AGREEMENT AND PLAN OF MERGER

EXECUTION COPY

EXHIBIT 2.1

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

KYPHON INC.

NEPTUNE ACQUISITION SUB, INC.

AND

ST. FRANCIS MEDICAL TECHNOLOGIES, INC.

AND WITH RESPECT TO ARTICLE VII ONLY

PHILIP M. YOUNG

AS STOCKHOLDERS’ REPRESENTATIVE

Dated as of December 4, 2006

TABLE OF CONTENTS

 

 

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TABLE OF CONTENTS

(Continued)

 

 

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TABLE OF CONTENTS

(Continued)

 

 

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Exhibits

 

 

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Index of Defined Terms

 

 

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AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) is made and entered into as of December 4, 2006, by and among Kyphon Inc., a Delaware corporation (“ Parent ”), Neptune Acquisition Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of Parent (“ Merger Sub ”), and St. Francis Medical Technologies, Inc., a Delaware corporation (the “ Company ”), and with respect to Article VII only, Philip M. Young, as Stockholders’ Representative.

RECITALS

A. The respective Boards of Directors of Parent, Merger Sub and the Company have deemed it advisable and in the best interests of their respective corporations and stockholders that Parent and the Company consummate the business combination and other transactions provided for herein in order to advance their respective long-term strategic business interests.

B. The respective Boards of Directors of Parent, Merger Sub and the Company have approved, in accordance with applicable provisions of the laws of the State of Delaware (“ Delaware Law ”), this Agreement and the transactions contemplated hereby, including the Merger (as defined in Section 1.1).

C. Promptly following the execution and delivery of this Agreement, stockholders of the Company representing the requisite number of shares of each class of the Company’s capital stock will, through an action by written consent (the “ Stockholder Approval ”), adopt this Agreement.

D. Parent, Merger Sub and the Company desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger.

NOW, THEREFORE , in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

ARTICLE I.

THE MERGER

1.1 The Merger . At the Effective Time and subject to and upon the terms and conditions of this Agreement and the applicable provisions of Delaware Law, Merger Sub shall be merged with and into the Company (the “ Merger ”), the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation. The Company, as the surviving corporation after the Merger, is hereinafter sometimes referred to as the “ Surviving Corporation .”

1.2 Effective Time; Closing . Subject to the provisions of this Agreement, the parties hereto shall cause the Merger to be consummated by filing a Certificate of Merger with the Secretary of State of the State of Delaware in accordance

with the relevant provisions of Delaware Law (the “ Certificate of Merger ”) (the time of such filing with the Secretary of State of the State of Delaware (or such later time as may be agreed in writing by the Company and Parent and specified in the Certificate of Merger) being the “ Effective Time ”) as soon as practicable on or after the Closing Date (as defined below). The closing of the Merger (the “ Closing ”) shall take place at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, located at One Market, San Francisco, California, at a time and date to be specified by the parties, which shall be no later than the second business day after the satisfaction or waiver of the conditions set forth in Article VI (other than those that by their terms are to be satisfied or waived at the Closing), or at such other time, date and location as the parties hereto agree in writing. The date on which the Closing occurs is referred to herein as the “ Closing Date .”

1.3 Effect of the Merger . At the Effective Time, the effect of the Merger shall be as provided in this Agreement and the applicable provisions of Delaware Law, including Section 259 of the General Corporation Law of the State of Delaware. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

1.4 Certificate of Incorporation and Bylaws . At the Effective Time, the Certificate of Incorporation of the Surviving Corporation shall be amended and restated in its entirety to be identical to the Certificate of Incorporation of Merger Sub, until thereafter amended in accordance with Delaware Law and as provided in such Certificate of Incorporation; provided , however , that at the Effective Time, Article I of the Certificate of Incorporation of the Surviving Corporation shall be amended and restated in its entirety to read as follows: “The name of the corporation is “St. Francis Medical Technologies, Inc.” At the Effective Time, the Bylaws of the Surviving Corporation shall be amended and restated in their entirety to be identical to the Bylaws of Merger Sub, until thereafter amended in accordance with Delaware Law and as provided in such Bylaws; provided , however , that at the Effective Time, if necessary, the Bylaws shall be amended so as to comply with Section 5.8(b).

1.5 Directors and Officers . The initial directors of the Surviving Corporation shall be the directors of Merger Sub immediately prior to the Effective Time, until their respective successors are duly elected or appointed and qualified. The initial officers of the Surviving Corporation shall be the officers of the Company immediately prior to the Effective Time, until their respective successors are duly appointed.

1.6 Effect on Capital Stock . Subject to the terms and conditions of this Agreement, at the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company or the holders of any shares of capital stock of the Company, the following shall occur:

(a) Company Capital Stock . Each share of the Common Stock (“ Company Common Stock ”), Series A Preferred Stock (“ Series A Preferred Stock ”), Series B Preferred Stock (“ Series B Preferred Stock ”) and Series C Preferred Stock

 

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(“ Series C Preferred Stock ”), par value $0.001 per share, of the Company issued and outstanding immediately prior to the Effective Time (collectively, “ Company Capital Stock ”), other than any shares of Company Capital Stock to be canceled pursuant to Section 1.6(b) and the Dissenting Shares (as defined in Section 1.6(c)(i)), will be canceled and extinguished and automatically converted into the right to receive the Per Share Consideration (as defined in Section 7.1) upon surrender of the certificate representing such share of Company Capital Stock and delivery of a duly completed letter of transmittal in the manner provided in Section 1.8 (or, in the case of a lost, stolen or destroyed certificate, upon delivery of an affidavit, and the giving of an indemnity undertaking if required) in the manner provided in Section 1.10, and any amounts payable with respect to such share pursuant to Section 1.7.

(b) Cancellation of Treasury and Parent Owned Stock . Each share of Company Capital Stock held by the Company or Parent or any direct or indirect wholly-owned Subsidiary (as defined in Section 2.1(a)) of the Company or of Parent immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof.

(c) Dissenting Shares .

(i) Notwithstanding anything in this Agreement to the contrary, any shares of Company Capital Stock outstanding immediately prior to the Effective Time and held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has exercised and perfected appraisal or dissenter’s rights for such shares in accordance with Section 262 of the Delaware General Corporation Laws (the “ DGCL ”) or Chapter 13 of the California Corporations Code and has not effectively withdrawn or lost such appraisal or dissenter’s rights (collectively, the “ Dissenting Shares ”) shall not be converted into or represent the right to consideration for Company Capital Stock set forth in Sections 1.6(a) and 1.7, and the holder or holders of such shares shall be entitled only to such rights as may be granted to such holder or holders in Chapter 13 of the California Corporations Code or Section 262 of the DGCL.

(ii) Notwithstanding the provisions of Section 1.6(c)(i), if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) such holder’s appraisal rights and dissenter’s rights under Chapter 13 of the California Corporations Code and Section 262 of the DGCL, then, as of the later of the Effective Time and the occurrence of such event, such holder’s shares shall automatically be converted into and represent only the right to receive the consideration for Company Capital Stock set forth in Sections 1.6(a) and 1.7, without interest, upon surrender of the certificate representing such shares.

(d) Stock Options . Each option to purchase Company Common Stock issued under the Company’s 1999 Stock Incentive Plan, as amended (the “ Company Option Plan ”), or otherwise listed in Section 2.2(b) of the Company Disclosure Letter, whether or not exercisable, whether or not vested, and whether or not performance-based, which is outstanding immediately prior to the Effective Time (each, a “ Company Option ”), shall not be assumed by the Surviving Corporation or Parent, but shall instead

 

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be converted immediately prior to the Effective Time, but in any event after giving effect to the action set forth in Section 5.7(f)(i) into the right to receive payment of an amount in cash (in addition to any amounts payable pursuant to Section 1.7) equal to the excess, if any, of the product of the Per Share Consideration and the total number of shares of Company Common Stock deliverable upon exercise of such Company Option (regardless of whether or not any such Company Option is then “vested” or exercisable) (the “ Option Shares ”) over the aggregate exercise price of such Option Shares (the right to receive such cash payment for each Option Share, a “ Cash Payment Right ”). Each Cash Payment Right shall be vested as of the Effective Time to the extent the Company Option so converted in accordance with this Section 1.6(d) is vested as of the Effective Time (after taking into account the accelerated vesting set forth in Section 5.7(f)(i)). At the Closing, each vested Cash Payment Right shall be paid to the holder thereof, and each unvested Cash Payment Right shall be paid into escrow pursuant to the terms of a Management Escrow Agreement to be entered into as of the Closing Date, the form of which is attached hereto as Exhibit A (the “ Management Escrow Agreement ”).

(e) Stock of Merger Sub . Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one (1) validly issued fully, paid and nonassessable share of common stock of the Surviving Corporation.

(f) Closing Certificate . At the Closing, the Company shall deliver to Parent a certificate (the “ Closing Certificate ”) substantially in the form attached hereto as Exhibit B , signed by the Company’s Chief Executive Officer or Chief Financial Officer, certifying on behalf of the Company as to (i) the number of shares of Company Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock outstanding immediately prior to the Effective Time, (ii) the number of Option Shares outstanding immediately prior to the Effective Time, and (iii) the amount of Closing Expenses.

1.7 Additional Merger Consideration .

(a) Definitions . For purposes of this Agreement, the following terms shall have the following meanings:

“ Change of Control ” shall mean (i) a merger or consolidation of Parent into or with any of the Persons listed on Schedule 1.7(a) and/or any of their affiliates (the “ Specified Persons ”) in a transaction or series of related transactions that results in more than 50% of the voting securities of Parent or the surviving, resulting or parent entity in such transaction or series of related transactions that are outstanding immediately after the consummation thereof being held by Persons other than those Persons that (individually or collectively) held such voting securities of Parent immediately prior to the consummation thereof, (ii) a sale or other disposition of all or substantially all of the assets or voting securities of Parent to any Specified Person(s) or (iii) a sale or other disposition to any Person (other than an Affiliate of Parent) of the Company Business or the business comprised of the IPD Devices (whether by sale of securities or assets).

 

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“ Earnout Amount ” shall mean either the First Earnout Amount and/or the Second Earnout Amount as applicable to the time period at issue.

“ Earnout Revenue ” shall mean either the First Earnout Revenue or the Second Earnout Revenue as applicable to the time period at issue.

“ First Deferred Payment Date ” shall mean (i) February 14, 2008, but only if the Stockholders’ Representative delivers written notice to Parent prior to January 31, 2008, stating that it will reserve any dispute of the First Earnout Amount until such time, if any, as it disputes the Second Earnout Amount pursuant to Section 1.7(c), otherwise (ii) ten (10) business days after the date of final resolution of the First Earnout Amount pursuant to Section 1.7(c), including resolution of any Disputed Items.

“ First Earnout Amount ” shall mean an amount equal to the product of (i) the First Earnout Revenue and (ii) two (2); provided , however , if the First Earnout Amount exceeds $200,000,000, the First Earnout Amount shall be deemed equal to $200,000,000.

“ First Earnout Revenue ” shall mean the Revenue during the six-month period commencing on July 1, 2007, and ending at the close of business on December 31, 2007.

“ IPD Devices ” shall mean the Company’s X STOP ^® interspinous process decompression device as such product is marketed as of the date hereof, together with all modifications thereto.

“ Per Share Earnout Amount ” shall mean the Earnout Amount divided by the Outstanding Shares, rounded to four decimal places.

“ Revenue ” shall mean the gross customer invoiced amounts for sales of IPD Devices in the United States, less credits issued for actual returns of IPD Devices. In the event that an IPD Device is sold by either Parent, the Company or any of their respective Affiliates in the form of a kit or other similar assemblage of products containing one or more components other than an IPD Device, Earnout Revenue for such IPD Device will be calculated by multiplying the Earnout Revenue from such assemblage of products by the fraction A/(A+B) where A is the average selling price in the United States from the IPD Device if sold separately during the applicable period by such Person or an Affiliate, and B is the total average selling price in the United States from all other components in the assemblage of products that are not IPD Devices during the applicable period. If no average selling price of any other component is available for the United States, the Earnout Revenue from the IPD Device shall be calculated by the Earnout Revenue from such assemblage of products by the fraction A/C where A is the average selling price in the United States from the IPD Device if sold separately during the applicable period by such Person or an Affiliate, and C is the total selling price of such kit or other assemblage of products.

“ Second Deferred Payment Date ” shall mean ten (10) business days after the date of final resolution of the Second Earnout Amount pursuant to Section 1.7(c), including resolution of any Disputed Items.

 

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“ Second Earnout Amount ” shall mean an amount equal to the product of (i) the Second Earnout Revenue and (ii) two (2); provided , however , if the sum of the First Earnout Amount and the Second Earnout Amount exceeds $200,000,000, the Second Earnout Amount shall be deemed equal to $200,000,000 minus the First Earnout Amount.

“ Second Earnout Revenue ” shall mean the Revenue during the six-month period commencing on January 1, 2008 and ending at the close of business on June 30, 2008.

“ Total Earnout Amount ” means the sum of the First Earnout Amount and the Second Earnout Amount.

(b) Deferred Payments.

(i) In addition to the amounts provided for in Sections 1.6(a) and 1.6(d), each Company Stockholder shall be entitled to receive the following amounts (the “ Deferred Payments ”):

(1) On the First Deferred Payment Date, an amount (the “ Initial Deferred Payment ”) equal to such Company Stockholder’s Pro Rata Portion (as defined in Section 7.1) of the First Earnout Amount, subject to any set-off pursuant to Article VII; and

(2) On the Second Deferred Payment Date, an amount (the “ Final Deferred Payment ”) equal to such Company Stockholder’s Pro Rata Portion (as defined in Section 7.1) of the Second Earnout Amount, subject to any set-off pursuant to Article VII.

(ii) Notwithstanding the foregoing, no amount shall be paid to a Company Stockholder pursuant to this Section 1.7(b) unless and until such Company Stockholder shall have surrendered such Company Stockholder’s Certificates and delivered a duly completed letter of transmittal in accordance with Section 1.8(c).

(c) Calculation of Earnout Amount . (i) On or prior to thirty (30) calendar days after the respective earnout period (forty-five (45) calendar days in the case of the first earnout period), Parent shall cause to be prepared and delivered to the Stockholders’ Representative a statement setting forth Parent’s calculation of the Earnout Amount (the “ Earnout Statement ”), together with reasonable supporting information.

(ii) After receipt of the Earnout Statement, the Stockholders’ Representative shall have thirty (30) calendar days to review the Earnout Statement. Unless the Stockholders’ Representative delivers written notice (the “ Dispute Notice ”) to Parent setting forth the items disputed by the Stockholders’ Representative on or prior to the 30 ^th calendar day after delivery of the Earnout Statement, the Stockholders’ Representative will be deemed to have accepted and agreed to the Earnout Statement, and the Earnout Statement (and the calculation of the Earnout Amount contained therein) will be final, binding and conclusive; provided , however , with respect to the First Earnout Amount, the Stockholders’ Representative may, upon delivery of written notice to Parent during such thirty-day period, elect to resolve such First Earnout Amount at the same time

 

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that the Second Earnout Amount is resolved. During such thirty-day period, Parent shall provide the Stockholders’ Representative with reasonable access to Parent’s books, records and personnel in order to permit the Stockholders’ Representative to verify the calculation of the Earnout Amount. If the Stockholders’ Representative delivers a Dispute Notice in a timely manner, Parent and the Stockholders’ Representative will, within thirty (30) calendar days following delivery of such notice (the “ Resolution Period ”), attempt in good faith to resolve their differences in writing with respect to the items specified in the Dispute Notice (the “ Disputed Items ”). Any resolution by Parent and the Stockholders’ Representative during the Resolution Period as to any Disputed Items will be final, binding and conclusive.

(iii) If Parent and the Stockholders’ Representative do not resolve all Disputed Items by the end of the Resolution Period, then all Disputed Items remaining in dispute will be promptly submitted to KPMG LLP (the “ Neutral Arbitrator ”). If requested by the Neutral Arbitrator, Parent and the Stockholders’ Representative agree to execute a reasonable engagement letter. The Neutral Arbitrator shall act as an arbitrator to determine only those Disputed Items remaining in dispute, consistent with this Section 1.7(c) and shall request a statement from each of Parent and the Stockholders’ Representative regarding such Disputed Items. Each of Parent and the Stockholders’ Representative will pay its own fees and expenses incurred with respect to the resolution of the Disputed Items. All fees and expenses relating to the work, if any, to be performed by the Neutral Arbitrator will be allocated between Parent and the Stockholders’ Representative in the same proportion that (i) the extent to which the Disputed Items so submitted to the Neutral Arbitrator are unsuccessfully disputed by each such party (as finally determined by the Neutral Arbitrator) bears to (ii) the total amount of such Disputed Items so submitted. The Neutral Arbitrator will deliver to Parent and the Stockholders’ Representative a written determination (such determination to include a work sheet setting forth all material calculations used in arriving at such determination and to be based on independent review and audit of the Revenue upon which the Earnout Amount is based) of the Disputed Items by the Neutral Arbitrator within forty-five (45) calendar days after receipt of such Disputed Items (or as soon thereafter as practicable), which determination will be final, binding and conclusive and judgment may be entered on the award.

(d) Obligations of Parent . Parent shall use commercially reasonable efforts to market, promote, sell and distribute the IPD Devices in the United States, and such efforts shall include, to the extent commercially reasonable, (i) the development of marketing, sales and training materials, as Parent reasonably deems appropriate, for the IPD Devices, (ii) educating medical professionals specializing in spinal procedures on the use of the IPD Devices, and (iii) displaying the IPD Devices at meetings where attending medical professionals specialize in spinal procedures; provided , however , it shall not be deemed to be commercially reasonable to take any action if to do so would violate applicable Legal Requirements or any intellectual property rights of any third party.

(e) No Security . The parties understand and agree that (i) the Per Share Earnout Amounts payable under this Section 1.7 are an integral part of the Merger consideration payable hereunder, (ii) the rights to receive such amounts will not be represented by any form of certificate, are not transferable, except by operation of law

 

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(including, without limitation, laws relating to descent and distribution, divorce and community property), and do not constitute an equity or ownership interest in Parent or the Surviving Corporation, (iii) no Company Stockholder shall have any rights as a security holder of the Surviving Corporation or Parent as a result of such Company Stockholder’s right to receive the Per Share Earnout Amounts, and (iv) no interest is payable with respect to the Per Share Earnout Amounts.

(f) Acceleration . The Earnout Amount of $200,000,000, less any Earnout Amount previously paid, subject to any set-off pursuant to Article VII, shall become immediately due and payable by Parent, such amount to be paid within three (3) business days of any of the following: (i) Parent or the Surviving Corporation commences any proceeding in bankruptcy or for dissolution, liquidation, winding-up, or other relief under state or federal bankruptcy laws; (ii) such proceedings are commenced against Parent or the Surviving Corporation, or a receiver or trustee is appointed for Parent or the Surviving Corporation or a substantial part of its respective property, and such proceeding or appointment is not dismissed or discharged within sixty (60) days after its commencement, (iii) Parent or the Surviving Corporation is unable to, or admits in writing its inability to, pay its debts when they become due; (iv) Parent or the Surviving Corporation makes an assignment for the benefit of creditors, or petitions or applies to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial portion of its assets or has a receiver, custodian or trustee appointed for all or a substantial portion of its assets; (v) a Change of Control; or (vi) Parent or the Surviving Corporation takes any action effectuating, approving or consenting to any of the foregoing.

1.8 Surrender of Certificates .

(a) Exchange Agent . Parent shall select its transfer agent or another nationally recognized exchange agent to act as the exchange agent (the “ Exchange Agent ”) in the Merger, which agent shall be reasonably acceptable to the Company.

(b) Parent to Provide Cash . Prior to the Effective Time, Parent shall enter into an agreement with the Exchange Agent which shall provide that, prior to the Effective Time, Parent shall make available to the Exchange Agent for exchange in accordance with this Article I, the Merger Consideration (as defined in Section 7.1), less the sum of (i) the Representative Reimbursement Amount (as defined in Section 7.1), and (ii) the amount to be deposited in escrow pursuant to the Management Escrow Agreement in exchange for Company Capital Stock and Company Options. The portion of the Representative Reimbursement Amount contributed following the Effective Time with respect to each Company Stockholder (as defined in Section 7.1) as of immediately prior to the Effective Time shall be in proportion to the aggregate amount of the Merger Consideration each such stockholder would otherwise be entitled to receive in the Merger by virtue of ownership of outstanding shares of Company Capital Stock and Company Options immediately prior to the Effective Time (treating, for purposes of this calculation, all Company Options and Company Restricted Stock as having fully vested and with respect to Company Options net of exercise prices). Any cash deposited with the Exchange Agent shall hereinafter be referred to as the “ Exchange Fund .”

 

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(c) Exchange Procedures . Within two (2) business days following the Effective Time, Parent shall make available for hand pick-up from the Exchange Agent and cause the Exchange Agent to mail to each holder of record (as of the Effective Time) of a certificate or certificates or an instrument or instruments (the “ Certificates ”), which immediately prior to the Effective Time represented (i) outstanding shares of Company Capital Stock whose shares were converted into the right to receive the Merger Consideration pursuant to Section 1.6(a) and (ii) the Company Options which were converted into the right to receive the Merger Consideration pursuant to Section 1.6(d): (A) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as are reasonably acceptable to the Company) and (B) instructions for use in effecting the surrender of the Certificates in exchange for cash constituting the Merger Consideration (less the Representative Reimbursement Amount with respect to such Company Stockholder in accordance with Article VII, and amounts to be deposited in escrow pursuant to the Management Escrow Agreement) (including a means of hand delivery). Upon surrender of Certificates for cancellation to the Exchange Agent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto and such other documents as may reasonably be required by the Exchange Agent, the holder of record of such Certificates shall be entitled to receive, in exchange therefor, the amount of cash constituting the Merger Consideration to which such holder is entitled pursuant to Section 1.6 (less the Representative Reimbursement Amount with respect to such Company Stockholder in accordance with Article VII and amounts to be deposited in escrow pursuant to the Management Escrow Agreement), and the Certificates so surrendered shall forthwith be canceled. No interest shall be paid or accrued on any cash constituting the Merger Consideration, other than with respect to amounts to be deposited in escrow pursuant to the Management Escrow Agreement. At the election of the respective Company Stockholder, the Exchange Agent shall make the foregoing payment by wire transfer to the extent that the aggregate amount owed to any such holder at the Closing is in excess of $1,000,000. Until so surrendered, outstanding Certificates will be deemed from and after the Effective Time, for all corporate purposes, to evidence the right to receive the Merger Consideration and the Earnout Amount into which such securities shall have been so converted.

(d) Required Withholding . Each of Parent, the Exchange Agent and the Surviving Corporation shall be entitled to deduct and withhold from the Merger Consideration and any other consideration payable or otherwise deliverable pursuant to this Agreement to any holder or former holder of Company Capital Stock or Company Options such amounts as may be required to be deducted or withheld therefrom under the Internal Revenue Code of 1986, as amended (the “ Code ”) or under any provision of state, local or foreign Tax law or under any other applicable Legal Requirement (as defined in Section 2.2(d)). To the extent such amounts are so deducted or withheld, the amount of such consideration shall be treated for all purposes under this Agreement as having been paid to the Person (as defined in Section 9.2(d)) to whom such consideration would otherwise have been paid.

 

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(e) No Liability . Notwithstanding anything to the contrary in this Section 1.8, neither the Exchange Agent, the Surviving Corporation nor any party hereto shall be liable to a holder of shares of Company Capital Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law.

(f) Investment of Exchange Fund . The Exchange Agent shall invest any cash included in the Exchange Fund as directed by Parent; provided , however , that no such investment or loss thereon shall affect the amounts payable to holders of the Company’s securities pursuant to this Article I. Any interest and other income resulting from such investment shall become a part of the Exchange Fund, and any amounts in excess of the amounts payable to holders of the Company’s securities pursuant to this Article I shall promptly be paid to Parent.

(g) Termination of Exchange Fund . Any portion of the Exchange Fund which remains undistributed to the holders of Certificates twelve (12) months after the Effective Time shall, at the request of the Surviving Corporation, be delivered to the Surviving Corporation or otherwise according to the instruction of the Surviving Corporation, and any holders of the Certificates who have not surrendered such Certificates in compliance with this Section 1.8 shall after such delivery to Surviving Corporation look only to Parent and the Surviving Corporation for the amount of cash constituting the Merger Consideration pursuant to Section 1.6(a) with respect to the shares of Company Capital Stock, or Section 1.6(d) with respect to Company Options and the Earnout Amount pursuant to Section 1.7 with respect to such shares and Company Options formerly represented thereby. If any Certificate shall not have been surrendered immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity (as defined in Section 2.3(c)), any such portion of the Exchange Fund remaining unclaimed by holders of the Company’s securities immediately prior to such time shall, to the extent permitted by law, become the property of the Surviving Corporation free and clear of any claims or interest of any Person previously entitled thereto.

1.9 No Further Ownership Rights in Company Capital Stock . All cash paid upon the surrender for exchange of shares of Company Capital Stock and Company Options in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Capital Stock and Company Options, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Company Capital Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I.

1.10 Lost, Stolen or Destroyed Certificates . In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall transfer in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof and, if required by Parent, the giving by the holder thereof of an indemnity undertaking with respect to any claim that may be made against it with respect to such Certificate, such amount of cash constituting the Merger Consideration and, at the applicable time, any amount payable pursuant to Section 1.7.

 

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1.11 Further Action . At and after the Effective Time, the officers and directors of Parent and the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of the Company and Merger Sub, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Company and Merger Sub, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger.

ARTICLE II.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to Parent and Merger Sub as of the date hereof, except as set forth in the disclosure letter supplied by the Company to Parent dated as of the date hereof (the “ Company Disclosure Letter ”), as follows:

2.1 Organization; Standing and Power; Charter Documents; Subsidiaries .

(a) Organization; Standing and Power . The Company and each of its Subsidiaries (as defined below) (i) is a corporation or other organization duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (except, in the case of good standing, for entities organized under the laws of any jurisdiction that does not recognize such concept), (ii) has the requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and (iii) is duly qualified or licensed and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed or to be in good standing, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect (as defined in Section 9.2(d)) on the Company. For purposes of this Agreement, “ Subsidiary ,” when used with respect to any party, shall mean any corporation or other organization, whether incorporated or unincorporated, at least a majority of the securities or other interests of which having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. Section 2.1(a) of the Company Disclosure Letter contains a correct and complete list of each jurisdiction where the Company and each of its Subsidiaries is organized and qualified to do business and a list of each of the officers and directors of the Company and its Subsidiaries.

(b) Charter Documents . The Company has delivered or made available to Parent: (i) a true and correct copy of the Certificate of Incorporation and Bylaws of the

 

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Company, each as amended to date (collectively, the “ Company Charter Documents ”) and (ii) the Certificate of Incorporation and Bylaws, or like organizational documents (collectively, “ Subsidiary Charter Documents ”), of each of its Subsidiaries, and each such instrument is in full force and effect. The Company is not in violation of any of the provisions of the Company Charter Documents and each Subsidiary is not in violation of its respective Subsidiary Charter Documents.

(c) Subsidiaries . Section 2.1(c) of the Company Disclosure Letter sets forth each Subsidiary of the Company as of the date hereof. All the outstanding shares of capital stock of, or other equity or voting interests in, each such Subsidiary have been validly issued and are fully paid and nonassessable and are owned by the Company, a wholly-owned Subsidiary of the Company, or the Company and another wholly-owned Subsidiary of the Company, free and clear of all material pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever, other than liens for taxes not yet due and payable or being contested in good faith and for which adequate reserves have been established on the Financial Statements (collectively, “ Liens ”), except for restrictions imposed by applicable securities laws, and are duly authorized, validly issued, full paid and nonassessable. Other than the Subsidiaries of the Company, neither the Company nor any of its Subsidiaries owns any capital stock of, or other equity or voting interests of any nature in, or any interest convertible, exchangeable or exercisable for, capital stock of, or other equity or voting interests of any nature in, any other Person.

2.2 Capital Structure .

(a) Capital Stock . The authorized capital stock of the Company consists of: (i) 25,000,000 shares of Company Common Stock, par value $0.001 per share and (ii) 15,000,000 shares of preferred stock, par value $0.001 per share (the “ Company Preferred Stock ”), 2,318,970 of which shares have been designated as Series A Preferred Stock, 5,808,573 of which shares have been designated as Series B Preferred Stock, and 6,500,000 of which shares have been designated as Series C Preferred Stock. At the close of business on the date hereof: (i) 8,895,088 shares of Company Common Stock were issued and outstanding; (ii) 2,318,970 shares of Series A Preferred Stock were issued and outstanding; (iii) 5,808,573 shares of Series B Preferred Stock were issued and outstanding; (iv) 6,364,977 shares of Series C Preferred Stock were issued and outstanding; and (v) 1,298,700 shares of Company Common Stock were reserved for issuance upon exercise of options granted pursuant to the Company Option Plans. No shares of Company Common Stock are owned or held by any Subsidiary of the Company. All of the outstanding shares of capital stock of the Company are, and all shares of capital stock of the Company which may be issued as contemplated or permitted by this Agreement will be, when issued, duly authorized and validly issued, fully paid and nonassessable and not subject to any preemptive rights. For purposes of this Agreement, “ Contract ” shall mean any written, oral or other agreement, contract, subcontract, settlement agreement, lease, instrument, note, warranty, purchase order, license, sublicense, or other legally binding commitment, as in effect as of the date hereof.

(b) Stock Options . Section 2.2(b) of the Company Disclosure Letter sets forth a true, complete and correct list of all persons who, at the close of business on

 

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the date hereof, hold outstanding Company Options indicating, with respect to each Company Option then outstanding, the number of shares of Company Common Stock subject to such Company Option, the exercise price, the date of grant, vesting schedule and expiration date thereof, including the extent to which any vesting had occurred as of the date of this Agreement and whether the vesting of such Company Option will be accelerated in any way by the consummation of the transactions contemplated by this Agreement or by the termination of employment or engagement or change in position of any holder thereof following or in connection with the consummation of the Merger, except as contemplated by this Agreement.

(c) Restricted Stock . Section 2.2(c) of the Company Disclosure Letter sets forth a true, complete and correct list of all persons who, at the close of business on the date hereof, hold outstanding Company Restricted Stock, indicating, with respect to each holder of Company Restricted Stock then outstanding, the date of purchase of such Company Restricted Stock, the number of shares of Company Restricted Stock purchased, the purchase price, the vesting schedule of such Company Restricted Stock and whether the holder of such Company Restricted Stock provided the Company with an election which indicates that it was timely filed under Section 83(b) of the Code with respect to such Company Restricted Stock.

(d) Other Securities . Except as otherwise set forth in this Section 2.2, as of the date hereof, there are no securities, options, warrants, calls, rights, contracts, commitments, agreements, instruments, arrangements, understandings, obligations or undertakings of any kind to which the Company or any of its Subsidiaries is a party or by which any of them is bound obligating the Company or any of its Subsidiaries to (including on a deferred basis) issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock, voting debt or other voting securities of the Company or any of its Subsidiaries, or obligating the Company or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, instrument, arrangement, understanding, obligation or undertaking. All outstanding shares of Company Common Stock, all outstanding Company Options, and all outstanding shares of capital stock of each Subsidiary of the Company have been issued and granted in compliance in all material respects with all applicable securities laws and all other applicable Legal Requirements (as defined below). There are not any outstanding Contracts of the Company or any of its Subsidiaries to (i) repurchase, redeem or otherwise acquire any shares of capital stock of, or other equity or voting interests in, the Company or any of its Subsidiaries or (ii) dispose of any shares of the capital stock of, or other equity or voting interests in, any of its Subsidiaries. The Company is not a party to any voting agreement with respect to shares of the capital stock of, or other equity or voting interests in, the Company or any of its Subsidiaries and, to the Knowledge (as defined in Section 9.2(b)) of the Company, there are no irrevocable proxies and no voting agreements, voting trusts, rights plans or anti-takeover plans with respect to any shares of the capital stock of, or other equity or voting interests in, the Company or any of its Subsidiaries. For purposes of this Agreement, “ Legal Requirements ” shall mean any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, order, edict, decree, rule, regulation, treaties, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity.

 

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2.3 Authority; Non-Contravention; Necessary Consents .

(a) Authority . The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby has been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement or to consummate the Merger and the other transactions contemplated hereby, subject only to the approval and adoption of this Agreement by the Company’s stockholders and the filing of the Certificate of Merger pursuant to Delaware Law. The Board of Directors of the Company, at a meeting duly called and held, duly adopted resolutions (i) approving and declaring advisable this Agreement, the Merger and the other transactions to be entered into by the Company contemplated by this Agreement, (ii) declaring that it is in the best interests of the holders of Company Capital Stock that the Company enter into this Agreement and consummate the Merger and the other transactions contemplated by this Agreement, (iii) directing that the adoption of this Agreement be submitted as promptly as practicable to the holders of Company Capital Stock for their consent thereto, and (iv) recommending (the “ Company Board Recommendation ”) that the holders of Company Capital Stock adopt this Agreement and approve the Merger, which resolutions have not been subsequently rescinded, modified or withdrawn in any way. The affirmative vote of (x) a majority of the issued and outstanding shares of Company Common Stock and Company Preferred Stock (on an as-converted to Company Common Stock basis), voting together as a single class, (y) a majority of the issued and outstanding shares of Company Preferred Stock, voting together as a single class, and (z) a majority of the issued and outstanding shares of Company Common Stock, voting together as a single class, to adopt this Agreement are the only votes of the holders of any class or series of the Company Capital Stock necessary to adopt this Agreement, approve the Merger and consummate the Merger and the other transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, assuming due execution and delivery by Parent and Merger Sub, constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except (A) as enforcement may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other laws affecting the rights of creditors generally and general equitable principles (whether considered in a proceeding in equity or at law), and (B) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of a court of competent jurisdiction before which any proceeding may be brought.

(b) Non–Contravention . The execution and delivery of this Agreement by the Company does not, and performance of this Agreement by the Company will not: (i) conflict with or violate the Company Charter Documents or any Subsidiary Charter Documents of any Subsidiary of the Company, (ii) subject to obtaining the approval and adoption of this Agreement by the Company’s stockholders as contemplated in

 

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Section 2.3(a) and compliance with the requirements set forth in Section 2.3(c), conflict with or violate any Legal Requirement applicable to the Company or any of its Subsidiaries or by which the Company or any of its Subsidiaries or any of their respective properties is bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or impair the Company’s rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of the Company or any of its Subsidiaries pursuant to any Company Material Contract (as defined in Section 2.17(a)), except in each of the foregoing clauses (ii) and (iii) as would not reasonably be expected to have a Material Adverse Effect on the Company.

(c) Necessary Consents . No consent, approval, order or authorization of, or registration, declaration or filing with any supranational, national, state, municipal, local or foreign government, any instrumentality, subdivision, court, administrative or regulatory authority, department, ministry, agency or commission, or other governmental authority or instrumentality, including notified bodies designated by the member states of the European Union and the European Free Trade Association (a “ Governmental Entity ”) is required to be obtained or made by the Company in connection with the execution and delivery of this Agreement or the consummation of the Merger and other transactions contemplated hereby, except for: (i) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which the Company and/or Parent are qualified to do business, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal, foreign and state securities (or related) laws and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “ HSR Act ”) and satisfaction of such other requirements of the comparable laws of other jurisdictions, (iii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities or “blue sky” laws and the securities laws of any foreign country, (iv) such other consents, authorizations, filings, approvals and registrations set forth in Section 2.3(c) of the Company Disclosure Letter, and (v) such consents, authorizations, filings, approvals and registrations, which if not obtained or made would not reasonably be expected to have a Material Adverse Effect on the Company. The consents, approvals, orders, authorizations, registrations, declarations and filings set forth in clauses (i) and (ii) are referred to herein as the “ Necessary Consents .”

2.4 Financial Statements . Section 2.4 of the Company Disclosure Letter includes a complete copy of (i) the audited consolidated balance sheets of the Company as of December 31, 2004 and December 31, 2005, and the related audited consolidated statements of income, changes in stockholders’ deficit and cash flows, of the Company for the years ended December 31, 2003, December 31, 2004 and December 31, 2005 and (ii) the unaudited consolidated balance sheet of the Company as of September 30, 2006, and unaudited consolidated statements of income and cash flows for the nine (9) months ended September 30, 2006 (collectively, the “ Financial Statements ”). The Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“ GAAP ”) (except that unaudited financial statements do not have notes thereto)

 

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applied on a consistent basis throughout the periods indicated and with each other. The Financial Statements present fairly in all material respects the financial condition and operating results of the company and its consolidated Subsidiaries as of the dates, and for the periods, indicated therein, subject, in the case of the unaudited financial statements, to normal year-end audit adjustments that are not expected to be material. The Company maintains a standard system of accounting established and administered in accordance with GAAP. The Company’s unaudited balance sheet as of September 30, 2006, is referred to as the “ Company Balance Sheet .”

2.5 Corporate Governance .

(a) The Company has established a system of internal accounting controls and disclosure controls and procedures sufficient to provide reasonable assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets, (iii) access to assets, and receipts and expenditures of the Company and its Subsidiaries are permitted only in accordance with management’s authorization, (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and (v) there is timely detection of the unauthorized acquisition, use or disposition of assets that could have a material effect on financial statements of the Company and its Subsidiaries.

(b) The Company has provided or made available to Parent or its counsel complete and correct copies of (a) all documents identified on the Company Disclosure Letter, (b) the Company Charter Documents and the Subsidiary Charter Documents, each as currently in effect, (c) the minute books containing records of all proceedings, consents, actions and meetings of the Board of Directors, committees of the Board of Directors and stockholders of the Company, and (d) all Company Permits relating to the business of the Company and all applications for such Company Permits. The minute books of the Company provided to Parent contain a complete and accurate summary of all meetings of the Board of Directors of the Company or any committee thereof, or of the stockholders of the Company, or actions by written consent in lieu thereof, since the time of incorporation of the Company and reflect all transactions referred to in such minutes accurately in all material respects. The books, records and accounts of the Company and its Subsidiaries (i) are true, correct and complete in all material respects, (ii) have been maintained in accordance with reasonable business practices on a basis consistent with prior years, (iii) are stated in reasonable detail and accurately and fairly reflect the transactions and dispositions of the assets and properties of the Company and its Subsidiaries, and (iv) accurately and fairly reflect the basis for the Financial Statements.

2.6 Undisclosed Liabilities . Except as disclosed in the Financial Statements, since the date of the Company Balance Sheet through the date hereof, neither the Company nor any of its Subsidiaries has any liabilities of a nature required to be disclosed on a consolidated balance sheet or in the related notes to the consolidated financial statements prepared in accordance with GAAP which are, individually or in the aggregate, material to the Company and its Subsidiaries taken as a whole, except for (i)

 

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liabilities shown on the Company Balance Sheet, (ii) liabilities which have arisen in the ordinary course of business consistent with past practice since the Balance Sheet Date, or (iii) liabilities incurred in connection with this Agreement or the transactions contemplated hereby.

2.7 Absence of Certain Changes or Events .

(a) Since the date of the Company Balance Sheet and through the date hereof, there has not been: (i) any Material Adverse Effect on the Company, (ii) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) in respect of, any of the Company’s or any of its Subsidiaries’ capital stock, (iii) any amendment of the Company’s Certificate of Incorporation or Bylaws, (iv) any damage, destruction or other casualty loss (whether or not covered by insurance) with respect to any Assets that, individually or in the aggregate, are material to the Company and its Subsidiaries, taken as a whole, (v) any purchase, redemption, other acquisition or amendment by the Company or any of its Subsidiaries of any of the Company’s capital stock or any other securities of the Company or its Subsidiaries or any options, warrants, calls or rights to acquire any such shares or other securities except for repurchases from Employees following their termination pursuant to the terms of their pre-existing stock option or purchase agreements, (vi) any split, combination or reclassification of any of the Company’s or any of its Subsidiaries’ capital stock, (vii) any material change by the Company in its accounting methods, principles or practices, except as required by concurrent changes in GAAP, (viii) any material revaluation by the Company of any of its assets, including writing down the value of capitalized inventory or writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice, (ix) any material election in respect of Taxes, or any adoption or change of any material accounting method in respect of Taxes, entering into of any tax allocation agreement, tax sharing agreement, tax indemnity agreement or closing agreement, settlement or compromise any claim, notice, audit report or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes, or (x) any plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its Subsidiaries (other than the Merger).

2.8 Taxes .

(a) Definition . For the purposes of this Agreement, the term “ Tax ” or, collectively, “ Taxes ” shall mean any and all federal, state, local and foreign taxes and other like governmental charges, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts, and any liability for the payment of any amounts of the type described above in this Section 2.8(a) as a result of any express or implied obligation to indemnify any other Person or as a result of any obligations under any agreements or arrangements with any other Person and including any liability for taxes of a predecessor entity.

 

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(b) Tax Returns and Audits .

(i) Filing of Tax Returns . The Company and each of its Subsidiaries have prepared and timely filed with the appropriate taxing authority all required federal, state, local and foreign returns, estimates, information statements and reports (“ Tax Returns ”) relating to any and all Taxes concerning or attributable to the Company, its Subsidiaries or their respective operations and such Tax Returns have been completed and are accurate in accordance with applicable law in all material respects. Neither the Company nor any of its Subsidiaries are currently the beneficiaries of any extension of time within which to file any Tax Return. No claim has ever been made in writing by an authority in a jurisdiction where the Company or any of its Subsidiaries do not file Tax Returns that it is or may be subject to taxation by that jurisdiction.

(ii) Payment of Taxes . All Taxes due and owing by the Company and any of its Subsidiaries on or before the date hereof (whether or not shown on any Tax Return) have been paid. The unpaid Taxes of the Company and any of its Subsidiaries (A) did not, as of the date of the Company Balance Sheet, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Company Balance Sheet (rather than any notes thereto), and (B) will not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company in filing its Tax Returns. Since the date of the Company Balance Sheet, neither the Company nor any of its Subsidiaries has incurred any liability for Taxes outside the ordinary course of business consistent with past practice.

(iii) Withholding . The Company and each of its Subsidiaries have paid or withheld all Taxes required to be paid or withheld with respect to their Employees and any independent contractor, creditor, stockholder, or other third party (and paid over to the appropriate Taxing authority) all Taxes required to be paid or withheld.

(iv) Audits, Investigations or Claims . Neither the Company nor any of its Subsidiaries has received from any Governmental Entity any (i) written notice indicating an intent to open an audit or other review, (ii) written request for information related to Tax matters, or (iii) written notice of deficiency or adjustment proposed in writing of any amount of Tax against the Company or any of its Subsidiaries. No proceedings are pending or being conducted with respect to any Tax matter and no power of attorney (other than powers of attorney authorizing employees of the Company to act on behalf of the Company) with respect to any Taxes of the Company or any of its Subsidiaries has been filed or executed with any Governmental Entity. There are no matters under discussion with any Governmental Entity with respect to Taxes that are likely to result in an additional liability for Taxes with respect to the Company or any of its Subsidiaries. The Company has delivered or made available to Parent complete and accurate copies of all Tax Returns of the Company and each of its Subsidiaries (and predecessors of each) for the years ended December 31, 2003, 2004 and 2005, and complete and accurate copies of all examination reports and statements of deficiencies assessed against or agreed to by the Company and each of its Subsidiaries since December 31, 2001. Neither the Company nor any of its Subsidiaries has waived any statute of

 

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limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency nor has any request been made in writing for any such extension or waiver.

(v) Liens . There are no Liens on any of the assets of the Company or any of its Subsidiaries relating to or attributable to Taxes.

(vi) USRPHC . Neither the Company nor any of its Subsidiaries is, nor has been at any time, a “United States Real Property Holding Corporation” within the meaning of Section 897(c)(2) of the Code.

(vii) Other Entity Liability . Neither the Company nor any of its Subsidiaries (a) has ever been a member of an affiliated group (within the meaning of Code §1504(a)) filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company), (b) owes any amount under any Tax sharing, indemnification or allocation agreement, or (c) has any liability for the Taxes of any Person (other than Company or any of its Subsidiaries) under section 1.1502-6 of the Treasury Regulations promulgated under the Code (the “ Treasury Regulations ”) (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise.

(viii) Tax Elections . The Company (and any Subsidiary of the Company) (i) has not consented at any time under former Section 341(f)(1) of the Code to have the provisions of former Section 341(f)(2) of the Code apply to any disposition of the assets of the Company or any of its Subsidiaries; (ii) has not agreed, nor is the Company or any of its Subsidiaries required, to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise; (iii) has not made an election, nor is the Company or any of its Subsidiaries required, to treat any of its assets as owned by another Person for Tax purposes or as a tax-exempt bond financed property or tax-exempt use property within the meaning of Section 168 of the Code; (iv) has not acquired nor owns any assets that directly or indirectly secure any debt the interest on which is tax exempt under Section 103(a) of the Code; (v) has not made nor will make a consent dividend election under Section 565 of the Code; (vi) has not elected at any time to be treated as an S corporation within the meaning of Sections 1361 or 1362 of the Code; and (vii) has not made any of the foregoing elections nor is required to apply any of the foregoing rules under any comparable state or local Tax provision.

(ix) Tax-Sharing Agreements . There are no Tax-sharing agreements or similar arrangements (including indemnity arrangements) with respect to or involving the Company or any of its Subsidiaries, and, after the Closing Date, neither the Company nor any of its Subsidiaries shall be bound by any such Tax-sharing agreements or similar arrangements or have any liability thereunder for amounts due in respect of periods prior to the Closing Date.

(x) Partnerships, Single Member LLCs, CFCs, PHCs and PFICs . Neither the Company nor any of its Subsidiaries (i) is a partner for Tax purposes with respect to any joint venture, partnership, or other arrangement or contract which is treated

 

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as a partnership for Tax purposes, (ii) owns a single member limited liability company which is treated as a disregarded entity other than LLC, (iii) is a stockholder of a “controlled foreign corporation” as defined in Section 957 of the Code (or any similar provision of state, local or foreign law), (iv) is a “personal holding company” as defined in Section 542 of the Code (or any similar provision of state, local or foreign law), or (v) is a stockholder in a “passive foreign investment company” within the meaning of Section 1297 of the Code.

(xi) Permanent Establishment . Neither the Company nor any of its Subsidiaries have or have had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States of America and such foreign country.

(xii) Surrogate Foreign Corporation . None of the Company’s Subsidiaries incorporated outside of the United States is a “surrogate foreign corporation” within the meaning of Section 7874(a)(2)(B) of the Code or is treated as a U.S. corporation under Section 7874(b) of the Code.

(xiii) Tax Shelters . The Company has not entered into any transaction identified as a “listed transaction” for purposes of Treasury Regulations Sections 1.6011-4(b)(2) or 301.6111-2(b)(2). If the Company has entered into any transaction such that, if the treatment claimed by it were to be disallowed, the transaction would constitute a substantial understatement of federal income tax within the meaning of Section 6662 of the Code, then it believes that it has either (x) substantial authority for the tax treatment of such transaction or (y) disclosed on its Tax Return the relevant facts affecting the Tax treatment of such transaction.

(xiv) Spin-Offs . Neither the Company nor any of its Subsidiaries has constituted either a “distributing corporation” or a “controlled corporation” in a distribution of stock intended to qualify for tax-free treatment under Section 355 or Section 361 of the Code.

2.9 Intellectual Property .

(a) Definitions . For the purposes of this Agreement, the following terms have the following meanings:

(i) “ Company Business ” shall mean the design, development, manufacture, marketing and sale of Company Products as conducted as of the date hereof.

(ii) “ Company IP Contract ” shall mean any and all Contracts to which the Company or any of its Subsidiaries is a party and pursuant to which (A) the Company or any of its Subsidiaries has granted a license (including any sublicense) under Intellectual Property to any third Person, or any option with respect thereto or (B) any third Person has granted a license (including any sublicense) to the Company or any its Subsidiaries under any Intellectual Property.

 

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(iii) “ Company Products ” shall mean the Company’s X STOP ^® interspinous process decompression device as such product is marketed as of the date hereof, together with all modifications thereto under development by the Company or any Subsidiary as of the date hereof.

(iv) “ Intellectual Property ” shall mean any and all of the following and all rights in, arising out of, or associated therewith: (A) all patents and applications therefor anywhere in the world (whether national, international or otherwise) and including all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (B) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data and customer lists, and all documentation relating to any of the foregoing; (C) all copyrights, copyrights registrations and applications therefor, and all other rights corresponding thereto throughout the world; (D) all industrial designs and any registrations and applications therefor throughout the world; (E) all trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor throughout the world; (F) all databases and data collections and all rights therein throughout the world; (G) all moral and economic rights of authors and inventors, however denominated, throughout the world; (H) all rights to enforce any of the foregoing against infringement or misappropriation thereof; and (I) any similar or equivalent rights to any of the foregoing anywhere in the world.

(v) “ Company Intellectual Property ” shall mean any and all Intellectual Property that the Company or any of its Subsidiaries owns or otherwise has rights to use, including the Company Registered Intellectual Property.

(vi) “ Company Registered Intellectual Property ” shall mean any and all of the Registered Intellectual Property owned by, or filed in the name of, the Company or any of its Subsidiaries.

(vii) “ Registered Intellectual Property ” shall mean any and all of the following anywhere in the world: (A) patents and patent applications (including provisional applications); (B) registered trademarks and applications to register trademarks, (including intent-to-use applications); (C) registered copyrights and applications for copyright registration; and (D) any other Intellectual Property that is the subject of an application, certificate, filing, registration or other document issued, filed with, or recorded by any Governmental Entity.

(b) Registered Intellectual Property; Proceedings . Section 2.9(b) of the Company Disclosure Letter lists as of the date hereof (i) all Company Registered Intellectual Property and specifies, where applicable, the jurisdictions in which each such item of Company Registered Intellectual Property has been issued or registered or in which any application for such issuance and registration has been filed, or in which any other filing or recordation has been made and (ii) any litigation, opposition, re-examination, interference proceeding, nullity action, reissue proceeding, cancellation, objection, claim or other equivalent proceeding or action pending, asserted or, to the Knowledge of the Company, threatened with respect to any Company Registered Intellectual Property.

 

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(c) Ownership of and Rights to Company Intellectual Property . The Company owns all right, title and interest in and to, or has a valid right or license to, Company Intellectual Property, free and clear of all Liens.

(d) No Order, Restriction or Obligation . No Company Intellectual Property is subject to any proceeding or outstanding order, Contract or stipulation restricting the use, transfer, or licensing thereof by the Company or any of its Subsidiaries, or that affects the validity, use or enforceability of such Company Intellectual Property. Neither the Company nor any of its Subsidiaries has an explicit or implied legal obligation, absolute or contingent, to any other Person to sell, transfer or assign any of the Company Intellectual Property. Neither the Company nor any of its Subsidiaries has made any assignment or granted any license, or is under any obligation to grant any such right or license to any other Person, under any of the Company Intellectual Property.

(e) Registration . All necessary registration, maintenance and renewal fees for each item of Company Registered Intellectual Property have been paid and all necessary documents, recordations and certificates in connection with such Company Registered Intellectual Property have been filed with the relevant Governmental Entities for the purposes of prosecuting, maintaining or perfecting such Company Registered Intellectual Property.

(f) Absence of Liens . The Company or its Subsidiaries owns and has good and exclusive title to each material item of Company Intellectual Property owned by it, free and clear of any Liens.

(g) No Forfeiture or Termination . The consummation of the Merger will not cause the forfeiture or termination of, or give rise to a right of forfeiture or termination of any Company Intellectual Property, or impair the right of the Surviving Corporation to use, possess, sell or license any Company Intellectual Property or portion thereof to the same extent that the Company and its Subsidiaries had the right to do so prior to the consummation of the Merger. There are no royalties, honoraria, fees or other payments payable by the Company to any Person (other than salaries payable to employees, consultants and independent contractors not contingent on or related to use of their work product) as a result of the ownership, use, possession, license-in, license-out, sale, marketing, advertising or disposition of any Company Intellectual Property by the Company, and the Merger will not result in any such royalties, honoraria, fees or other payments being payable by the Surviving Corporation. Neither the Company nor any of its Subsidiaries has knowingly permitted any Company Registered Intellectual Property to enter the public domain or, with respect to any Company Registered Intellectual Property for which an application has been submitted or a registration obtained, to lapse (other than (i) through the expiration of such Company Registered Intellectual Property at the end of its maximum statutory term or (ii) applications abandoned and listed on Section 2.9(g)(ii) of the Company Disclosure Letter).

(h) Company IP Contracts.

Section 2.9(h) of the Company Disclosure Letter lists as of the date hereof all Company IP Contracts.

 

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(i) As of the date hereof, (A) all of the Company IP Contracts are in force and effect and (B) to the Knowledge of the Company, no party thereto is in material breach thereof.

(ii) The consummation of the Merger will not result in the modification, cancellation, termination, suspension, acceleration of any payments, breach or other violation with respect to any Company IP Contract, nor give any third party to any Company IP Contract the right to do any of the foregoing.

(iii) Following the Effective Time, the Surviving Corporation will be permitted to exercise all of the Company’s rights under all Company IP Contracts (including, without limitation, the right to receive royalties), to the same extent the Company or its Subsidiaries would have been able to had the Merger not occurred and without being required to pay any material additional amounts or consideration other than fees, royalties or payments which the Company or its Subsidiaries would otherwise be required to pay had the Merger not occurred.

(iv) The Merger will not result in any Company Intellectual Property or the Company Business being subject to any material non-compete or other material restriction of like nature.

(v) None of the Company IP Contracts assigns or grants, or sets forth or creates an obligation to assign or grant, any third party (A) rights in, to or under any Company Intellectual Property, or (B) the right to sublicense any Company Intellectual Property or Company Registered Intellectual Property.

(i) No Infringement . To the Knowledge of the Company, the Company Business does not materially infringe or misappropriate the Intellectual Property of any third party or, to the Knowledge of the Company, constitute unfair competition or unfair trade practices under the laws of any jurisdiction.

(j) No Notice of Infringement . Neither the Company nor any of its Subsidiaries has received written notice from any third party that the Company Business infringes or misappropriates the Intellectual Property of any third party or constitutes unfair competition or unfair trade practices under the laws of any jurisdiction, and no litigation, arbitration or other adversary proceeding is pending, or, to the Knowledge of the Company, is threatened, in each case against the Company or any of its Subsidiaries alleging the infringement or misappropriation of the Intellectual Property of any third party or any unfair competition or unfair trade practices under the laws of any jurisdiction.

(k) No Claim or Threat; Validity . To the Knowledge of the Company, none of the Company Intellectual Property is subject to any pending or threatened outstanding order, stipulation, proceeding, or notification, including without limitation any pending interference, opposition, cancellation, reissue, reexamination, or other challenge or adversarial proceeding, restricting in any manner the use, transfer, or licensing by the

 

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Company of any Company Intellectual Property, or which may affect the validity, use or enforceability of any Company Intellectual Property, except as may arise in the normal course of prosecution of applications for Company Registered Intellectual Property. To the Knowledge of the Company, no inequitable conduct has been committed in the prosecution of the patent rights in the Company Registered Intellectual Property, and no material information was withheld from any entity requiring disclosure of such information during prosecution of such patent rights.

(l) No Third Party Infringement . To the Knowledge of the Company, no Person is infringing or misappropriating any Company Intellectual Property. The Company has not brought any action, suit or proceeding for infringement or misappropriation of any Company Intellectual Property or breach of any Company IP Contract.

(m) Proprietary Information Agreements . The Company and each of its Subsidiaries has taken reasonable steps to protect the Company’s and its Subsidiaries’ rights in the Company’s confidential information and trade secrets within the Company Intellectual Property or any trade secrets or confidential information of third parties provided to the Company or any of its Subsidiaries. Each of the current and former employees of the Company or any of its Subsidiaries has entered into its standard form of confidentiality and proprietary information and invention disclosure and assignment agreement. Each of the current and former consultants and independent contractors of the Company or any of its Subsidiaries has entered into its standard form of confidentiality and proprietary information and invention disclosure and assignment agreement or consulting agreement, except where failure to do so would not have a Material Adverse Effect on the Company. The Company has unencumbered and unrestricted exclusive ownership of any and all Company Intellectual Property used in the Company Business independently or jointly conceived, reduced to practice, created, authored or developed by any and all current and former employees, consultants and independent contractors.

(n) Funding of Company Intellectual Property and Company Registered Intellectual Property . To the Knowledge of the Company, no government funding, including funding pursuant to a government grant, or facilities or personnel of a university, college, other educational or medical institution or research center was used in the development of the Company Intellectual Property. To the Knowledge of the Company, no current or former employee, consultant or independent contractor of the Company or one of its Subsidiaries, who was involved in, or who contributed to, the creation or development of any Company Intellectual Property, was employed by or has performed services for any government, university, college or other educational or medical institution or research center during a period of time during which such employee, consultant or independent contractor was also performing services for the Company or one of its Subsidiaries.

2.10 Compliance; Permits .

(a) Compliance . Neither the Company nor any of its Subsidiaries is in conflict with, or in default or in violation of, any Legal Requirement applicable to the

 

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Company or any of its Subsidiaries or by which the Company or any of its Subsidiaries or any of their respective businesses or properties is bound or affected, except for those conflicts, defaults or violations that, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect on the Company. There is no material judgment, injunction, order or decree binding upon the Company or any of its Subsidiaries which has or would reasonably be expected to have the effect of prohibiting or materially impairing the Company Business.

(b) Permits . The Company and its Subsidiaries hold, to the extent legally required, all permits, licenses, variances, clearances, consents, certificates, commissions, franchises, exemptions, registrations, orders, authorizations and approvals from Governmental Entities (“ Permits ”) that are material to the operation of the business of the Company and its Subsidiaries taken as a whole (collectively, “ Company Permits ”). As of the date hereof, no suspension, material modification or cancellation of any of the Company Permits is pending or, to the Knowledge of the Company, threatened. The Company and its Subsidiaries are in compliance in all material respects with the terms of the Company Permits.

2.11 Litigation . As of the date hereof, there are no civil, criminal or administrative actions, suits, claims, or proceedings before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator (collectively, “ Legal Proceedings ”) pending or, to the Knowledge of the Company, threatened (a) against the Company or any of its Subsidiaries, that seek to restrain or enjoin the consummation of the transactions contemplated hereby or that (i) involve an amount in controversy in excess of $150,000, (ii) seek material injunctive relief, (iii) seek to impose any legal restraint on or prohibition against or limit the Surviving Corporation’s ability to operate the business of the Company and its Subsidiaries substantially as it was operated immediately prior to the date of this Agreement or (iv) would, individually or in the aggregate with all other pending or threatened Legal Proceedings, have a Material Adverse Effect on the Company, or (b) to the Knowledge of the Company, against any current or former director or officer of the Company or any of its Subsidiaries (in their respective capacities as such), whether or not naming the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries is subject to or bound by any outstanding judgment, decision, decree, injunction, ruling, writ, assessment or order of any Governmental Entity under applicable Legal Requirements that would reasonably be expected to result in material liability to the Company and its Subsidiaries, taken as a whole.

2.12 Brokers’ and Finders’ Fees; Fees and Expenses . Except for fees payable to J.P. Morgan Securities Inc. pursuant to an engagement letter dated November 8, 2006, a true and complete copy of which the Company has provided to Parent prior to the date hereof, the Company has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or the termination of any proposed initial public offering of the Company Common Stock.

 

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2.13 Employee Benefit Plans .

(a) General Information and Schedule . Section 2.13(a) of the Company Disclosure Letter sets forth a list as of the date hereof of the following: (i) all severance and employment agreements of the Company with directors or officers; (ii) all severance programs and policies of each of the Company or its Subsidiaries; (iii) all plans or agreement of the Company or its Subsidiaries relating to any of its current or former employees, consultants or directors (each, an “ Employee ”) pursuant to which benefits would vest or an amount would become payable or the terms of which would otherwise be materially altered, in any case by virtue of the transactions contemplated by this Agreement or by the termination of employment or engagement or change in position of any Employee following or in connection with the consummation of the Merger; (iv) each Company Benefit Plan (as defined in Section 2.13(b)); and (v) each Option Plan. The Company is not party to any severance agreements or arrangements except to the extent that severance benefits, arrangements, rights or obligations are required or imposed by applicable Legal Requirements .

(b) Benefit Plan Compliance .

(i) The Company has furnished or made available to Parent a true, correct and complete copy with respect to the Company, and any trade or business (whether or not incorporated) which is treated as a single employer with the Company (an “ ERISA Affiliate ”) within the meaning of Section 414(b), (c), (m) or (o) of the Code, each material “employee benefit plan” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”), and each material bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, stock-related or performance award, retirement, vacation, severance, disability, death benefit, hospitalization, medical, loan (other than travel allowances and relocation packages), fringe benefit, disability, sabbatical and other plan or arrangement providing benefits to any Employee (collectively, “ Company Benefit Plans ”) and related material plan documents. Each Company Benefit Plan has been, in all material respects, administered and operated in accordance with its terms, with the applicable provisions of ERISA, the Code and all other applicable Legal Requirements. Each Company Benefit Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has either received a favorable determination, opinion, notification or advisory letter from the IRS with respect to each such Company Benefit Plan as to its qualified status under the Code, or has remaining a period of time under applicable Treasury Regulations or IRS pronouncements in which to apply for such a letter and make any amendments necessary to obtain a favorable determination as to the qualified status of each such Company Benefit Plan.

(ii) To the Knowledge of the Company, no material oral or written representation or commitment with respect to any material aspect of any Company Benefit Plan has been made to an Employee of the Company or any of its Subsidiaries by an authorized Company Employee that is not materially in accordance with the written or otherwise preexisting terms and provisions of such Company Benefit Plans.

 

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(iii) To the Knowledge of the Company, there are no material unresolved claims or disputes under the terms of, or in connection with, any Company Benefit Plan (other than routine undisputed claims for benefits), and no action, legal or otherwise, has been commenced with respect to any such material claim.

(c) Defined Benefit, Multiple Employer and Multiemployer Plans . At no time has the Company or any ERISA Affiliate maintained, established, sponsored, participated in, or contributed to, any (i) Company Benefit Plan subject to Title IV of ERISA, (ii) multiemployer plan (as defined in Section 3(37) of ERISA), or (iii) “multiple employer plan” as defined in ERISA or the Code.

(d) Fiduciary Duties and Prohibited Transactions . Neither the Company nor any plan fiduciary of any Company Benefit Plan which has engaged in, or has any material liability in respect of, any transaction in violation of Sections 404 or 406 of ERISA or any “prohibited transaction,” as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code, or has otherwise violated the provisions of Part 4 of Title I, Subtitle B of ERISA so as to create any material liability of the Company or any Company Benefit Plan. To the Knowledge of the Company, the Company has not participated in a violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Welfare Plan or Pension Plan, and the Company has not been assessed any civil penalty under Section 502(l) of ERISA.

(e) Unrelated Business Taxable Income; Unpaid Contributions . No Company Benefit Plan (or trust or other funding vehicle pursuant thereto) has incurred any liability under Code Section 511. Neither the Company nor any ERISA Affiliate has any liability for unpaid contributions under Section 515 of ERISA with respect to any Employee Plan.

(f) Continuation Coverage . No Company Benefit Plan provides health benefits (whether or not insured), with respect to Employees after retirement or other termination of service (other than coverage mandated by applicable Legal Requirements or benefits, the full cost of which is borne by the Employee), other than individual arrangements the amounts of which are not material.

(g) International Employee Plans . The Company does not now, nor has it ever had the obligation to, maintain, establish, sponsor, participate in, or contribute to any International Employee Plan (as defined below). As used in this Agreement, “ International Employee Plan ” shall mean each Company Benefit Plan that has been adopted or maintained by the Company or any ERISA Affiliate, whether informally or formally, or with respect to which the Comp