AGREEMENT AND PLAN OF MERGER

 

TABLE OF CONTENTS

				Page
ARTICLE 1 THE MERGER				2
1.1		Effective Time of the Merger		2
1.2		Closing		2
1.3		Effects of the Merger		2
1.4		Directors and Officers		3
ARTICLE 2 CONVERSION OF SECURITIES; MERGER CONSIDERATION				3
2.1		Conversion of Capital Stock		3
2.2		Dissenting Shares		6
2.3		Exchange of Certificates		6
2.4		Distributions with Respect to Unexchanged Shares		8
2.5		No Fractional Shares		8
2.6		Tax Consequences		9
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF TARGET				9
3.1		Making of Representations and Warranties		9
3.2		Organization and Corporate Power		10
3.3		Corporate Records		10
3.4		Authorization and Non-Contravention; Required Filings and Consents		10
3.5		Capitalization		11
3.6		Target Subsidiaries; Investments		12
3.7		Financial Statements		12
3.8		Absence of Undisclosed Liabilities		13
3.9		Absence of Certain Developments		13
3.10		Accounts Receivable and Inventories		15
3.11		Distributions to Shareholders; Transactions with Affiliates		16
3.12		Title to Assets		16
3.13		Intellectual Property		17
3.14		Tax Matters		19
3.15		Certain Contracts and Arrangements		20
3.16		Litigation		22

 

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3.17		Permits; Compliance with Laws		22
3.18		Employee and Labor Matters		23
3.19		Employee Benefit Programs		25
3.20		Environmental Matters		26
3.21		Insurance		27
3.22		Relationship with Customers and Suppliers		27
3.23		Trade Regulation		28
3.24		Products; Product Warranties		28
3.25		Information Supplied by Target		29
3.26		Brokers		29
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB				29
4.1		Organization of Acquiror and Sub		30
4.2		Acquiror Capital Structure		30
4.3		Authorization and Non-Contravention; Required Filings and Consents		31
4.4		Commission Filings		32
4.5		Interim Operations of Sub		32
4.6		Disclosure		32
4.7		Brokers		33
ARTICLE 5 POST-CLOSING COVENANTS OF SURVIVING CORPORATION				33
5.1		Closing Date Financial Statements		33
5.2		Employee Confidentiality and Proprietary Rights Agreements		33
ARTICLE 6 COVENANTS OF ACQUIROR AND SUB				34
6.1		Reservation of Acquiror Common Stock		34
6.2		NASDAQ National Market Listing		34
6.3		Indemnification of Target Officers and Directors		34
ARTICLE 7 OTHER AGREEMENTS				34
7.1		Confidentiality		34
7.2		No Public Announcement		34

 

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7.3		Regulatory Filings; Consents; Reasonable Efforts		35
7.4		Further Assurances		35
7.5		FIRPTA		35
7.6		Other Filings		36
7.7		Reorganization Matters		36
ARTICLE 8 CONDITIONS TO MERGER				36
8.1		Conditions to Each Party’s Obligation to Effect the Merger		36
8.2		Additional Conditions to Obligations of Acquiror and Sub		37
8.3		Additional Conditions to Obligations of Target		38
ARTICLE 9 POST-CLOSING ADJUSTMENT				39
9.1		Post-Closing Adjustment Amount		39
9.2		Post-Closing Delivery of Consideration		40
ARTICLE 10 FEES AND EXPENSES				40
10.1		Fees and Expenses		40
ARTICLE 11 INDEMNIFICATION				40
11.1		Survival of Representations and Warranties		40
11.2		Indemnification by Target Shareholders		41
11.3		Indemnification by Acquiror and Sub		42
11.4		Defense of Third Party Claims		42
11.5		Exclusive Remedy		44
11.6		Reliance		44
ARTICLE 12 MISCELLANEOUS				45
12.1		Notices		45
12.2		Interpretation		46
12.3		Counterparts		46
12.4		Entire Agreement; No Third Party Beneficiaries		46
12.5		Governing Law		46

 

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12.6		Assignment		47
12.7		Amendment		47
12.8		Certain Remedies		47
12.9		Severability		47
12.10		Attorneys’ Fees		48
12.11		Extension; Waiver		48

 

Exhibit A — Employment Agreement

Exhibit B — Shareholders Agreement

Exhibit C — Escrow Agreement

Exhibit D—Confidentiality and Proprietary Rights Agreement

Target Disclosure Schedule

Acquiror Disclosure Schedule

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DEFINED TERMS

Acquiror Commission Reports		Section 4.4
Acquiror Common Stock		Section 2.1
Acquiror Disclosure Schedule		Article 4
Acquiror Material Adverse Effect		Section 4.1
Acquiror		Introductory Paragraph
Affiliate		Section 3.10
Agreement of Merger		Section 1.1
Agreement		Introductory Paragraph
Articles of Incorporation		Section 3.2
Bylaws		Section 3.2
Cash Consideration		Section 2.1
Certificates		Section 2.3
Closing Date Balance Sheet		Section 5.1
Closing Date Financial Statements		Section 5.1
Closing Date		Section 1.2
Closing Stock Price		Section 2.1
Closing		Section 1.2
Code		Section 2.6
Commission		Article 4
Common Stock Exchange Ratio		Section 2.1
Confidentiality Agreement		Section 7.1
Constituent Corporations		Section 1.3
Control		Section 3.6
Damages		Section 11.2
Disclosing Party		Section 11.6
Dissenting Shares		Section 2.2
Effective Time		Section 1.1
Employee Program		Section 3.19
Employment Agreements		Recitals
Environmental Law		Section 3.20
Escrow Agreement		Section 2.3(b)
Escrow Amount		Section 2.3(b)
Exchange Act		Section 4.4
FIRPTA		Section 7.5

 

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GAAP		Section 3.7
Hazardous Material		Section 3.20
Hazardous Waste		Section 3.20
Indemnified Party		Section 11.4
Indemnifying Party		Section 11.4
Intellectual Property Rights		Section 3.13
IRS		Section 3.14
Knowledge		Section 3.15
Material Customer		Section 3.22
Material Supplier		Section 3.22
Merger Consideration		Section 2.1
Merger		Recitals
Minnesota Law		Section 1.1
Most Recent Balance Sheet		Section 3.7
Other Filings		Section 7.6
Permits		Section 3.17
Person		Section 3.6
Securities Act		Section 4.4
Shareholders Agreements		Recitals
Stock Consideration		Section 2.1
Sub		Introductory Paragraph
Subsidiary		Section 2.1
Surviving Corporation		Section 1.3
Target Common Stock		Section 2.1
Target Disclosure Schedule		Section 3.1
Target Intellectual Property Assets		Section 3.13
Target Material Adverse Effect		Section 3.2
Target Shareholder		Recitals
Target		Introductory Paragraph
Taxes		Section 3.14
Transaction Documents		Section 3.4

 

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AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER dated as of April 3, 2007 (this “AGREEMENT”), is entered into by and among Cascade Microtech, Inc. , an Oregon corporation (“ACQUIROR”), Gryphics Acquisition Corporation , a Minnesota corporation and a wholly-owned subsidiary of Acquiror (“SUB”), and Gryphics, Inc. , a Minnesota corporation (“TARGET”).

RECITALS:

A.            The Boards of Directors of Acquiror, Sub and Target deem it advisable and in the best interests of each corporation and their respective shareholders that Acquiror and Target combine in order to advance the long-term business interests of Acquiror and Target;

B.            The combination of Acquiror and Target shall be effected by the terms of this Agreement through a transaction in which Target will merge with and into Sub and the shareholders of Target will become shareholders of Acquiror (the “MERGER”);

C.            As a condition and inducement to Acquiror’s willingness to enter into this Agreement, certain employees of Target who are also shareholders of Target (including James Rathburn) have, concurrently with the execution of this Agreement, each executed and delivered an Employment Agreement in the form attached hereto as Exhibit A (the “EMPLOYMENT AGREEMENTS”), which agreements shall only become effective at the Effective Time (as defined in Section 1.1 below).

D.            As a further condition and inducement to Acquiror’s willingness to enter into this Agreement, each shareholder of Target (each, a “TARGET SHAREHOLDER” and, together the “TARGET SHAREHOLDERS”) has executed and delivered to Acquiror a Shareholders Agreement in the form attached hereto as Exhibit B , which agreements shall only become effective at the Effective Time (the “SHAREHOLDERS AGREEMENTS”).

NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties agree as follows:

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ARTICLE 1
THE MERGER

1.1          Effective Time of the Merger

Subject to the provisions of this Agreement, an agreement of merger (the “AGREEMENT OF MERGER”) in such mutually acceptable form as is required by the relevant provisions of the Minnesota Business Corporation Act (“MINNESOTA LAW”) shall be duly executed and delivered by the parties hereto and thereafter delivered to the Secretary of State of the State of Minnesota for filing on the Closing Date (as defined in Section 1.2).  The Merger shall become effective upon the due and valid filing of the Agreement of Merger with the Secretary of State of the State of Minnesota or at such time thereafter as is provided in the Agreement of Merger (the “EFFECTIVE TIME”).

1.2          Closing

The closing of the Merger (the “CLOSING”) will take place at 10:00 a.m., Pacific time, on the date hereof (the “CLOSING DATE”), at the offices of Ater Wynne LLP, 222 SW Columbia, Suite 1800, Portland, Oregon unless another date or place is agreed to in writing by Acquiror and Target.

1.3          Effects of the Merger

(a)           At the Effective Time (i) the separate existence of Target shall cease and Target shall be merged with and into Sub (Sub and Target are sometimes referred to below as the “CONSTITUENT CORPORATIONS” and Sub following consummation of the Merger is sometimes referred to below as the “SURVIVING CORPORATION”), (ii) the Articles of Incorporation of Sub shall be the Articles of Incorporation of the Surviving Corporation, and thereafter may be amended in accordance with its terms and as provided by law, (iii) the Bylaws of Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, and thereafter may be amended in accordance with its terms and as provided by law, and (iv) the name of Sub shall be changed to the name of Target, which name shall thereafter be the name of the Surviving Corporation.

(b)           At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Minnesota Law.  Without limiting the generality of the foregoing, at and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges,

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powers and franchises of a public as well as of a private nature, and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations.

1.4          Directors and Officers

The directors and officers of Target immediately prior to the Effective Time shall resign as of the Effective Time.  The directors of Sub immediately prior to the Effective Time shall become the directors of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation, and the officers of Sub immediately prior to the Effective Time shall become the officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed.

ARTICLE 2
CONVERSION OF SECURITIES; MERGER CONSIDERATION

2.1          Conversion of Capital Stock

(a)           At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of common stock of Target, $.01 par value (“TARGET COMMON STOCK”) or capital stock of Sub or Acquiror:

(i)            Capital Stock of Sub .  Each issued and outstanding share of the capital stock of Sub shall remain outstanding and thereafter constitute one fully paid and nonassessable share of Common Stock of the Surviving Corporation.

(ii)           Cancellation of Acquiror-Owned and Target-Owned Stock .  All shares of Target Common Stock that are owned by Acquiror, Sub, Target or any other direct or indirect Subsidiary (as defined below) of Acquiror or Target shall be canceled and retired and shall cease to exist and no stock of Acquiror or other consideration shall be delivered in exchange.  All shares of Common Stock, $.01 par value, of Acquiror (“ACQUIROR COMMON STOCK”), if any, owned by Target shall remain unaffected by the Merger.  As used in this Agreement, the word “SUBSIDIARY” means, with respect to any other party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which are held by such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar

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functions with respect to such corporation or other organization or a majority of the profit interests in such 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.

(b)           Merger Consideration.

(i)            Subject to Section 2.3, each issued and outstanding share of Target Common Stock (other than any Dissenting Shares as defined in and to the extent provided in Section 2.2) shall be converted into the right to receive:

(A)          cash in an amount per share calculated as follows:

 

where,

A   =                       $13,671,000.00;

B   =                         the positive or negative dollar amount of the difference between (i) $2,322,207.00 and (ii) the amount of working capital reflected on the Closing Date Balance Sheet plus the amount of any capital expenditures made during the period commencing on December 31, 2006 and ending on the date of the Closing Balance Sheet;

C   =                         the total number of shares of Target Common Stock issued and outstanding at the Effective Time; and

D   =                        the “CASH CONSIDERATION.”

For the purposes of this Section 2.1(b)(i)(A), the “working capital” of the Target shall mean the Target’s cash and cash equivalents, inventory, accounts receivable and any other current assets, net of reserves, plus pre-paid expenses, less accounts payable and current accrued liabilities incurred in the ordinary course of business, in each case determined in accordance with Target’s past practice.

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(B)           a number of fully paid and nonassessable shares of Acquiror Common Stock equal to the Common Stock Exchange Ratio (the “STOCK CONSIDERATION”).  The “COMMON STOCK EXCHANGE RATIO” shall be calculated as follows:

 

where,

A   =                       $12,000,000.00;

B   =                         the average closing price of Acquiror Common Stock for the ten (10) trading days ending on the fifth business day before the earlier of :  (i) the Closing Date or (ii) the date of any public announcement regarding this Agreement, whether made by filing with the SEC or otherwise (the “CLOSING STOCK PRICE”);

C   =                         the total number of shares of Target Common Stock issued and outstanding at the Effective Time; and

D   =                        the Common Stock Exchange Ratio.

(ii)           All shares of Target Common Stock when converted as provided in this Section 2.1(b), shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the Cash Consideration and the Stock Consideration (together, the “MERGER CONSIDERATION”) and any cash in lieu of fractional shares of Acquiror Common Stock to be issued or paid in consideration therefor upon the surrender of such certificate in accordance with Section 2.3, without interest.

(iii)          If, between the date of this Agreement and the Effective Time, the outstanding shares of Acquiror Common Stock shall have been changed into a different number of shares or a different class by reason of any reclassification, split-up, stock dividend or stock combination, then the Common Stock Exchange Ratio shall be correspondingly adjusted.

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2.2          Dissenting Shares

(a)           Notwithstanding any provision of this Agreement to the contrary, any shares of Target Common Stock held by a holder who has exercised such holder’s dissenters’ rights in accordance with Section 302A.473 of the Minnesota Law, and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters’ rights (“DISSENTING SHARES”), shall not be converted into or represent a right to receive the Merger Consideration pursuant to Section 2.1, but the holder of the Dissenting Shares shall only be entitled to such rights as are granted by Section 302A.473 of the Minnesota Law.

(b)           Notwithstanding the provisions of Section 2.2(a), if any holder of shares of Target Common Stock who asserts his dissenters’ rights with respect to such shares in accordance with Section 302A.473 of the Minnesota Law shall effectively withdraw or lose (through failure to perfect or otherwise) the right to receive payment for the fair market value of such shares under Minnesota Law, then, as of the later of the Effective Time or the occurrence of such event, such holder’s shares shall automatically be converted into and represent only the right to receive the Merger Consideration and payment for fractional shares as provided in Sections 2.1(b) and 2.5, without interest, upon surrender of the certificate or certificates representing such shares.

(c)           Target shall give Acquiror (i) prompt notice of any written demands for appraisal with respect to any shares of capital stock of Target pursuant to Section 302A.473 of the Minnesota Law, withdrawals of such demands, and any other instruments concerning appraisal served pursuant to the Minnesota Law and received by the Target and (ii) the opportunity to participate in all negotiations and proceedings with respect to dissenters’ rights under the Minnesota Law.  Target shall not, except with the prior written consent of Acquiror, voluntarily make any payment with respect to any dissenters’ rights with respect to Target Common Stock or offer to settle or settle any such demands.

2.3          Exchange of Certificates

(a)           From and after the Effective Time, each holder of an outstanding certificate or certificates (each a “CERTIFICATE,” and, collectively the “CERTIFICATES”) which represented shares of Target Common Stock immediately prior to the Effective Time shall have the right to surrender each Certificate to Acquiror and, except as provided in Section 2.3(b) and Section 2.3(c), receive promptly in exchange for all Certificates surrendered by such holder the Merger Consideration into which the Target Common Stock evidenced by the Certificates so surrendered shall have been converted pursuant to the provisions of this Article 2.  The surrender

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of Certificates shall be accompanied by duly completed and executed Letters of Transmittal in such form as may be mutually agreed by Acquiror and Target.  Until surrendered, each outstanding Certificate which prior to the Effective Time represented shares of Target Common Stock shall be deemed for all corporate purposes after the Effective Time to evidence ownership of the Merger Consideration into which the shares of Target Common Stock have been converted but shall, subject to applicable dissenters’ rights under the Minnesota Law and Section 2.2, have no other rights.  Subject to dissenters’ rights under the Minnesota Law and Section 2.2, from and after the Effective Time, the holders of shares of Target Common Stock shall cease to have any rights in respect of such shares and their rights shall be solely in respect of the Merger Consideration into which such shares of Target Common Stock have been converted.  From and after the Effective Time, there shall be no further registration of transfers on the records of Target of shares of Target Common Stock outstanding immediately prior to the Effective Time.

(b)           Prior to the Closing, Acquiror shall deposit with Mellon Investor Services LLC, the escrow agent under the escrow agreement substantially in the form attached hereto as Exhibit C hereto (the “ESCROW AGREEMENT”), cash in the amount of One Million Two Hundred Eighty Three Thousand Five Hundred Fifty and 00/100 Dollars ($1,283,550.00) of the total Merger Consideration payable to holders of the outstanding shares of Target Common Stock at the Effective Time (the “ESCROW AMOUNT”).  The Escrow Amount will represent an aggregate of approximately five percent (5%) of the Merger Consideration otherwise payable to each holder of Target Common Stock.

(c)           At the Closing, Acquiror shall hold back from the Merger Consideration payable at Closing an amount in cash equal to One Hundred Thirty Six Thousand Seven Hundred Ten and 00/100 Dollars ($136,710.00) (the “HOLDBACK AMOUNT”).  The Holdback Amount shall be payable to the holders of Certificates in accordance with Article 9 hereof.

(d)           If any shares of Acquiror Common Stock are to be issued in the name of a person other than the person in whose name the Certificate(s) surrendered in exchange therefor is registered, it shall be a condition to the issuance of such shares that (i) the Certificate(s) so surrendered shall be transferable, and shall be properly assigned, endorsed or accompanied by appropriate stock powers, (ii) such transfer is permitted by applicable law and (iii) the person requesting such transfer shall pay Acquiror, or its exchange agent, any transfer or other taxes payable by reason of the foregoing or establish to the satisfaction of Acquiror that such taxes have been paid or are not required to be paid.

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(e)           In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed, Acquiror shall deliver in exchange for such lost, stolen or destroyed Certificate the Merger Consideration pursuant to the provisions of this Article 2.  The Board of Directors of Acquiror may in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificate to provide to Acquiror an indemnity agreement against any claim that may be made against Acquiror with respect to the Certificate alleged to have been lost, stolen or destroyed.

(f)            Neither Acquiror nor Target shall be liable to a holder of shares of Target Common Stock for the Merger Consideration payable to such holder pursuant to the provisions of this Article 2 that is delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.

2.4          Distributions with Respect to Unexchanged Shares

No dividends or other distributions declared or made after the Effective Time with respect to Acquiror Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Acquiror Common Stock represented thereby and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.5 below until the holder of record of such Certificate shall surrender such Certificate or applicable documents in lieu thereof pursuant to Section 2.3(e).  Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Acquiror Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of Acquiror Common Stock to which such holder is entitled pursuant to Section 2.5 below and the amount of dividends or other distributions with a record date after the Effective Time previously paid with respect to such whole shares of Acquiror Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender, and a payment date subsequent to surrender, payable with respect to such whole shares of Acquiror Common Stock.

2.5          No Fractional Shares

No fractional shares of Acquiror Common Stock shall be issued in the Merger.  In lieu of the issuance of any such fractional shares, Acquiror shall pay to each holder of shares of Target

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Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of Acquiror Common Stock (after taking into account all Certificates delivered by such holder) an amount in cash (rounded to the nearest whole cent and without interest) determined by multiplying (i) the fraction of a share of Acquiror Common Stock which such holder would otherwise be entitled to receive by (ii) the Closing Stock Price.

2.6          Tax Consequences

The Merger is intended to qualify as a reorganization within the meaning of the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”).  The parties hereto hereby adopt this Agreement as a “plan of reorganization” within the meaning of Section 1.368-2(g) of the United States Treasury Regulations. Each of Target, Sub and Acquiror shall report the Merger as a reorganization within the meaning of Section 368(a) of the Code. However, Acquiror makes no representations or warranties to Target or to any shareholder of Target regarding the tax treatment of the Merger, or any of the Tax consequences to Target or any shareholder of Target relating to the Merger, this Agreement, or any of the other transactions or agreements contemplated hereby. Target acknowledges that it and its shareholders are relying solely on their own tax advisors in connection with the Merger, this Agreement and the other transactions and agreements contemplated hereby.  Target makes no representations or warranties to Acquiror, for itself or on behalf of any shareholder of Target, regarding the tax treatment of the Merger, or any of the Tax consequences to Acquiror relating to the Merger, this Agreement, or any of the other transactions or agreements contemplated hereby. Acquiror acknowledges that it is relying solely on its own tax advisors in connection with the Merger, this Agreement and the other transactions and agreements contemplated hereby.

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF TARGET

3.1          Making of Representations and Warranties

As a material inducement to Acquiror and Sub to enter into this Agreement and consummate the transactions contemplated hereby, Target represents and warrants to Acquiror and Sub, except as disclosed in the disclosure schedule delivered to Acquiror pursuant to this Agreement (the “TARGET DISCLOSURE SCHEDULE”), arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article 3, as follows:

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3.2          Organization and Corporate Power

Target is a corporation duly organized, validly existing and in good standing under the laws of Minnesota, and has all requisite corporate power to own, lease and operate its property and to carry on its business as now being conducted, and is duly qualified or registered to do business as a foreign corporation (a) in each jurisdiction listed in Section 3.2 of the Target Disclosure Schedule and (b) in each jurisdiction in which the failure to be so qualified or registered would reasonably be expected to result in a material adverse effect on the business as presently conducted, assets (including intangible assets), liabilities, financial condition, property, or results of operations of Target taken as a whole (a “TARGET MATERIAL ADVERSE EFFECT”).  The copies of the articles of incorporation and bylaws (“ARTICLES OF INCORPORATION” and “BYLAWS,” respectively) of Target, as amended to date, which have been furnished to counsel for Acquiror by Target, are correct and complete at the date hereof.

3.3          Corporate Records

The corporate record books of Target accurately record all corporate action taken by its shareholders and board of directors and committees.  The copies of the corporate records of Target, as made available to Acquiror for review, are true and complete copies of the originals of such documents.

3.4          Authorization and Non-Contravention; Required Filings and Consents

(a)           Target has all requisite corporate power and authority to enter into this Agreement and the other documents and agreements executed or required to be executed by or on behalf of Target or the Target Shareholders pursuant hereto or contemplated hereby (collectively, the “TRANSACTION DOCUMENTS”) and subject to approval by the Shareholders pursuant to the MBCA to consummate the transactions contemplated by this Agreement and such Transaction Documents.  The execution and delivery of this Agreement and such Transaction Documents and the consummation of the transactions contemplated by this Agreement and such Transaction Documents have been duly authorized by all necessary corporate action on the part of Target.  This Agreement has been and such Transaction Documents have been or, to the extent not executed as of the date hereof, will be duly executed and delivered by Target.  This Agreement and each of the Transaction Documents to which Target is a party constitutes, and each of the Transaction Documents to which Target will become a party when executed and delivered by Target will constitute, the valid and binding obligation of Target, enforceable in accordance with its terms.

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(b)           The execution and delivery by Target of this Agreement and the Transaction Documents to which it is or will become a party does not, and consummation of the transactions contemplated by this Agreement or the Transaction Documents to which it is or will become a party will not, (i) conflict with, or result in any violation or breach of any provision of the Articles of Incorporation or Bylaws of Target, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit), or require any notice or consent by any party under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which Target is a party or by which it or any of its properties or assets may be bound, except as disclosed in Section 3.4 of the Target Disclosure Schedules, or (iii) conflict with or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Target or any of its properties or assets.

(c)           No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental entity is required by or with respect to Target in connection with the execution and delivery of this Agreement or the Transaction Documents to which it is or will become a party or the consummation of the transactions contemplated hereby or thereby, except for (i) the filing of the Articles of Merger with the Minnesota Secretary of State, and (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and the laws of any foreign country.

3.5          Capitalization

As of the date hereof and as of the Closing Date, the authorized capital stock of Target consists and will consist only of 10,000,000 shares of Target Common Stock of which 1,071,307 shares are and will be issued and outstanding.  Target has not issued or agreed to issue nor is it obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into such shares or any warrants, options or other rights to acquire any such convertible securities.  The issued and outstanding shares of Target Common Stock are held of record by the shareholders of Target as set forth and identified in the shareholder list attached as Section 3.5 to the Target Disclosure Schedule.  As of the date hereof, all of the outstanding shares of capital stock of Target have been duly and validly authorized and issued and are fully paid and nonassessable and have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws and are not subject to any preemptive rights.  There are no preemptive rights, rights of first refusal, put or call rights or obligations, or anti-dilution rights with respect to the issuance, sale or redemption of Target’s

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capital stock, nor are there any obligations to repurchase, redeem or otherwise acquire any shares of Target’s capital stock.  Except as set forth in Section 3.5 of the Target Disclosure Schedule, there are no rights to have Target’s capital stock registered for sale to the public in connection with the laws of any jurisdiction, and there are no agreements relating to the voting of Target’s voting securities and no restrictions on the transfer of Target’s capital stock.

3.6          Target Subsidiaries; Investments

Target has no direct or indirect subsidiaries.  Except as set forth on Section 3.6 of the Target Disclosure Schedule, Target does not own or have any direct or indirect equity interest in or Control over any corporation, partnership, joint venture or other entity of any kind.  The term “CONTROL” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.  As used in this Agreement, the term “PERSON” shall mean an individual, a corporation, an association, a partnership, an estate, a trust or any other entity or organization.

3.7          Financial Statements

Section 3.7 of the Target Disclosure Schedule includes the following financial statements and schedules of Target, all of which statements (including the footnotes and schedules thereto) were prepared in accordance with generally accepted accounting principles (“GAAP”) consistently applied during the periods covered thereby (subject, in the case of unaudited financial statements, to normal year-end adjustments, the absence of footnotes and other disclosure associated with an audited report) and fairly present in all material respects the financial condition of Target on the dates of such statements and the results of its operations and their cash flows for the periods covered thereby: (a) audited balance sheet of Target as of December 31, 2006 and the related statements of income, retained earnings and cash flow for the fiscal year then ended, in each case certified by the independent certified public accountants of Target, (b) an unaudited balance sheet of Target as of February 28, 2007 (the “MOST RECENT BALANCE SHEET”) and related statements of income, retained earnings and cash flow for the two (2) month period then ended, certified by Target’s Chief Financial Officer, (c) complete and correct copies of all attorneys’ responses to audit inquiry letters and all management letters from Target’s independent certified public accountants, and (d) complete and correct copies of all management representation letters provided by Target to its independent certified public accountants.  Nothing has come to the attention of the management of Target since such

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respective dates which would indicate that such financial statements and schedules were not true and correct in all material respects as of the date thereof.

3.8          Absence of Undisclosed Liabilities

(a)           As of the date of the Most Recent Balance Sheet, Target did not have any liability of any nature, whether accrued, absolute, contingent or otherwise, asserted or unasserted, known or unknown (including without limitation, liabilities as guarantor or otherwise with respect to obligations of others, or liabilities for taxes due or then accrued or to become due or contingent or potential liabilities relating to activities of Target or the conduct of its business prior to the date of the Most Recent Balance Sheet regardless of whether claims in respect thereof had been asserted as of such date), except the liabilities (i) stated or specifically adequately reserved against on the Most Recent Balance Sheet, (ii) reflected in Section 3.8 of the Target Disclosure Schedule, or (iii) immaterial liabilities incurred in the ordinary course of business of Target which are not required to be reflected in the Most Recent Balance Sheet or the notes thereto under GAAP.

(b)           As of the Closing Date, Target will not have any liabilities of any nature, whether accrued, absolute, contingent or otherwise, asserted or unasserted, known or unknown (including without limitation, liabilities as guarantor or otherwise with respect to obligations of others, or liabilities for taxes due or then accrued or to become due or contingent or potential liabilities relating to activities of Target or the conduct of its business prior to the date hereof or the Closing, as the case may be, regardless of whether claims in respect thereof had been asserted as of such date), except liabilities (i) stated or adequately reserved against on the Most Recent Balance Sheet or the notes thereto, (ii) reflected in Section 3.8 of the Target Disclosure Schedule, (iii) incurred in the ordinary course of business of Target consistent with the terms of this Agreement or (iv) which would not be required to be disclosed by Target on a balance sheet prepared as of the Closing Date under GAAP.  Without limiting the foregoing, as of the date of the Closing Date Balance Sheet and the Closing Date, Target shall have no indebtedness other than accounts payable reflected on the Closing Date Balance Sheet.

3.9          Absence of Certain Developments

Since December 31, 2006 Target has conducted its business only in the ordinary course consistent with past practice and, except as otherwise set forth in Section 3.9 of the Target Disclosure Schedule, there has not been:

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(a)           any material change in the financial condition, properties, assets, liabilities, business or operations of Target;

(b)           any material contingent liability incurred by Target as guarantor or otherwise with respect to the obligations of others or any cancellation of any material debt or claim owing to, or waiver of any material right of, Target.

(c)           any material mortgage, encumbrance or lien placed on any of the properties of Target which remains in existence on the date hereof or will remain on the Closing Date;

(d)           any material obligation or liability of any nature, whether accrued, absolute, contingent or otherwise, asserted or unasserted, incurred by Target other than obligations and liabilities incurred in the ordinary course of business and not prohibited by the terms of this Agreement;

(e)           any purchase, sale or other disposition, or any agreement or other arrangement for the purchase, sale or other disposition, of any of the material properties or assets of Target other than in the ordinary course of business or as contemplated by this Agreement;

(f)            any material damage, destruction or loss of Target properties or assets, whether or not covered by insurance;

(g)           any declaration, setting aside or payment of any dividend by Target or the making of any other distribution in respect of the capital stock of Target or any direct or indirect redemption, purchase or other acquisition by Target of its own capital stock;

(h)           any material labor trouble or material claim of unfair labor practices involving Target; any material change in the compensation payable or to become payable by Target to any of its officers or employees other than normal merit increases in accordance with its usual practices, or any bonus payment or arrangement made to or with any of such officers or employees;

(i)            any material change with respect to the officers of Target;

(j)            any payment or discharge of a material lien or liability of Target which was not shown on the Most Recent Balance Sheet or incurred in the ordinary course of business thereafter;

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(k)           any obligation or liability incurred by Target to any of its officers, directors, shareholders or employees, including any material increases in compensation, or any loans or advances made by Target to any of its officers, directors, shareholders or employees, except normal compensation and expense allowances payable to directors, officers or employees;

(l)            any change in accounting methods or practices of Target;

(m)          any other material transaction entered into by Target other than transactions in the ordinary course of business; or

(n)           any agreement or understanding whether in writing or otherwise, for Target to take any of the actions specified in paragraphs (a) through (m) above.

3.10        Accounts Receivable and Inventories

(a)           Except to the extent reserved against in the Most Recent Balance Sheet, all of the accounts receivable of Target are valid and enforceable claims, Target has not received notice that such claims are subject to set-off or counterclaim, and such claims are, in the best judgment of Target, fully collectable in the normal course of business after deducting the allowance for doubtful accounts stated in the Most Recent Balance Sheet and adjusted since the date thereof in accordance with GAAP.  Target does not have any accounts receivable from any person which is an Affiliate (“AFFILIATE”) as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, of any of its directors, officers, employees, or stockholders except as set forth in Section 3.10 of the Target Disclosure Schedule.

(b)           The inventories of Target at February 28, 2007 are shown on the Most Recent Balance Sheet.  Such inventories and the inventories acquired by Target subsequent to the date of such balance sheet consist of items of a quality and quantity usable and salable in the normal course of its business over a period of not more than one year from the date of this Agreement, subject to recorded reserves reflected on the Most Recent Balance Sheet.  The values of obsolete materials and materials below standard quality as they relate to the business as currently conducted have been written down on its books of account to realizable market value, or adequate reserves have been provided therefore in accordance with GAAP.  All items included in such inventories are owned by Target, except for sales made subsequent to the date of such balance sheet in the ordinary course of business, for all of which either the purchaser has made full payment or the purchaser is obligated to make payment and such obligation is an asset of Target in accordance with GAAP.  All inventories of raw materials and finished goods are

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carried on the Most Recent Balance Sheet and are carried on the books of Target in accordance with the “standard cost” method.

3.11        Distributions to Shareholders; Transactions with Affiliates

(a)           All distributions, dividends and other payments made by Target to the Target Shareholders during the calendar years 2004, 2005, 2006 and 2007 to date are described in Section 3.11 of the Target Disclosure Schedule, including the date, amount, recipient and purpose of each such distribution, dividend or payment.

(b)           Except as set forth in Section 3.11 of the Target Disclosure Schedule, there are no material loans, leases or other continuing transactions (other than ordinary compensation payments) between Target and any present or former shareholder, director or officer of Target, or any member of such officer’s, director’s or shareholder’s immediate family, or any person controlled by such officer, director or shareholder or his or her immediate family.  Except as set forth in Section 3.11 of the Target Disclosure Schedule, no shareholder, director or officer of Target, any of their respective spouses or family members, owns directly or indirectly on an individual or joint basis any material interest in, or serves as an officer or director or in another similar capacity of, any material competitor or supplier of Target, or any organization which has a material contract or arrangement with Target.

3.12        Title to Assets

Except as set forth in Section 3.12 of the Target Disclosure Schedule:

(a)           Target owns, free and clear of all liens, restrictions and encumbrances, and has good, valid and marketable title to all assets purported to be owned by it, including all assets reflected on the Most Recent Balance Sheet.

(b)           Section 3.12 of the Target Disclosure Schedule identifies all equipment, furniture, and other tangible assets with an original cost greater than $10,000 owned by Target.  Each asset identified in Section 3.12 of the Target Disclosure Schedule is free of material defects and deficiencies and in good condition and repair consistent with its age and intended use (ordinary wear and tear excepted), and has been maintained consistent with commercially reasonable maintenance schedules.

(c)           Section 3.12 of the Target Disclosure Schedule identifies all assets that are being leased or licensed to Target.  All of the assets listed in Section 3.12 of the Target Disclosure

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Schedule are in all material respects in good operating condition and useable in the ordinary course of business (ordinary wear and tear excepted).  All leases pursuant to which Target leases real or personal property are valid and effective in accordance with their respective terms and there exists no default thereunder or condition that could result in a default thereunder or termination thereof.

(d)           The assets and properties owned or leased by Target (i) constitute all the assets and properties currently used by Target in its business (except for dispositions made in the ordinary course of business), (ii) constitute all of the properties and assets necessary for Target to conduct its business in the manner in which it is currently being conducted and is currently proposed to be conducted by Target, and (iii) are sufficient for the operation of its business on a basis consistent with past practices.

3.13        Intellectual Property

(a)           Section 3.13(a) of the Target Disclosure Schedule contains an accurate and complete list of all patents, patent applications, registered and material unregistered trademarks and registered copyrights owned by or registered in the name of Target, specifying any jurisdiction that has issued a registration with respect thereto or in which an application for such a registration is pending, and any applicable registration or application number.  Section 3.13(a) of the Target Disclosure Schedule contains an accurate and complete list of all licenses, sublicenses, and other agreements as to which Target is a party and pursuant to which any person other than Target is authorized to use any Intellectual Property Rights owned by Target.  Section 3.13(a) of the Target Disclosure Schedule contains an accurate and complete list of all licenses, sublicenses, and other agreements as to which Target is a party and pursuant to which Target is authorized to use any Intellectual Property Rights owned by any third party other than end-user licenses granted to Target relating to “off the shelf” personal computer software that is generally available on commercially reasonable terms from persons that are unaffiliated with Target and that is not incorporated into any product marketed, sold, or licensed by, or used in the provision of any service provided by Target.

(b)           Target collectively owns or has the right to use all Intellectual Property Rights that are used in the conduct of the business of Target as presently conducted (“TARGET INTELLECTUAL PROPERTY ASSETS”).  Such ownership and right to use are (and upon Closing, will be) free and clear of, and without liability under, all liens and security interests of any person.  Except for the breaches and events described in Section 3.13(b) of the Target Disclosure Schedule, no party to any license, sublicense, or agreement listed in Section 3.13 of

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the Target Disclosure Schedule is (or upon Closing, will be) in breach or default and no event has occurred (or, upon Closing, will occur) which with notice or lapse of time would constitute a breach or default or permit termination, modification or acceleration thereunder.  Except for licenses listed in Section 3.13(b) of the Target Disclosure Schedule as royalty-bearing, there are (and upon Closing, will be) no royalties, honoraria, fees, or other payments payable by Target to any person by reason of the ownership, use, license, sale, or disposition of any Target Intellectual Property Asset.

(c)           To Target’s Knowledge, neither the Target Intellectual Property Assets, nor the conduct of Target’s business as presently conducted by Target uses or discloses in an