

to be made, as soon as reasonably
practicable, a response in compliance with such request.  The parties waive compliance by the other
parties hereto with any applicable California bulk sales law.

 

6.5                                 Necessary
Consents.  Seller shall use
commercially reasonable efforts to promptly obtain such material written
consents and authorizations of third parties, give notices to third parties and
take such other actions as may be necessary or appropriate in order to effect
the consummation of the Asset Purchase and the other transactions contemplated
by this Agreement, to enable Buyer to carry on the Business immediately after
the Closing in all material respects and to keep in effect and avoid the
breach, violation of, termination of, or adverse change to any Seller Material
Contract to which Seller is a party or is bound or by which any of its assets
or properties is bound, all as identified on Schedule 6.5 of the
Seller Disclosure Letter hereto.

 

6.6                                 Litigation.  Seller shall notify Buyer in writing
promptly after learning of any claim, action, suit, arbitration, mediation,
proceeding or investigation by or before any court, arbitrator or arbitration
panel, board or governmental agency, initiated by or against it, or known by
Seller to be threatened against Seller or any of its Subsidiaries, officers,
directors, employees or stockholders in their capacity as such.

 

6.7                                 No
Solicitation; Acquisition Proposals.

 

(a)                                  No
Solicitation Generally.  From and
after the date of this Agreement until the Closing or termination of this
Agreement pursuant to Article 10, Telos Sellers will not, nor will they
authorize or permit any of their respective officers, directors, affiliates or
employees or any investment banker, attorney or other advisor or representative
retained by any of them (all of the foregoing collectively being the “Seller Representatives”) to, directly or indirectly,
(i) solicit, initiate, seek, entertain, encourage, facilitate, support or
induce the making, submission or announcement of any inquiry, expression of
interest, proposal or offer that constitutes, or could reasonably be expected
to lead to, an Acquisition Proposal (as hereinafter defined), (ii) enter
into, participate in, maintain or continue any communications (except solely to
provide written notice as to the existence of these provisions) or negotiations
regarding, or deliver or make available to any Person any non-public
information with respect to, or take any other action regarding, any inquiry,
expression of interest, proposal or offer that constitutes, or could reasonably
be expected to lead to, an Acquisition Proposal, (iii) agree to, accept,
approve, endorse or recommend any Acquisition Proposal, (iv) enter into
any letter of intent or any other Contract contemplating or otherwise relating
to any Acquisition Proposal, (v) submit any Acquisition Proposal to the
vote of any security holders of Seller or any Subsidiary, (vi) withhold,
withdraw or modify, in a manner adverse to Buyer, the approval of Seller Board
of this Agreement and/or any of the transactions contemplated hereby, or
(vii) take any action or position that is inconsistent with, or withdraw
or modify, in a manner adverse to Buyer, any determination or recommendation
referred to in Section 6.11(b).  If
any Seller Representative, whether in his or her capacity as such or in any
other capacity, takes any action that Seller is obligated pursuant to this
Section 6.7 to cause such Seller Representative not to take, then Seller
shall be deemed for all purposes of this Agreement to have breached this
Section 6.7.

 

“Acquisition Proposal” shall mean, with
respect to Seller, any agreement, offer, proposal or indication of interest
(other than this Agreement, the Asset Purchase or any other

 

44

 

offer, proposal or
indication of interest by Buyer), or any public announcement of intention to
enter into any such agreement or of any offer, proposal or indication of
interest, relating to, or involving: (A) any sale, exchange, transfer,
purchase or other acquisition or disposition of more than a 20% interest in the
total outstanding voting securities of Seller or any Telos Seller or any tender
offer or exchange offer that if consummated would result in any Person or group
beneficially owning 20% or more of the total outstanding voting securities of
Seller or any Telos Seller or any merger, consolidation, business combination
or similar transaction involving Seller or any of its Subsidiaries;
(B) any sale, lease (other than in the ordinary course of business),
mortgage, pledge, exchange, transfer, license (other than in the ordinary
course of business), acquisition, or disposition of substantially all of the
assets of Telos Sellers in any single transaction or series of related
transactions; (C) any liquidation or dissolution of Seller or any of its
Subsidiaries; or (D) any other transaction the consummation of which would
reasonably be expected to materially impede, interfere with, prevent or
materially delay the Asset Purchase.

 

(b)                                 Notice.  Seller shall promptly (and in any event
within two (2) calendar days) advise, orally and in writing, Buyer of
(i) an Acquisition Proposal, (ii) any inquiry, expression of
interest, proposal, or offer that constitutes, or could reasonably be expected
to lead to, an Acquisition Proposal, or (iii) any request for non-public
information which could reasonably be expected to lead to an Acquisition
Proposal as well as, in the event of any of (i)-(iii) above, (1) the material
terms and conditions of such Acquisition Proposal, inquiry, expression of
interest, proposal, offer, notice or request, and (2) the identity of the
Person or group making any such Acquisition Proposal, inquiry, expression of
interest, proposal, offer, notice or request. 
Seller will (x) keep Buyer informed as promptly as practicable of
the status and details (including any amendments, modifications or proposed
amendments or modifications) of any such Acquisition Proposal, inquiry,
expression of interest, proposal, offer, notice or request and (y) provide
to Buyer as promptly as practicable a copy of all written and other materials
and information provided to Seller in connection with any such Acquisition
Proposal, inquiry, expression of interest, proposal, offer, notice or
request.  Seller shall provide Buyer
with at least twenty-four hours’ prior notice of any meeting of the Seller
Board at which the Seller Board is reasonably expected to consider any
Acquisition Proposal to determine whether such Acquisition Proposal is a
superior offer.

 

6.8                                 Access
to Information.  Seller, upon
reasonable notice, shall allow Buyer and its agents and advisors access during
Seller’s business hours to the files, books, records, technology, Contracts,
personnel and offices of Telos Sellers, including any and all information
relating to Seller’s Taxes, Contracts, Liabilities, financial condition and
real, personal and intangible property, subject to the terms of the
Nondisclosure Letter Agreement between Seller and Buyer dated February 6,
2004 (the “Mutual NDA”) and provided that
such access shall not unduly disrupt Seller’s normal business activities.  Seller shall use its commercially reasonable
efforts to cause its accountants to cooperate with Buyer and Buyer’s agents and
advisors (provided that, prior to any disclosure to such agents or advisors,
such agents or advisors are bound by the terms of a confidentiality agreement
with substantially similar restrictions as included in the Mutual NDA to
restrict the use and disclosure of Seller’s confidential information) in making
available all financial information reasonably requested by Buyer and its
agents and advisors, including the right to examine all working papers
pertaining to all financial statements prepared or audited by such accountants.

 

45

 

6.9                                 Satisfaction
of Conditions Precedent.  Seller
shall use its reasonable best efforts to satisfy or cause to be satisfied all
the conditions precedent set forth in Article 9, and Seller shall use its
reasonable best efforts to cause the Asset Purchase and the other transactions
contemplated by this Agreement to be consummated in accordance with the terms
of this Agreement.

 

6.10                           Seller
Employees.  Within seven days of the
date hereof, Buyer shall deliver to Seller a list of the employees of the
Business to which Buyer wishes to offer employment (which list shall include at
least 70% of the aggregate number of employees and consultants of the Telos
Sellers as of the date hereof, and Buyer (or a Subsidiary thereof) shall offer
employment, subject to completion of the Closing and effective on the Closing
Date, on terms substantially equivalent to (or better than) those in effect
prior to Closing (other than with respect to location of employment for
employees employed outside of Canada), to each such employee (each, an “Employee Offeree”). 
In addition to any Assumed Liabilities assumed by Buyer with respect to
Transferred Employees, Buyer shall also assume and pay as an Assumed Liability
all costs associated with the termination by Seller of the employment of that
number of Telos Seller employees that is equal to the number by which the
number of Employee Offerees is less than 70% of the aggregate number of
employees and consultants of the Telos Sellers as of the date hereof, in which
event the obligations of Buyer to cover such termination costs under this
Section 6.10 on the one hand and the obligations of the Telos Sellers to pay
termination costs with respect to employees under Section 2.1(d) on the other
hand shall be allocated, as to which party has responsibility for the
termination costs payable with respect to each such individual terminated
employee, on an equitable basis to be agreed in good faith by the parties.  The Telos Sellers shall terminate, subject
to completion of the Closing and effective on the Closing Date, the employment
of any Employee Offeree who does not accept such offer prior to the Closing
Date.  Buyer (or a Subsidiary thereof)
shall on or prior to the Closing again offer employment to each such Employee
Offeree who did not accept such offer, provided that such Employee Offeree is
listed on a certificate of Seller delivered to Buyer no more than 3 days prior
to the Closing, effective immediately, on terms substantially equivalent to (or
better than) those in effect prior to the Closing.  Prior to or promptly after termination or resignation of each
Employee Offeree who accepts any such offer of employment (each, a “Transferring Employee”), the Telos Seller that employed such
Transferring Employee shall pay to such Transferring Employee all accrued and
unpaid salary and other compensation (including accrued and unpaid vacation pay
but excluding any severance or termination payments) to which such Transferring
Employee may be entitled under Applicable Law or Contract (other than accrued
and unpaid salary payable to Jack Mar and Ron McLeod which shall be an Assumed
Liability to be discharged by Buyer upon the Closing). The Telos Sellers shall
use their best efforts to assist, and shall cooperate with and not interfere
with, Buyer (and the applicable Subsidiaries thereof) in connection with the
recruitment and hiring of employees of the Business, pursuant to this
Section 6.10 or otherwise.

 

6.11                           Approval
of the Seller Stockholders.  Each
Telos Seller has taken all action necessary in accordance with, as applicable,
this Agreement, the Seller Convertible Notes, Applicable Law, and the
organizational documents of such Telos Seller to obtain the written consent of
the Seller, TELOS Hong Kong and the Seller Stockholders and holders of the
Seller Convertible Notes approving the Asset Purchase and adopting this
Agreement (the written consent of the Seller Stockholders and the holders of
the Seller Convertible Notes being,

 

46

 

the “Seller Stockholders Consent”) as of the date hereof.  Within ten business days after the date of
this Agreement, the Seller shall distribute to its stockholders, after prior
approval by Buyer, which approval shall not be unreasonably withheld or
delayed, an information statement (together with any amendments thereof or
supplements thereto, the “Information Statement”)
to provide notice to such stockholders of the action taken by written consent
in lieu of a meeting to approve this Agreement and the transaction contemplated
hereby, as required by Section 228(e) of the Delaware General Corporation
Law.  The Seller represents and warrants
to Buyer that the Information Statement will not, at the time it is first
mailed to the Seller’s stockholders, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that the Seller makes no representation or warranty with respect to any
information contained in the Information Statement furnished to the Seller by
Buyer or any of its affiliates.  No
amendment or supplement to the Information Statement will be made by the Seller
without the approval of Buyer, which shall not be unreasonably withheld or
delayed.

 

6.12                           Notices
to Seller Securityholders and Employees.

 

(a)                                  Seller
shall timely provide to holders of Seller Capital Stock and Seller Options all
advance notices required to be given to such holders in connection with this
Agreement, the Asset Purchase and the transactions contemplated by this
Agreement under the Seller Option Plan or other applicable Contracts.

 

(b)                                 Seller
shall give all notices and other information required to be given to the
employees of Seller and any applicable Governmental Authority under the Code,
the Worker Adjustment and Retraining Notification Act of 1988, if applicable
and other Applicable Law in connection with the transactions contemplated by
this Agreement or other applicable Contracts.

 

6.13                           Audited
Financial Statements.  As soon as
practicable, Seller agrees to furnish or cause to be furnished to Buyer the
audited balance sheet of Seller as of December 31, 2003, and the
related audited statements of operations, statements of cash flows and
statements of changes in stockholders’ equity for the year ended
December 31, 2003, and any notes to the foregoing financial
statements (the “2003 Audited Financial Statements”).

 

6.14                           Closing
Balance Sheet.  By the later of May
31st, 2004 and two weeks from Closing, Seller shall deliver to Buyer
the Closing Balance Sheet.  In
connection with the preparation of the Closing Balance Sheet Buyer shall
provide Seller and Seller’s independent auditors and authorized representatives
full access at all reasonable times to the properties, books, records and
personnel of the Business in their possession, custody or control relating to
periods prior to the Closing Date for purposes of preparing the Closing Balance
Sheet.  Buyer shall pay all reasonable
costs and expenses of Seller’s independent auditors incurred in connection with
the preparation and review of the Closing Balance Sheet.  Buyer shall pay the reasonable costs and expenses
incurred by Seller to retain Mr. Tim Law, or a similarly qualified person, for
a period of no more than 30 days following the Closing to prepare the Closing
Balance Sheet.

 

47

 

ARTICLE 7

BUYER COVENANTS

 

During the time period
from the Agreement Date until the earlier to occur of (a) the Closing or
(b) the termination of this Agreement in accordance with the provisions of
Article 10, Buyer covenants and agrees with Seller as follows:

 

7.1                                 Advice
of Changes.  Buyer shall promptly
advise Seller in writing of (a) any event occurring subsequent to the
Agreement Date that would render any representation or warranty of Buyer
contained in Article 5 untrue or inaccurate such that the condition set
forth in Section 8.1 would not be satisfied or (b) any breach of any
covenant or obligation of Buyer pursuant to this Agreement or any Buyer
Ancillary Agreement such that the condition set forth in Section 8.2 would
not be satisfied.

 

7.2                                 Regulatory
Approvals.  Buyer shall promptly
execute and file, or join in the execution and filing of, any application,
notification or other document that may be necessary in order to obtain the
authorization, approval or consent of any Governmental Authority, whether
foreign, federal, state, local or municipal, which may be reasonably required
in connection with the consummation of the Asset Purchase and the other
transactions contemplated by this Agreement, any Buyer Ancillary
Agreement.  Buyer shall use diligent
efforts to obtain all such authorizations, approvals and consents and shall pay
any associated filing fees payable by Buyer with respect to such
authorizations, approvals and consents. 
Buyer shall promptly inform Seller of any material communication between
Buyer and any Governmental Authority regarding any of the transactions
contemplated hereby.  If Buyer or any
affiliate of Buyer receives any formal or informal request for supplemental
information or documentary material from any Governmental Authority with
respect to the transactions contemplated hereby, then Buyer shall make, or
cause to be made, as soon as reasonably practicable, a response in compliance
with such request.

 

7.3                                 Satisfaction
of Conditions Precedent.  Buyer
shall use its reasonable best efforts to satisfy or cause to be satisfied all
of the conditions precedent that are set forth in Article 9, and Buyer
shall use its reasonable best efforts to cause the Asset Purchase and the other
transactions contemplated by this Agreement to be consummated in accordance with
the terms of this Agreement.

 

7.4                                 Buyer
Plans.  As promptly as reasonably
practicable after the Closing, Buyer shall, or shall cause its Subsidiaries to,
enroll all Transferring Employees in Buyer’s employee benefit plans (the “Buyer Plans”) subject to satisfaction of eligibility
standards that are applicable to similarly situated employees of Buyer on
substantially similar terms applicable to employees of Buyer who are similarly
situated based on levels of responsibility. 
Buyer shall recognize the prior service with Seller or its Subsidiaries,
as applicable, of each of the Transferring Employees in connection with each of
the Buyer Plans for purposes of eligibility and levels of benefits (other than
levels of benefits under any “pension plan” within the meaning of
Section 3(2) of ERISA or any retiree welfare plan).  Notwithstanding anything in this
Section 7.4 to the contrary, this Section 7.4 shall not operate to
duplicate any benefit provided to any Transferring Employee or to fund any such
benefit.

 

48

 

7.5                                 Directors
and Officers Insurance.  On or prior
to the Closing Date, Seller shall procure, at its expense, a directors’ and
officers’ liability insurance policy in respect of acts or omissions occurring
on or prior to the Closing Date covering persons who are currently covered by
Seller’s directors’ and officers’ liability insurance policy in effect on the
date hereof.  Such policy shall be for a
period of no more than six years from the Closing Date and shall include
coverage in the amount of $5,000,000 with the usual and customary scope of
coverage.

 

7.6                                 Transaction
Taxes.  Buyer shall be responsible
for any and all excise, value added, registration, stamp, property,
documentary, transfer, sales, use and similar Taxes, levies, charges and fees
(including all real estate transfer Taxes) incurred, or that may be payable to
any taxing authority, in connection with, the transactions (including without
limitation the sale, transfer, and delivery of the Purchased Assets)
contemplated by this Agreement provided that to the extent permitted by
applicable law, Buyer and Seller shall cooperate with each other to obtain
exemptions from such Taxes or to otherwise legally minimize such Taxes.  Buyer shall timely file all Tax Returns
relating to such Taxes that are required to be filed after the Closing
Date.  Notwithstanding the foregoing,
each party shall be responsible for its own income, capital gain or other
similar Taxes due in connection with the transactions (including without
limitation the sale, transfer, and delivery of the Purchased Assets)
contemplated by this Agreement.

 

7.7                                 Proration
of Property Taxes.  All Property
Taxes levied with respect to the Purchased Assets for any Straddle Period,
whether imposed or assessed in the Pre-Closing Tax Period or Post-Closing Tax
Period, shall be prorated between the applicable Telos Seller and the Purchaser
as of 12:01 A.M. on the date of the Closing. 
If any Taxes subject to proration are paid by Purchaser, on the one
hand, or a Telos Seller, on the other hand, the proportionate amount of such
Taxes paid (or in the event a refund of any portion of such Taxes previously
paid is received, such refund) shall be paid promptly by (or to) the other
after the payment of such Taxes (or promptly following the receipt of any such
refund).

 

ARTICLE 8

CONDITIONS TO OBLIGATIONS OF TELOS SELLERS

 

The obligations of the
Telos Sellers to consummate the Asset Purchase and take the other actions
required to be taken by the Telos Sellers at the Closing are subject to the
fulfillment or satisfaction as of the Closing, of each of the following
conditions (it being understood that (a) any one or more of the following
conditions may be waived by Seller in a writing signed on behalf of Seller and
(b) by proceeding with the Closing, Seller shall be deemed to have waived
any of such conditions that remain unfulfilled or unsatisfied):

 

8.1                                 Accuracy
of Representations and Warranties. 
The representations and warranties of Buyer set forth in Article 5
shall be true and correct on and as of the Closing with the same force and
effect as if they had been made on the Closing Date (except for any such
representations or warranties shall be true and correct, and such
representations and warranties shall be true and correct on and as of such
specified date or dates) except to the extent the failure of such
representations and warranties to be so true and correct does not have a
Material Adverse Effect on Buyer, and at the Closing Seller shall have received
a certificate to such effect executed by an officer of Buyer.

 

49

 

8.2                                 Covenants.  Buyer shall have performed and complied in
all material respects with all of its covenants contained in Article 6 and
Article 7 on or before the Closing (to the extent that such covenants
require performance by Buyer on or before the Closing), and at the Closing
Seller shall have received a certificate to such effect executed by an officer
of Buyer.

 

8.3                                 Compliance
with Law; No Legal Restraints; No Litigation.  There shall not be issued, enacted or adopted any order, decree,
temporary, preliminary or permanent injunction, legislative enactment, statute,
regulation, action or proceeding, or any judgment or ruling by any Governmental
Authority that prohibits or renders illegal or imposes limitations on the Asset
Purchase or any other material transaction contemplated by this Agreement.

 

8.4                                 Government
Consents.  There shall have been
obtained at or prior to the Closing Date such permits or authorizations, and
there shall have been taken all such other actions by any Governmental
Authority or other regulatory authority having jurisdiction over the parties
and the actions herein proposed to be taken, as may be required to lawfully consummate
the Asset Purchase.

 

8.5                                 Secretary
Certificates.  Seller shall have
received certificates executed by the Secretary or Assistant Secretary of Buyer
certifying:

 

(a)                                  the
resolutions duly adopted by the Board of Directors of Buyer authorizing the execution
of this Agreement and the execution, performance and delivery of all
agreements, documents and transactions contemplated hereby; and

 

(b)                                 the
incumbency of the officers of each entity executing this Agreement and all
agreements and documents contemplated hereby.

 

8.6                                 Opinion
of Buyer’s Legal Counsel.  Seller
shall have received from Shearman & Sterling LLP, legal counsel to the
Buyer, an opinion opining to the matters set forth in Exhibit H.

 

8.7                                 Buyer
Good Standing Certificates.  Seller
shall have received certificates from the Delaware Secretary of State
certifying that Buyer is in good standing in such jurisdiction.

 

8.8                                 Seller
Stockholder Approvals.  The Asset
Purchase and this Agreement shall have been duly and validly approved and
adopted, as required by Applicable Law and Seller’s Certificate of
Incorporation and Bylaws, each as in effect on the date of such approval and
adoption, by the requisite vote or written consent of the Seller Stockholders
and by the requisite written consent of holders of the Seller Convertible
Notes.

 

8.9                                 Bill
of Sale and Assumption Agreement. 
Buyer shall have executed and delivered counterparts of the Bill of Sale
and Assumption Agreement.

 

8.10                           Intellectual
Property Assignments.  Seller shall
have received from Buyer:  (i)  the
Trademark and Domain Name Assignments, executed on Buyer’s behalf by an
authorized officer of Buyer with his or her execution notarized, in a form
acceptable for recording with the United States Patent and Trademark Office or
applicable domain name registrar, and any foreign offices, as applicable;
(ii) the Patent Assignments, executed on Buyer’s behalf by an authorized
officer of Buyer with his or her execution notarized, in a form acceptable for
recording with the United

 

50

 

States Patent and Trademark Office, and any foreign offices, as
applicable; and (iii) the Other Instruments.

 

8.11                           Buyer
Ancillary Agreements.  Buyer shall
have executed and delivered counterparts of each of the Ancillary Agreements
not referenced above to which Buyer is a signatory and provided all
deliverables and performed all obligations required to be completed by Buyer
prior to or at the Closing under all of the Buyer Ancillary Agreements.

 

8.12                           Initial
Payment.  Buyer shall have paid the
portion of the Initial Payment payable at the Closing in the manner
contemplated by Section 2.2(b) (provided that, in accordance with
Sections 2.3 and 2.4, the Escrow Cash and Holdback Cash will not be
delivered to the Telos Sellers at the Closing but will instead be delivered as
provided and subject to the terms of Article 2.3 and Section 2.8,
respectively).

 

8.13                           Escrow
Cash and Working Capital Adjustment Cash. 
Buyer shall have deposited the Escrow Cash and Working Capital
Adjustment Cash in the Escrow Account with the Escrow Agent in the manner
contemplated by Sections 2.3 and 2.4.

 

8.14                           Employment
Matters.  The Buyer shall have
executed and delivered an employment agreement with Mr. Jack Mar, acceptable to
Mr. Mar, which shall not have been revoked.

 

ARTICLE 9

CONDITIONS TO OBLIGATIONS OF BUYER

 

Buyer’s obligations to consummate the Asset Purchase
and take the other actions required to be taken by them at the Closing are
subject to the fulfillment or satisfaction, as of the Closing, of each of the
following conditions (it being understood that (a) any one or more of the
following conditions may be waived by Buyer in a writing signed by Buyer and
(b) by proceeding with the Closing, Buyer shall be deemed to have waived
any of such conditions that remains unfulfilled or unsatisfied):

 

9.1                                 Accuracy
of Representations and Warranties. 
Subject to the Seller Disclosure Letter, the representations and
warranties of Seller set forth in Article 4 shall be true and correct on
and as of the Closing with the same force and effect as if they had been made
on the Closing Date (except for any such representations or warranties that by
their terms speak only as of a specific date or dates, in which case such
representations and warranties shall be true and correct on and as of such
specified date or dates) except to the extent the failure of any such
representations and warranties to be so true and correct does not have a
Material Adverse Effect on Seller, and at the Closing Buyer shall have received
a certificate to such effect executed by Seller’s President or Chief Executive
Officer.

 

9.2                                 Covenants.  Seller shall have performed and complied in
all material respects with all of its covenants contained in Article 6 at
or before the Closing (to the extent that such covenants require performance by
Seller at or before the Closing), and at the Closing Buyer shall have received
a certificate to such effect executed by Seller’s President or Chief Executive
Officer.

 

51

 

9.3                                 No
Material Adverse Change.  There
shall not have been any Material Adverse Change in Seller occurring between the
date of this Agreement and the Closing and at the Closing Buyer shall have
received a certificate to such effect executed by Seller’s President or Chief
Executive Officer.

 

9.4                                 Compliance
with Law; No Legal Restraints; No Litigation.  There shall not be issued, enacted or adopted, or threatened in
writing by any Governmental Authority, any order, decree, temporary,
preliminary or permanent injunction, legislative enactment, statute,
regulation, action, proceeding, or any judgment or ruling by any Governmental
Authority that prohibits or renders illegal or imposes limitations on the Asset
Purchase or any other material transaction contemplated by this Agreement.  No litigation or proceeding shall be
threatened or pending for the purpose or with the probable effect of enjoining
or preventing the consummation of any of the transactions contemplated by this
Agreement.

 

9.5                                 Government
Consents.  There shall have been
obtained at or prior to the Closing Date such permits or authorizations, and
there shall have been taken all such other actions by any Governmental
Authority or other regulatory authority having jurisdiction over the parties
and the actions herein proposed to be taken, as may be required to consummate
the Asset Purchase, including requirements under applicable federal and state
securities laws.

 

9.6                                 Secretary
Certificates.  Buyer shall have
received certificates executed by the Secretary or Assistant Secretary of
Seller certifying:

 

(a)                                  the
resolutions duly adopted by the Board of Directors of Seller and by the
stockholders of Seller authorizing the execution of this Agreement and the
execution, performance and delivery of all agreements, documents and
transactions contemplated hereby; and

 

(b)                                 the
incumbency of the officers of each entity executing this Agreement and all
agreements and documents contemplated hereby.

 

9.7                                 Opinion
of Seller’s Legal Counsel.  Buyer
shall have received from Fenwick & West LLP, U. S. legal counsel to Seller,
an opinion opining to the matters set forth in Exhibit I-1, from McCarthy
Tetrault LLP, Canadian legal counsel to Seller, an opinion opining as to the
matters set forth in Exhibit I-2 and from Conyers, Dill & Pearman,
Bermuda legal counsel to Seller, an opinion opining as to the matters set forth
in Exhibit I-3.

 

9.8                                 Consents.  Buyer shall have received duly executed
copies of those third party consents, approvals, assignments, notices, waivers,
authorizations or other certificates set forth in Schedule 9.8 attached
hereto.

 

9.9                                 Seller
Stockholder Approvals.  The Asset
Purchase and this Agreement shall have been duly and validly approved and
adopted, as required by Applicable Law and Seller’s Certificate of
Incorporation and Bylaws, each as in effect on the date of such approval and
adoption, by the requisite vote or written consent of the Seller Stockholders
and by the requisite written consent of holders of the Seller Convertible
Notes.

 

52

 

9.10                           Bill
of Sale and Assumption Agreement. 
Each Telos Seller shall have executed and delivered counterparts of the
Bill of Sale and Assumption Agreement.

 

9.11                           Intellectual
Property Assignments.  Buyer shall have
received from Telos Sellers:  (i) 
the Trademark and Domain Name Assignments, executed on Telos Sellers’ behalf by
an authorized officer of each Telos Seller with his or her execution notarized,
in a form acceptable for recording with the United States Patent and Trademark
Office or applicable domain name registrar; (ii) the Patent Assignments,
executed on Telos Sellers’ behalf by an authorized officer of each Telos Seller
with his or her execution notarized, in a form acceptable for recording with
the United States Patent and Trademark Office and (iii)  the Other
Instruments.

 

9.12                           Seller
Ancillary Agreements.  Telos Sellers
shall have executed and delivered counterparts of each of the Ancillary
Agreements not referenced above to which a Telos Seller is a signatory and
provided all deliverables and performed all obligations required to be
completed by a Telos Seller prior to or at the Closing under all of the Seller
Ancillary Agreements.

 

9.13                           Employment
Matters.  Jack Mar and 60% of the
Employee Offerees (not including Mr. Mar or any Employee Offerees located
outside of Canada who are required to relocate as part of the terms of the
offer of employment) shall have accepted the offer of employment with Buyer (or
a Subsidiary thereof), which acceptance shall not have been revoked.

 

9.14                           Seller
Good Standing Certificates.  Buyer
shall have received a certificate from the Delaware and California Secretaries
of State (with respect to Seller), the province of British Columbia (with
respect to TELOS Engineering Ltd.), and Bermuda (with respect to TELOS
Engineering (Bermuda) Ltd.) certifying that such entity is in good standing and
that all applicable Taxes and fees of Seller through and including the Closing
Date have been paid (to the extent that such concepts are applicable in such
jurisdictions).

 

9.15                           FIRPTA
Certificate.  Buyer shall have
received certification from Seller of non-foreign status, in accordance with
Treasury Regulations under Sections 1445 and 894 of the Code.

 

9.16                           Release
of Encumbrances.  All Encumbrances
on the Purchased Assets arising from or in connection with the Seller Senior
Convertible Notes shall have been irrevocably released.

 

ARTICLE 10

TERMINATION OF AGREEMENT

 

10.1                           Termination
by Mutual Consent.  This Agreement
may be terminated at any time prior to the Closing by the mutual written
consent of Buyer and Seller.

 

10.2                           Unilateral
Termination.

 

(a)                                  Either
Buyer or Seller, by giving written notice to the other, may terminate this
Agreement if a court of competent jurisdiction or other Governmental Authority
shall have issued a nonappealable final order, decree or ruling or taken any
other action, in each case having

 

53

 

the effect of permanently restraining, enjoining or otherwise prohibiting
the Asset Purchase or any other material transaction contemplated by this
Agreement.

 

(b)                                 Either
Buyer or Seller, by giving written notice to the other, may terminate this
Agreement if the Asset Purchase shall not have been consummated by midnight Pacific
Time on June 30, 2004, which date may be extended by the mutual
written consent of the parties hereto.

 

(c)                                  Either
Buyer or Seller may terminate this Agreement at any time prior to the Closing
if (a) the other has committed a breach of (i) any of its
representations and warranties under Article 4 or Article 5, as
applicable, in any material respect or (ii) any of its covenants under
Article 6 or Article 7, as applicable, materially adversely affecting
(or materially delaying) the consummation of the transactions contemplated
hereby and has not cured such breach within twenty business days after the
party seeking to terminate this Agreement has given the other party written
notice of the material breach and its intention to terminate this Agreement pursuant
to this Section 10.2(c) (provided, however, that no such
cure period shall be available or applicable to any such breach which by its
nature cannot be cured) and (b) if not cured on or prior to the Closing
Date, such breach would result in the failure of any of the conditions set
forth in Article 9 or Article 8, as applicable, to be fulfilled or
satisfied; provided, however, that the right to terminate this Agreement under
this Section 10.2(c) shall not be available to a party if the party is at
that time in material breach of this Agreement.

 

10.3                           Effect
of Termination.  In the event of
termination of this Agreement as provided in Section 10.2, this Agreement
shall forthwith become void and there shall be no liability or obligation on
the part of Buyer or Seller or their respective officers, directors,
stockholders or affiliates; provided, however, that the provisions of this
Section 10.3 (Effect of Termination) and Article 12 (Miscellaneous)
shall remain in full force and effect and survive any termination of this
Agreement.

 

ARTICLE 11

SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION

AND REMEDIES; CONTINUING COVENANTS

 

11.1                           Survival.  If the Asset Purchase is consummated, the
representations, warranties, covenants and agreements of Seller and Buyer
contained in this Agreement and the other agreements, certificates and
documents contemplated hereby shall survive the Closing and remain in full
force and effect, regardless of any investigation or disclosure made by or on
behalf of any of the parties to this Agreement, until June 30, 2005
(the “Expiration Date”) provided
further, that, such expiration shall not affect the rights of any Buyer
Indemnified Person or Seller Indemnified Person, as applicable, under this
Article 11 to seek recovery of Damages (as defined in Section 11.2)
arising out of any fraud by Seller or Buyer, as applicable, until the
expiration of the applicable statute of limitations with respect to any such
claim.  If written notice of a claim of
breach of representation and warranty has been given prior to the expiration of
the applicable representation and warranty by a party hereto to another party
hereto, then the relevant representation and warranty shall survive as to such
claim until such claim has been finally resolved in accordance with this
Article 11.

 

54

 

11.2                       Agreement
of Telos Sellers to Indemnify. 
Subject to the limitations set forth in this Article 11, from and
after the Closing, each Telos Seller shall, jointly and severally, indemnify
and hold harmless Buyer and its officers, directors, agents, representatives,
stockholders and employees, and each person, if any, who controls or may
control Buyer within the meaning of the Securities Act or the Exchange Act
(each hereinafter referred to individually as a “Buyer Indemnified Person” and collectively
as the “Buyer Indemnified Persons”)
from and against any and all actual losses, costs, damages, liabilities and
expenses (including reasonable attorneys’ fees, other professionals’ and experts’
fees, costs of investigation and court costs), calculated net of any recoveries
under existing insurance policies (net of any applicable collection costs and
reserves, deductibles, premium adjustments and retrospectively rated premiums)
and net of the amount of any indemnity and contribution received from third
parties (hereinafter collectively referred to as “Damages”), arising from claims, demands,
assertions of liability, or actual or threatened actions, suits or proceedings
(whether civil, criminal, administrative or investigative) directly or
indirectly arising out of, resulting from or in connection with:  (i) any actual failure of any
representation or warranty made by Seller in this Agreement or in the Seller
Disclosure Letter to be true and correct as of the Closing Date (as though such
representation or warranty were made as of the Closing Date, except in the case
of representations and warranties which by their terms speak only as of a
specific date or dates, in which case such representations and warranties shall
have actually failed to be true and correct as of such specified date or
dates); (ii) any actual breach of or default in connection with any of the
covenants or agreements made by Seller in this Agreement or in the Seller Disclosure
Letter; (iii) Seller’s failure to pay, perform or discharge, when due, any
Excluded Liability; and (iv) any Transaction Expenses of Telos Sellers; in
each case which becomes known to the relevant Buyer Indemnified Person during
the period of survival of the representations, warranties, covenants and
agreements and for which Buyer delivers timely written notice to Seller in
accordance with Sections 11.5 and 11.7 prior to the Expiration Date;
provided, however, that, notwithstanding anything herein to the contrary, the
Buyer Indemnified Persons shall not have any right to indemnification under
this Article 11 with respect to any Damages arising out of, resulting from
or in connection with any of the matters described in clauses (i) through
(iv) above to the extent that Buyer has previously been compensated for such
Damages pursuant to the retention by Buyer of an amount of the Working Capital
Adjustment Cash pursuant to Section 2.8.

 

11.3                           Agreement
of Buyer to Indemnify.  From and
after the Closing, Buyer shall indemnify and hold harmless Seller, each of its
Subsidiaries and the respective officers, directors, agents, representatives,
stockholders and employees of Telos Sellers, and each person, if any, who
controls or may control Seller within the meaning of the Securities Act or the
Exchange Act (each hereinafter referred to individually as a “Seller Indemnified Person” and collectively
as “Seller Indemnified Persons”)
from and against any and all Damages arising from claims, demands, assertions
of liability, or actual or threatened actions, suits or proceedings (whether
civil, criminal, administrative or investigative) directly or indirectly
arising out of, resulting from or in connection with:  (i) any actual failure of any representation or warranty
made by Buyer in this Agreement to be true and correct as of the date of this
Agreement and as of the Closing Date (as though such representation or warranty
were made as of the Closing Date, except in the case of representations and
warranties which by their terms speak only as of a specific date or dates),
(ii) any actual breach of or default in connection with any of the
covenants or agreements made by Buyer in this Agreement, including the Earnout,
(iii) Buyer’s failure to pay, perform or discharge, when due, any Assumed
Liability; (iv) any Liability arising out of the use or operation

 

55

 

of the Purchased Assets or the conduct of the Business by Buyer and its
Affiliates after the Closing Date; and (v) any Transaction Expenses of
Buyer and its Subsidiaries;  in each
case which becomes known to a Seller Indemnified Person during the period of
survival of the representations, warranties, covenants and agreements and for
which a Seller Indemnified Person delivers a written notice to Buyer in
accordance with Sections 11.5 and 11.7 prior to the Expiration Date.

 

11.4                           Remedies
and Limitations.

 

(a)                                  Escrow
Cash.  If the Asset Purchase is
consummated, recovery from the Escrow Cash, and the Earnout (solely as
contemplated by Section 11.4(b) below), shall be the sole and exclusive
remedy of the Buyer Indemnified Persons under this Agreement with respect to
the matters listed in  clauses (i)
and (ii) of Section 11.2, except in the case of fraud by a Telos Seller.

 

(b)                                 Earnout.  In the case of Damages arising out of or
resulting from (i) fraud by a Telos Seller, or (ii) after Buyer has
exhausted or made bona fide indemnification claims upon all the Escrow Cash
(after taking into account all other claims for indemnification from the Escrow
Cash made by Buyer), Buyer shall have the right to set-off any Damages for
which the Buyer Indemnified Persons are entitled to be indemnified pursuant to
this Article 11 against the amount of any earned but unpaid Earnout.

 

(c)                                  Basket.  Notwithstanding anything contained herein to
the contrary, no Buyer Indemnified Person may receive any recovery in respect
of any claim for indemnification that is made pursuant to clauses (i) and
(ii) of Section 11.2, and that does not involve fraud by a Telos Seller
unless and until Damages in an aggregate amount greater than US$350,000.00
(the “Basket”) have been
incurred, paid or properly accrued, following which the Buyer Indemnified
Persons may make claims for indemnification for those Damages included in the
amount of the Basket as well as any and all amounts in excess of the amount of
the Basket.

 

(d)                                 Buyer
shall, and shall cause each other Buyer Indemnified Person to use all
commercially reasonable efforts to mitigate any Damages which any Buyer
Indemnified Person may suffer in consequence of any matter giving rise to a
claim for indemnification hereunder. 
Seller shall, and shall cause each other Seller Indemnified Person to,
use all commercially reasonable efforts to mitigate any Damages which any
Seller Indemnified Person may suffer in consequence of any matter giving rise
to a claim for indemnification hereunder.

 

(e)                                  Buyer
shall not be entitled to recover Damages in respect of any claim, or otherwise
obtain reimbursement or restitution of Damages, more than once with respect to
any claim hereunder.

 

(f)                                    From
and after the Closing, except with respects to claims based on fraud or for
non-cash equitable remedies, the remedies provided in this Article 11
shall be exclusive as to any claims by a party under this Agreement or under
any other agreement, certificate and document contemplated hereby or arising
out of the transactions provided for herein and therein and shall preclude
assertion by any party of any other rights or the seeking of any other remedies
against another party.

 

56

 

(g)                                 If
any person entitled to indemnification hereunder is entitled to recover from
any person other than the indemnifying party hereunder, including under any
applicable insurance policy but excluding from any Taxing authority as a result
of a reduction of such indemnified person’s Tax liability, any amount that
relates to a matter giving rise to a claim for indemnification under
Section 11.2 or 11.3, as applicable, such indemnified person will take all
commercially reasonable steps to recover such amount from such third party
prior to pursuing such claim against the party providing indemnification
hereunder.  If such indemnified person
recovers any such amount from such third party, the amount of Damages
recoverable under Section 11.2 or 11.3, as applicable, shall be reduced by
the amount of such recovery.

 

11.5                           Notice
of Claim.  As used herein, the
term “Claim” means a claim
for indemnification for Damages under this Article 11.  An indemnified party may give notice of a
Claim under this Agreement (a “Notice of
Claim”) to the Seller, in the case of an Buyer Indemnified Person,
and to Buyer, in the case of a Seller Indemnified Person, promptly after such
indemnified party becomes aware of the existence of any potential claim for
indemnification under this Article 11, arising from or relating to:

 

(a)                                  Any
matter specified in Section 11.2 or Section 11.3, as applicable; or

 

(b)                                 the
assertion, whether orally or in writing, against such indemnified party of a
claim, demand, suit, action, arbitration, investigation, inquiry or proceeding
brought by a third party against such indemnified party (in each such case,
a “Third-Party Claim”) that
is based on, arises out of or relates to any matter specified in
Section 11.2, or Section 11.3, as applicable.

 

The period during which claims may be initiated
(the “Claims Period”) by the
Buyer Indemnified Persons for indemnification either from the Escrow Cash
and/or the Earnout with respect to the matters set forth in Section 11.2,
or by the Seller Indemnified Persons for indemnification from Buyer with
respect to the matters set forth in Section 11.3, shall commence at the
Closing and terminate on the Expiration Date, provided that the Claims Period for
indemnification from and against Damages arising out of, resulting from or in
connection with fraud by any Telos Seller or the Buyer shall commence on the
Closing and terminate upon the expiration of the applicable statute of
limitations.  Notwithstanding anything
contained herein to the contrary, any bona fide Claims for Damages specified in
any Notice of Claim delivered in accordance herewith prior to expiration of the
applicable Claims Period with respect to facts and circumstances existing prior
to expiration of the applicable Claims Period shall remain outstanding until
such Claims for Damages have been resolved or satisfied, notwithstanding the
expiration of such Claims Period.  Until
the expiration of the applicable Claims Period, no delay on the part of an
indemnified party in giving a Notice of Claim shall relieve the indemnifying
party from any of its obligations under this Article 11 unless (and then
only to the extent that) the indemnifying party is materially prejudiced
thereby.

 

11.6                           Defense
of Third-Party Claims.

 

(a)                                  The
indemnified party shall determine and conduct the defense of any Third-Party
Claim, and the costs and expenses incurred by the indemnified party in
connection with such defense or settlement (including reasonable attorneys’ fees,
other professionals’ and

 

57

 

experts’ fees and court or arbitration costs) shall be included in the
Damages for which the indemnified party may seek indemnification pursuant to a
Claim made by any indemnified party hereunder to the extent and subject to the
limits provided in this Article 11.

 

(b)                                 The
indemnifying party shall have the right to receive copies of all pleadings,
notices and communications with respect to the Third-Party Claim and may participate
in, but not to determine or conduct, any defense of the Third-Party Claim with
respect to the Third-Party Claim.

 

(c)                                  No
settlement of any such Third-Party Claim with any third party claimant shall be
made and no such settlement shall be determinative of the existence of or
amount of indemnifiable Damages relating to such matter, except with the prior
written consent of the Seller, in the case of any Third-Party Claim for which
any Buyer Indemnified Person is seeking indemnification, or the Buyer, in the
case of any Third-Party Claim for which any Seller Indemnified Person is
seeking indemnification.

 

11.7                           Contents
of Notice of Claim.  Each Notice of
Claim given pursuant to Section 11.5 shall contain the following
information:

 

(a)                                  that
the indemnified party has directly or indirectly incurred, paid or properly
accrued (in accordance with GAAP) or, in good faith, believes it shall have to
directly or indirectly incur, pay or accrue (in accordance with GAAP), Damages
in an aggregate stated amount arising from such Claim (which amount may be the
amount of damages claimed by a third party in an action brought against any
indemnified party based on alleged facts, which if true, would give rise to
liability for Damages under this Article 11); and

 

(b)                                 a
brief description, in reasonable detail (to the extent reasonably available),
of the facts, circumstances or events giving rise to the alleged Damages based
on the indemnified party’s good faith belief thereof, including the identity
and address of any third-party claimant (to the extent reasonably available)
and copies of any formal demand or complaint, the amount of Damages, the date
each such item was incurred, paid or properly accrued, or the basis for such
anticipated liability, and the specific nature of the breach to which such item
is related.

 

11.8                           Resolution
of Notice of Claim.  Each Notice of
Claim given shall be resolved as follows:

 

(a)                                  Uncontested
Claims.  If, within twenty (20)
business days after a Notice of Claim is received, the indemnifying party does
not contest such Notice of Claim in writing as provided in
Section 11.8(b), the indemnifying party shall be conclusively deemed to
have consented to the recovery by the indemnified party of all Damages that
arise with respect to the claim described in the Notice of Claim in accordance
with this Article 11, including the forfeiture of Escrow Cash and, without
further notice, to have stipulated to the entry of a final judgment for Damages
against the indemnifying party for such amount in any court having jurisdiction
over the matter where venue is proper.

 

(b)                                 Contested
Claims.  If the indemnifying party
gives the other party written notice contesting all or any portion of a Notice
of Claim within the twenty (20) business day

 

58

 

period specified in Section 11.8(a) (a “Contested Claim”) then such Contested Claim
shall be resolved by either (i) a written settlement agreement executed by
the Telos Sellers and Buyer or (ii) in the absence of such a written
settlement agreement within thirty (30) business days following receipt of
the written notice, by binding arbitration between the Telos Sellers and Buyer
in accordance with the terms and provisions of Section 11.8(c).

 

(c)                                  Arbitration.  If the Buyer and the Telos Sellers are
unable to resolve a Contested Claim by negotiation, each of Buyer and the Telos
Sellers agree that any Contested Claim will be submitted to mandatory, final
and binding arbitration before J.A.M.S./ENDISPUTE or its successor (“J.A.M.S.”), pursuant to the United States
Arbitration Act, 9 U.S.C., Section 1 et seq. and that any such arbitration
will be conducted in Santa Clara County, California.  Either Buyer or Seller may commence the arbitration process
called for by this Agreement by filing a written demand for arbitration with
J.A.M.S. and giving a copy of such demand to each of the other parties to this
Agreement.  The arbitration will be
conducted in accordance with the provisions of J.A.M.S’ Streamlined Arbitration
Rules and Procedures in effect at the time of filing of the demand for
arbitration, subject to the provisions of this Section 11.8.3.  The parties will cooperate with J.A.M.S. and
with each other in promptly selecting an arbitrator from J.A.M.S.’ panel of
neutrals, and in scheduling the arbitration proceedings in order to fulfill the
provisions, purposes and intent of this Agreement.  The parties covenant that they will participate in the
arbitration in good faith, and that they will share in its costs in accordance
with subparagraph (i) below.  The
provisions of this Section 11.8.3 may be enforced by any court of
competent jurisdiction, and the party seeking enforcement will be entitled to
an award of all costs, fees and expenses, including attorneys’ fees, to be paid
by the party against whom enforcement is ordered.  Judgment upon the award rendered by the arbitrator may be entered
in any court having competent jurisdiction.

 

(i)                                     Payment
of Costs.  Buyer on the one hand,
and/or Seller, on the other hand, will bear the expense of deposits and
advances required by the arbitrator in equal proportions, but either party may
advance such amounts, subject to recovery as an addition or offset to any
award.  The arbitrator shall determine
the party who is the prevailing party and the party who is the non-prevailing
party.  The non-prevailing party shall
pay all reasonable costs, fees and expenses related to the arbitration,
including reasonable fees and expenses of attorneys, accountants and other
professionals incurred by the prevailing party, the fees of each arbitrator and
the administrative fee of the arbitration proceedings.  If such an award would result in manifest
injustice, however, the arbitrator may apportion such costs, fees and expenses
between the parties in such a manner as the arbitrator deems just and
equitable.

 

(ii)                                  Burden
of Proof.  Except as may be
otherwise expressly provided herein, for any Contested Claim submitted to
arbitration, the burden of proof will be as it would be if the claim were
litigated in a judicial proceeding governed by California law exclusively.

 

(iii)                               Award.  Upon the conclusion of any arbitration
proceedings hereunder, the arbitrator will render findings of fact and
conclusions of law and a final written arbitration award setting forth the basis
and reasons for any decision reached (the “Final Award”) and will deliver such documents to Seller and
Buyer, together with a signed copy of the Final Award.  The Final Award will constitute a conclusive
determination of all issues in question, binding upon Seller and Buyer, and
will include an affirmative statement to such effect.

 

59

 

(iv)                              Timing.  Seller, Buyer and the arbitrator will
conclude each arbitration pursuant to this Section 11.8 as promptly as
possible for the Contested Claim being arbitrated.

 

(v)                                 Terms
of Arbitration.  The arbitrator
chosen in accordance with these provisions will not have the power to alter,
amend or otherwise affect the terms of these arbitration provisions or the
provisions of this Agreement.

 

11.9                           Exclusive
Remedy.  Following the Closing,
except as specifically otherwise provided in this Agreement, arbitration
conducted in accordance with this Agreement will be the sole and exclusive
means of resolution of any Contested Claim made pursuant to this
Article 11.

 

11.10                     Tax Consequences of
Indemnification Payments.  All
payments (if any) made to a Buyer Indemnified Person or to a Seller Indemnified
Person pursuant to any indemnification obligations under this Article 11
will be treated as adjustments to the purchase price for tax purposes and such
agreed treatment will govern for purposes of this Agreement, unless otherwise
required by Applicable Law.

 

ARTICLE 12

MISCELLANEOUS

 

12.1                           Governing
Law.  The internal laws of the State
of California, applicable to agreements between California residents and
entered into and to be performed within California, shall govern the validity
of this Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto.  The parties hereto hereby irrevocably submit
to the exclusive jurisdiction of the courts of the State of California and the
Federal courts of the United States of America located within the County of
Santa Clara in the State of California solely in respect of the interpretation
and enforcement of the provisions of this Agreement and of the documents
referred to in this Agreement, and in respect of the transactions contemplated
hereby and thereby (including resolution of disputes under
Section 11.8(c)), and hereby waive, and agree not to assert, as a defense
in any action, suit or proceeding for the interpretation or enforcement hereof
or thereof, that it is not subject thereto or that such action, suit or
proceeding may not be brought or is not maintainable in said courts or that the
venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a California State or Federal court.  The parties hereby consent to and grant any
such court jurisdiction over the person of such parties and over the subject
matter of such dispute and agree that mailing of process or other papers in
connection with any such action or proceeding in the manner provided in
Section 12.9 or in such other manner as may be permitted by Applicable
Law, shall be valid and sufficient service thereof.  With respect to any particular action, suit or proceeding, venue
shall lie solely in Santa Clara County, California.

 

12.2                           Assignment;
Binding Upon Successors and Assigns. 
The Buyer’s obligations hereunder may not be assigned or delegated by
the Buyer in any manner whatsoever, whether directly or by operation of law or
otherwise, except in connection with any acquisition by a third party of the
Buyer (through a merger or otherwise) or substantially all of the Buyer’s
assets in

 

60

 

which case Buyer shall cause such third party to specifically assume
all of Buyers obligations hereunder; and provided further that Buyer may assign
any of its rights, but not any of its obligations hereunder, to one or more
direct or indirect wholly owned subsidiaries of Buyer without the consent of
the Seller.  Except as set forth in the
preceding sentence, no party hereto may assign any of its rights or obligations
hereunder without the prior written consent of the other parties hereto.  This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns as set forth herein. 
Any assignment in violation of this provision shall be void.

 

12.3                           Severability.  If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, then the remainder of this Agreement and the application of such
provision to other persons or circumstances shall be interpreted so as reasonably
to effect the intent of the parties hereto. 
The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that shall
achieve, to the extent possible, the economic, business and other purposes of
the void or unenforceable provision.

 

12.4                           Counterparts.  This Agreement may be executed in any number
of counterparts, each of which shall be an original as regards any party whose
signature appears thereon and all of which together shall constitute one and
the same instrument.  This Agreement
shall become binding when one or more counterparts hereof, individually or
taken together, shall bear the signatures of all parties reflected hereon as
signatories.

 

12.5                           Other
Remedies.  Except as otherwise
expressly provided herein, any and all remedies herein expressly conferred upon
a party hereunder shall be deemed cumulative with and not exclusive of any
other remedy conferred hereby or by law on such party, and the exercise of any
one remedy shall not preclude the exercise of any other.  The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached.  It is accordingly agreed that
the parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any State having jurisdiction.

 

12.6                           Amendments
and Waivers.  Any term or provision
of this Agreement may be amended, and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively), only by a writing signed by the party
to be bound thereby.  The waiver by a
party of any breach hereof or default in the performance hereof shall not be
deemed to constitute a waiver of any other default or any succeeding breach or
default.  This Agreement may be amended
by the parties hereto as provided in this Section 12.6 at any time before
or after adoption of this Agreement by the Seller Stockholders, but, after such
adoption, no amendment shall be made which by Applicable Law requires the
further approval of the Seller Stockholders without obtaining such further
approval.  At any time prior to the
Closing, each of Seller and Buyer, by action taken by its Board of Directors,
may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other,
(b) waive any inaccuracies in the representations and warranties made to
it contained herein or in any document delivered pursuant hereto, and
(c) waive compliance with any of the agreements or conditions for its
benefit contained herein.

 

61

 

No such waiver or extension shall be effective unless signed in writing
by the party against whom such waiver or extension is asserted.  The failure of any party to enforce any of
the provisions hereof shall not be construed to be a waiver of the right of
such party thereafter to enforce such provisions.

 

12.7                           Expenses.  Each party shall bear its respective
Transaction Expenses.

 

12.8                           Attorneys’
Fees.  Should suit be brought to
enforce or interpret any part of this Agreement, the prevailing party shall be
entitled to recover, as an element of the costs of suit and not as damages,
reasonable attorneys’ fees to be fixed by the court (including costs, expenses
and fees on any appeal).  The prevailing
party shall be entitled to recover its costs of suit, regardless of whether
such suit proceeds to final judgment.

 

12.9                           Notices.  All notices and other communications
required or permitted under this Agreement shall be in writing and shall be
either hand delivered in person, sent by facsimile, sent by certified or
registered first-class mail, postage pre-paid, or sent by nationally recognized
express courier service.  Such notices
and other communications shall be effective upon receipt if hand delivered or
sent by facsimile, three (3) days after mailing if sent by mail, and
one (1) day after dispatch if sent by express courier, to the following
addresses, or such other addresses as any party may notify the other parties in
accordance with this Section 12.9:

 

If to Buyer:

 

UTStarcom, Inc.

1275 Harbor Bay Parkway, Suite 100

Alameda, CA 94502

Attention:  Legal Department

Facsimile No.: 510-864-8800

Telephone No.:  510-864-8802

 

with a copy to:

Shearman & Sterling LLP

1080 Marsh Road

Menlo Park, CA 94025

Attention:  Carmen Chang, Esq.

Facsimile No.: (650) 838-3699

Telephone No.: (650) 838-3612

 

If to the Telos Sellers:

 

4600 Jacombs Road

Richmond, BC VCV 3B1

Canada

Attention:  President

Facsimile No.: (604) 303-8557

Telephone No.: (604) 303-2316

 

62

 

with a copy to:

 

Fenwick & West LLP

Embarcadero Center West

275 Battery Street

San Francisco, CA 94111

Attention:                      David
Michaels, Esq.

Lynda M. Twomey, Esq.

Facsimile No.: (415) 281-1350

Telephone No.: (415) 875-2300

 

12.10                     Interpretation; Rules of
Construction.  When a reference is
made in this Agreement to Exhibits, such reference shall be to an
Exhibit to this Agreement unless otherwise indicated.  When a reference is made in this Agreement
to Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated.  When reference is
made in this Agreement to Schedules, such reference shall be to a Schedule to
this Agreement.  When a reference is
made in this Agreement to Articles, such reference shall be to an Article of
this Agreement unless otherwise indicated. 
Capitalized terms used in the Exhibits and Schedules and not otherwise
defined therein, shall have the meaning ascribed in this Agreement.  The words “include”, “includes” and “including”
when used herein shall be deemed in each case to be followed by the words
“without limitation”.  The headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.  Reference to the Subsidiaries of an entity
shall be deemed to include all direct and indirect Subsidiaries of such
entity.  The signatories hereto agree
that they have been represented by legal counsel during the negotiation and
execution of this Agreement and, therefore, waive the application of any law,
regulation, holding or rule of construction providing that ambiguities in an
agreement or other document shall be construed against the party drafting such
agreement or document.

 

12.11                     No Joint Venture.  Nothing contained in this Agreement shall be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto.  No party is by
virtue of this Agreement authorized as an agent, employee or legal
representative of any other party.  No
party shall have the power to control the activities and operations of any
other and their status is, and at all times shall continue to be, that of
independent contractors with respect to each other.  No party shall have any power or authority to bind or commit any
other party.  No party shall hold itself
out as having any authority or relationship in contravention of this
Section 12.11.

 

12.12                     Further Assurances.  Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and reflect the transactions described
herein and contemplated hereby and to carry into effect the intents and
purposes of this Agreement.

 

12.13                     Third Party Beneficiary Rights.  No provisions of this Agreement are
intended, nor shall be interpreted, to provide or create any third party
beneficiary rights or any other rights of any kind in any client, customer,
employee, affiliate, stockholder, partner or any party hereto or any other
Person unless specifically provided otherwise herein and, except as so
provided, all

 

63

 

provisions hereof shall be personal solely between the parties to this
Agreement; except that Article 11 is intended to benefit the Persons set
forth herein.

 

12.14                     Public Announcement.  Prior to the publication of a mutually
agreed press release or the inclusion of mutually agreed disclosure in a press
release issued by Buyer, neither party shall make any public announcement
relating to this Agreement or the transactions contemplated hereby (except as
may be required by law or to obtain necessary third party consents or to its
Board of Directors or its advisors) and Seller shall use its reasonable efforts
to prevent any trading in shares of securities issued by Buyer by its officers,
directors, employees, stockholders and agents prior to the Closing.

 

12.15                     Confidentiality.  Seller and Buyer each confirm that they have
entered into the Mutual NDA and that they are each bound by, and shall abide
by, the provisions of such Mutual NDA; provided, however, that Buyer shall not
be bound by such Mutual NDA after the Closing. 
If this Agreement is terminated, the Mutual NDA shall remain in full
force and effect, and all copies of documents containing confidential
information of a disclosing party shall be returned by the receiving party to
the disclosing party or be destroyed, as provided in the Mutual NDA.

 

12.16                     Entire Agreement.  This Agreement, the exhibits and schedules
hereto, Seller Ancillary Agreements, the Buyer Ancillary Agreements constitute
the entire understanding and agreement of the parties hereto with respect to
the subject matter hereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto other than the Mutual
NDA.  The express terms hereof control
and supersede any course of performance or usage of the trade inconsistent with
any of the terms hereof.

 

12.17                     Waiver of Jury Trial.  EACH OF BUYER AND EACH TELOS SELLER HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF BUYER AND THE TELOS SELLERS IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.

 

[SIGNATURE PAGE NEXT]

 

64

 

IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.

 

	
  UTSTARCOM,
  INC.

  	
  TELOS
  TECHNOLOGY, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Michael J.
  Sophie

  	
   

  	
   

  	
  By:

  	
  /s/ Jack Mar

  	
   

  
	
   

  	
   

  	
   

  
	
  Name: 
  Michael J. Sophie

  	
  Name:

  	
   

  	
  Jack Mar

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:  Chief
  Financial Officer and SVP Finance

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TELOS TECHNOLOGY (BERMUDA)

  LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jack Mar

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
  Jack Mar

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TELOS TECHNOLOGY (CANADA),

  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jack Mar

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
  Jack Mar

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TELOS ENGINEERING LIMITED

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jack Mar

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
  Jack Mar

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

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