AGREEMENT AND PLAN OF MERGER

 

 

 

                          AGREEMENT AND PLAN OF MERGER

 

                                      AMONG

 

                    CONVERSION SERVICES INTERNATIONAL, INC.,

 

                             A DELAWARE CORPORATION,

 

                           MCKNIGHT ASSOCIATES, INC.,

 

                             A DELAWARE CORPORATION,

 

                           MCKNIGHT ASSOCIATES, INC.,

 

                              A TEXAS CORPORATION,

 

                                       AND

 

                                WILLIAM MCKNIGHT

 

                            DATED AS OF JULY 22, 2005

 

 

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                          AGREEMENT AND PLAN OF MERGER

 

            AGREEMENT   AND   PLAN OF   MERGER,   dated as of July   22,   2005   (this

"Merger Agreement"),   among Conversion Services International,   Inc., a Delaware

corporation   ("CSI"),   McKnight   Associates,   Inc., a Delaware corporation and a

wholly owned   subsidiary of CSI ("Merger   Sub"),   McKnight   Associates,   Inc., a

Texas corporation ("MAI") and William McKnight (the "Stockholder").

 

            WHEREAS,   the Boards of   Directors   of CSI,   Merger Sub and MAI have

each approved the merger of MAI with and into Merger Sub (the "Merger") upon the

terms and subject to the   conditions   of this Merger   Agreement,   thus   enabling

Merger Sub to acquire all of the common   stock of MAI in   exchange   for cash and

CSI's common stock, par value $0.001 ("CSI Common Stock");

 

            WHEREAS,   the   Stockholder   has approved the Merger and the terms of

this Merger Agreement; and

 

            WHEREAS,   CSI,   Merger Sub, MAI and the   Stockholder   desire to make

certain representations, warranties, covenants and agreements in connection with

the Merger and also to prescribe various conditions to the Merger.

 

            NOW,    THEREFORE,    in    consideration   of   the   foregoing   and   the

representations,   warranties,   covenants and agreements   herein   contained,   the

parties agree as follows:

 

                                    ARTICLE I

                                   THE MERGER

 

Section 1.01       The Merger; Effective Time of the Merger.

 

      Upon the terms and   conditions of this Merger   Agreement and in accordance

with the Delaware   General   Corporation   Law (the "DGCL") and the Texas Business

Corporation   Act   ("TBCA"),   MAI shall be merged with and into Merger Sub at the

Effective   Time (as   hereinafter   defined).   The Merger shall   become   effective

immediately   when the   certificates   of merger (the   "Certificates   of Merger"),

prepared and executed in accordance with the relevant provisions of the DGCL and

TBCA, as   applicable,   is duly filed with the Secretary of State of the State of

Delaware   and the   Secretary   of State of the State of Texas (or other   relevant

secretaries   of state,   as necessary)   or, if agreed to by the parties,   at such

time   thereafter as is provided in the   Certificates   of Merger (the   "Effective

Time").   The   filing   of the   Certificates   of   Merger   shall be made as soon as

practicable after the closing of the Merger (the "Closing").

 

 

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Section 1.02       Closing.

 

      The Closing shall take place at on a date and at a time to be specified by

the   parties,   which   shall   be no later   than   the   fifth   business   day   after

satisfaction (or waiver in accordance with this Merger   Agreement) of the latest

to occur of the conditions set forth in Article VI (the "Closing Date"),   at the

offices of CSI, unless another date, time or place is agreed to by the parties.

 

Section 1.03       Merger Consideration.

 

      (a)   Subject to   adjustments   set forth in   Sections   1.03(b)   and 1.03(c)

below, the aggregate   consideration to be paid to the Stockholder   shall consist

of cash and CSI common stock with an aggregate value of approximately $2,250,000

(the   "Consideration"),   consisting of: (i) at Closing,   the   Stockholder   shall

receive   cash of   $500,000   and   $1,500,000   of CSI Common   Stock,   based on the

closing   price of the CSI Common   Stock on the national   securities   exchange or

automated   quotation   system   upon   which   shares of CSI   Common   Stock are then

listed; and (ii) within 60 days of the six (6) month anniversary of the Closing,

the Stockholder shall receive additional cash of $250,000, (the "Additional Cash

Sum")   such   additional   payment   being   absolute   and not being   based upon any

performance   requirements or other   conditions of any kind,   except   Stockholder

shall not be entitled to such Additional Cash Sum if he resigns prior to the six

(6) month   anniversary   of the   Closing   Date in the   absence of a breach by CSI

and/or Merger Sub. CSI and Merger Sub   acknowledge and agree that the Additional

Cash Sum simply   represents the remainder of the   Consideration   paid to acquire

MAI.

 

            (i) As of the   Closing   Date,   Stockholder   will   have the   right to

retain all cash and funds   contained in, and retain   possession of, the MAI bank

account(s),   as such cash balances and bank   account(s) are disclosed on Section

1.03(a)(i) to the MAI Disclosure Letter. These funds shall be in addition to the

cash   provided   as part of the   Consideration,   as set forth in Section   1.03(a)

above;

 

            (ii) MAI agrees that as of the   Closing   Date,   the working   capital

(current   assets less current   liabilities) of MAI shall equal $150,000 as shown

on the Current Balance Sheet (as defined below).   As of the Closing Date,   minus

the working capital of $150,000, Stockholder will have the right to all accounts

receivable   and invoices for services   provided by MAI through the Closing Date,

as such receivables and invoices are disclosed on Section 1.03(a)(ii) to the MAI

Disclosure Letter. CSI shall pay Stockholder an additional   $172,000 by Tuesday,

July 26, 2005.   Likewise,   any work   performed by MAI after the Closing Date, as

reflected in appropriate   invoices,   shall be for the benefit of CSI, Merger Sub

or an   affiliate,   and   Stockholder   shall   not have any   claim or right to such

funds. If Stockholder is paid directly or otherwise collects funds for such work

performed after the Closing Date, Stockholder will remit such promptly to CSI or

Merger Sub, as appropriate;

 

            (iii) As of the Closing Date,   CSI and/or Merger Sub agree agrees to

pay   the   liabilities   of   MAI   incurred   through   the   Closing   Date,   as   such

liabilities are disclosed on Section   1.02(a)(iii) to the MAI Disclosure Letter,

IN addition,   CSI or Merger Sub will pay the   liabilities   of MAI incurred after

the Closing Date;

 

            (iv) CSI and Merger Sub agree that MAI does not own any hard assets,

furniture,   fixtures,   computers or   equipment,   with any such items being owned

personally by Stockholder, thus being excluded from this Agreement.

 

 

<PAGE>

 

 

Section 1.04       Effects of the Merger.

 

      (a) At the   Effective   Time:   (i) MAI shall be merged with and into Merger

Sub, the separate   existence of MAI shall cease and Merger Sub shall continue as

the surviving   corporation   (Merger Sub and MAI are sometimes referred to herein

as the "Constituent Corporations" and Merger Sub is sometimes referred to herein

as the   "Surviving   Corporation")   and the merger shall have such effects as are

set forth in the DGCL and TBCA; (ii) the Certificate of   Incorporation of Merger

Sub   as in   effect   immediately   prior   to   the   Effective   Time   shall   be   the

Certificate of Incorporation of the Surviving Corporation;   and (iii) the Bylaws

of Merger Sub as in effect   immediately prior to the Effective Time shall be the

Bylaws of the Surviving Corporation.

 

      (b) The directors and officers of Merger Sub at the Effective   Time shall,

from and   after   the   Effective   Time,   be the   directors   and   officers   of the

Surviving   Corporation   and shall serve until   their   successors   have been duly

elected or appointed and qualified or until their earlier death,   resignation or

removal   in   accordance    with   the   Surviving    Corporation's    Certificate   of

Incorporation and Bylaws.

 

      (c) For federal income tax purposes,   it is intended that the Merger shall

qualify as a reorganization within the meaning of Section 368(a) of the Internal

Revenue Code.

 

 

                                    ARTICLE II

                    EFFECT OF THE MERGER ON THE CAPITAL STOCK

                        OF THE CONSTITUENT CORPORATIONS;

                        EXCHANGE OF MERGER CONSIDERATION

 

Section 2.01       Effect on Capital Stock.

 

      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, no par value, of MAI ("MAI

Common Stock"), the Consideration paid or issued in accordance with the terms of

this Merger   Agreement   shall be deemed to have been issued,   or shall have been

reserved   for   issuance,   as   applicable,   in full   satisfaction   of all   rights

pertaining to MAI Common Stock.   At the Effective Time, each share of MAI Common

Stock owned prior to the Effective Time 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   its   portion   of   the

Consideration.

 

      If,   subsequent   to the date of this   Merger   Agreement   but   prior to the

Effective   Time, the number of shares of CSI Common Stock issued and outstanding

is changed as a result of a stock split, reverse stock split,   recapitalization,

reclassification   or other similar   transaction,   the CSI Common Stock and other

items dependent thereon shall be appropriately and equitably adjusted herein.

 

 

<PAGE>

 

 

Section 2.02       Exchange of Certificates for Merger Consideration.

 

      (a) Exchange   Procedures.   Upon surrender of a certificate or certificates

which,   immediately prior to the Effective Time, represented all the outstanding

shares of MAI Common Stock (the   "Certificates")   for   cancellation to CSI or to

such other agent or agents as may be appointed   by CSI,   and any other   required

documents, the holder of record of such Certificate shall be entitled to receive

in exchange therefor the portion of the Consideration   which such holder has the

right   to   receive,   and the   Certificate   so   surrendered   shall   forthwith   be

canceled.   In the event of a transfer of   ownership   of MAI Common Stock that is

not registered in the transfer records of MAI, the appropriate Consideration may

be issued to a transferee if the Certificate   representing such MAI Common Stock

is presented to CSI accompanied by all documents required to evidence and effect

such transfer and by evidence that any applicable stock transfer taxes have been

paid.   Until   surrendered as contemplated by this Section 2.02, each Certificate

shall be deemed at any time after the Effective Time to represent only the right

to receive upon such surrender the appropriate   Consideration as contemplated by

Section 2.02(b).

 

      (b) No Further   Ownership   Rights in MAI Common   Stock.   All shares of CSI

Common Stock issued in exchange for and upon the   conversion of MAI Common Stock

in accordance with the terms hereof (including any cash paid pursuant to Section

2.02(a) or 2.02(c)) shall be deemed to have been issued in full   satisfaction of

all rights pertaining to such shares of MAI Common Stock,   subject,   however, to

the rights   pertaining   to such shares of MAI Common   Stock with   respect to the

Consideration,    and   after   the   Effective   Time   there   shall   be   no   further

registration   of   transfers   on   the   stock   transfer   books   of   the   Surviving

Corporation of the shares of MAI Common Stock that 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 II.

 

      (c) No   Liability.   None of the   parties   shall be liable to any holder of

shares of MAI   Common   Stock or CSI Common   Stock,   as the case may be, for such

shares (or dividends or distributions with respect thereto) or cash delivered to

a public   official   pursuant to any applicable   abandoned   property,   escheat or

similar law.

 

 

                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

 

Section 3.01       Representations and Warranties of the Stockholder.

 

      Subject   to the   exceptions   set   forth   in the   disclosure   letter   to be

delivered by the   Stockholder to CSI and Merger Sub in connection   herewith (the

"MAI Disclosure   Letter"),   the   Stockholder   represents and warrants to CSI and

Merger Sub as follows:

 

      (a) Organization, Standing and Power.

 

            (i)   MAI or any of its   Subsidiary   is an   entity,   duly   organized,

validly   existing and in good   standing   under the laws of its   jurisdiction   of

organization,   has all requisite   power and authority to own,   lease and operate

 

 

<PAGE>

 

 

its   properties   and to carry on its   business   as now being   conducted,   and to

stockholders knowledge, is duly qualified and in good standing to do business in

each   jurisdiction   in which the business it is   conducting,   or the   operation,

ownership   or leasing of its   properties,   makes such   qualification   necessary,

other than where the failure to be so organized   or so to qualify   (individually

or in the aggregate)   would not have a Material   Adverse Effect (as   hereinafter

defined) on MAI. To   Stockholders   Knowledge MAI is not required to be qualified

in any state or   jurisdiction in order to conduct the operation of its business.

Stockholder is the sole   stockholder   of MAI Common Stock.   MAI has delivered to

CSI complete and correct copies of its Certificate of Incorporation   and Bylaws.

Section   3.01(a)   of the MAI   Disclosure   Letter   sets   forth   each   direct,   or

indirect,   Subsidiary   of MAI   and   its   jurisdiction   of   organization   and the

jurisdictions where it is qualified to do business.

 

            (ii) As used in this Merger Agreement,   the word "Subsidiary" means,

with   respect to any   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 that 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   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 any one or more of its

Subsidiaries.

 

            (iii) As used in this Merger Agreement,   a "Material Adverse Effect"

shall mean any effect or change   that is or would be   materially   adverse to the

business,   operations,   assets, condition (financial or otherwise) or results of

operations   of   (i)   in   respect   of   MAI,   MAI   and   its   direct   and   indirect

Subsidiaries,   taken as a whole,   and (ii) in respect of CSI, CSI and all of its

direct and indirect Subsidiaries, taken as a whole.

 

            (iv) As used in this   Merger   Agreement,   "Knowledge"   means   actual

knowledge or items that one should   reasonably   have   knowledge of,   without any

independent investigation.

 

      (b) Capital Structure.

 

            (i) Section   3.01(b)(i) of the MAI Disclosure   Letter sets forth the

authorized,   issued and outstanding   capital stock or other equity   interests of

MAI and each of its Subsidiaries as well as any other securities (including debt

securities) of MAI or its respective   Subsidiaries.   All   outstanding   shares of

capital stock of MAI and its Subsidiaries   have been duly authorized and validly

issued and are fully paid and non-assessable and were not issued in violation of

any preemptive rights or other   preferential   rights of subscription or purchase

other than those that have been waived or otherwise   cured or satisfied   and all

such shares   owned by MAI, or a direct or indirect   wholly owned   Subsidiary   of

MAI, are free and clear of all liens, charges, encumbrances,   claims and options

of any nature.

 

            (ii) Section   3.01(b)(ii) of the MAI Disclosure   Letter sets forth a

list of all   options,   warrants,   convertible   securities,   rights,   commitments

(including   pre-emptive   rights) or agreements to which MAI or any Subsidiary of

MAI is bound to issue, deliver, sell, purchase, redeem or acquire or cause to be

issued, delivered,   sold, purchased,   redeemed or acquired, shares of MAI Common

Stock,   capital stock of an MAI Subsidiary or any other securities of MAI or its

Subsidiaries.

 

 

<PAGE>

 

 

            (iii) There are not as of the date hereof,   and there will not be at

the   Effective   Time,   any   stockholder   agreements,    voting   trusts   or   other

agreements or   understandings   to which MAI or the Stockholder are a party or by

which it is bound   relating to the voting of any shares of the capital   stock of

MAI or any of its   Subsidiaries.   There are no   restrictions   on MAI to vote the

capital stock of any of its Subsidiaries.

 

       (c) Authority; No Violations; Consents and Approvals.

 

            (i) The Board of   Directors   of MAI has approved the Merger and this

Merger   Agreement,   by vote of the   directors   with no   negative   vote,   and has

resolved to deem this Merger Agreement and the transactions contemplated hereby,

including the Merger,   advisable and fair to, and in the best   interests of, MAI

and the   Stockholder.   MAI has all   requisite   corporate   power and authority to

enter into this Merger Agreement and to consummate the transactions contemplated

hereby.   The   execution   and delivery of this Merger   Agreement   and each of the

agreements required to be executed in connection   therewith and the consummation

of the transactions contemplated hereby and thereby have been duly authorized by

all necessary   corporate   action on the part of MAI.   This Merger   Agreement and

each of the agreements required to be executed in connection therewith have been

duly   executed   and   delivered   by MAI   and   constitutes   a   valid   and   binding

obligation of MAI   enforceable   in   accordance   with its terms,   subject,   as to

enforceability,   to   bankruptcy,   insolvency,   reorganization   and other laws of

general applicability   relating to or effecting creditors' rights and to general

principles   of equity   and   limitations   imposed   on   indemnity   obligations   by

applicable   federal and state securities laws. This Merger Agreement and each of

the   agreements   required to be executed in connection   therewith have been duly

executed and delivered by the   Stockholder   and   constitutes a valid and binding

obligation of the Stockholder enforceable in accordance with its terms, subject,

as to enforceability, to bankruptcy,   insolvency,   reorganization and other laws

of general   applicability   relating   to or   effecting   creditors'   rights and to

general principles of equity and limitations imposed on indemnity obligations by

applicable federal and state securities laws.

 

            (ii) The execution and delivery of this Merger Agreement by MAI does

not, and the   consummation by MAI of the   transactions   contemplated   hereby and

compliance with the provisions   hereof will not, conflict with, or result in any

violation   of, or   default   (with or without   notice or lapse of time,   or both)

under, or give rise to a right of   termination,   cancellation or acceleration of

any   obligation   or to the loss of a material   benefit   under,   or result in the

creation of any lien,   security interest,   charge or encumbrance upon any of the

properties   or assets   of MAI or any of its   respective   Subsidiaries   under any

provision   of (A) the   Certificate   of   Incorporation   or   Bylaws   of MAI or any

provision of the comparable   charter or   organizational   documents of any of its

Subsidiaries, (B) any loan or credit agreement, note, bond, mortgage, indenture,

lease or other agreement,   instrument, permit, concession,   franchise or license

applicable   to MAI or any of its   respective   Subsidiaries   or (C) any judgment,

order, decree, statute, law, ordinance,   rule or regulation applicable to MAI or

any of its   respective   Subsidiaries   or any   of its   respective   properties   or

assets,   other   than,   in the case of   clause   (B) or (C),   any such   conflicts,

violations, defaults, rights, liens, security interests, charges or encumbrances

that are set forth on Section 3.01(a)(ii) of the MAI Disclosure Letter.

 

 

<PAGE>

 

 

            (iii)   No   consent,    approval,    order   or   authorization    of,   or

registration,   declaration   or filing with, or permit from, any U.S. or non-U.S.

court,   administrative   agency or commission or other governmental   authority or

instrumentality (a "Governmental   Entity"),   is required by, or with respect to,

MAI or any of its respective   Subsidiaries   in connection with the execution and

delivery   of this   Merger   Agreement   by MAI or the   consummation   by MAI of the

transactions   contemplated   hereby,   as to which the   failure   to obtain or make

would have a Material   Adverse Effect on MAI,   except for: (A) the filing of the

Certificates of Merger;   or (B) such filings and approvals as may be required by

any applicable state   securities,   "blue sky" or takeover laws, or Environmental

Law.

 

      (d) Financial Statements. Attached hereto as Section 3.01(d)(i) to the MAI

Disclosure Letter is a copy of MAI's financial statements as of and for the year

ended   December 31, 2004 and   financial   statements   as of and for the six-month

period ended June 30, 2005 (the "MAI Financial   Statements").   The MAI Financial

Statements   were not prepared in accordance with generally   accepted   accounting

principles   ("GAAP").   However, the MAI Financial Statements already provided to

CSI fairly and accurately   present the financial   condition of MAI (subject,   in

the case of the unaudited   statements,   to normal   year-end   adjustments and the

absence of footnotes).

 

      (e) Absence of Certain   Changes or Events.   Except as   disclosed   in or as

reflected on the MAI Financial   Statements,   or except as   contemplated   by this

Merger   Agreement,   since May 30, 2005, there has not been: (i) any declaration,

setting aside or payment of any dividend or other distribution (whether in cash,

stock   or   property)   with   respect   to any of   MAI's   capital   stock;   (ii) any

amendment   of   any   term   of   any   outstanding   equity   security   of   MAI or any

Subsidiary; (iii) any repurchase,   redemption or other acquisition by MAI or any

Subsidiary of any outstanding shares of capital stock or other equity securities

of, or other ownership   interests in, MAI or any Subsidiary;   (iv) any change in

any method of accounting or accounting practice by MAI or any Subsidiary; or (v)

a Material Adverse Effect with respect to MAI.

 

 

<PAGE>

 

 

      (f) No   Undisclosed   Liabilities.   There are no   liabilities of MAI or any

Subsidiary   of any   kind   whatsoever,   whether   accrued,   contingent,   absolute,

determined,   determinable or otherwise,   other than: (i) liabilities   adequately

provided for on the Current Balance Sheet (as defined below) included in the MAI

Financial Statements; (ii) liabilities under this Merger Agreement; and (iii) as

disclosed on Section 3.01(f)(iii) to the MAI Disclosure Letter.

 

      (g) No Default.   Neither MAI nor any Subsidiary is in default or violation

(and no event   has   occurred   which,   with   notice or the lapse of time or both,

would   constitute a default or   violation),   nor is the execution of this Merger

Agreement a default or violation,   of any term, condition or provision of (i) in

the case of MAI or any Subsidiary,   their   respective   charters,   agreements and

bylaws, (ii) any note, bond, mortgage,   indenture,   license,   agreement or other

instrument   or   obligation   to which MAI or any   Subsidiary is now a party or by

which MAI or any Subsidiary or any of their respective   properties or assets may

be bound   or   (iii)   any   order,   writ,   injunction,   decree,   statute,   rule or

regulation applicable to MAI or any Subsidiary.

 

      (h) Compliance with Applicable Laws. MAI and any of its Subsidiaries   hold

all permits, licenses, variances,   exemptions,   orders, franchises and approvals

of   all   Governmental   Entities   necessary   for   the   lawful   conduct   of   their

respective   businesses   (the "MAI Permits") and are in compliance with the terms

of the MAI Permits that would not have a Material   Adverse   Effect on MAI or its

Subsidiaries.   To   Stockholder's   Knowledge,   MAI is qualified in all states and

jurisdictions   where required in order to conduct the operation of its business.

The businesses of MAI and its   Subsidiaries are not being conducted in violation

of any law, ordinance or regulation of any Governmental Entity. No investigation

or review by any Governmental Entity with respect to MAI and its Subsidiaries is

pending or threatened.

 

      (i) Litigation.   There is no (i) suit, action or proceeding pending or, to

Stockholder's    Knowledge,    threatened    against   or   affecting    MAI   and   its

Subsidiaries,   or   (ii)   judgment,   decree,   injunction,   rule or   order   of any

Governmental Entity or arbitrator outstanding against MAI and its Subsidiaries.

 

       (j) Taxes.

 

            (i) MAI is an "S   corporation"   as defined in the   Internal   Revenue

Code (the "Code"),   and MAI and Stockholder have not taken any action that would

change such status of MAI. MAI and its   Subsidiaries   and any   affiliate has (A)

timely   (taking into account any   extensions)   filed in correct form all federal

and all state, local and non-U.S.   returns,   declarations,   reports,   estimates,

information returns and statements   ("Returns")   required to be filed by or with

respect to it in respect of any Taxes (as hereinafter defined),   (B) timely paid

all Taxes that are due and payable (except for audit   adjustments that would not

have a Material   Adverse Effect on MAI and its   Subsidiaries in the aggregate or

to the extent that   liability   therefor is   reserved   for in MAI's most   recent,

regularly-prepared   balance   sheet   prepared as of June 30,   2005 (the   "Current

Balance   Sheet"))   for which MAI and its   Subsidiaries   may be   liable,   and (C)

complied   in all   respects   with all   applicable   laws,   rules   and   regulations

relating to the payment and   withholding of Taxes and has in all respects timely

withheld   from   employee   wages   and   paid   over   to   the   proper    governmental

authorities all amounts required to be so withheld and paid over.

 

 

<PAGE>

 

 

            (ii) 2004 is the last   taxable   period   through   which   the   federal

income   Tax   Returns   of MAI and its   Subsidiaries   have   been   examined   by the

Internal Revenue Service ("IRS") or otherwise closed. All deficiencies   asserted

as a result of such   examinations   and any examination by any applicable   state,

local or non-U.S.   taxing   authority have been paid, fully settled or adequately

provided for in the Current Balance Sheet. No federal,   state, local or non-U.S.

Tax   audits   or   other   administrative   proceedings   or   court   proceedings   are

presently   pending   with   regard to any Taxes for which MAI or its   Subsidiaries

would be   liable,   and no   deficiency   for any   such   Taxes   has been   proposed,

asserted   or   assessed   pursuant   to any such   examination   against   MAI and its

Subsidiaries   by any federal,   state,   local or non-U.S.   taxing   authority with

respect to any period.

 

            (iii) Neither MAI nor its   Subsidiaries   (A) has executed or entered

into (or prior to the close of   business   on the   Closing   Date will   execute or

enter into) with the IRS or any other   taxing   authority   (x) any   agreement   or

other   document   extending   or having   the   effect of   extending   the period for

assessments or collection of any Taxes for which MAI and its Subsidiaries   would

be liable or (y) a closing   agreement   pursuant to Section 7121 of the Code,   or

any predecessor   provision thereof or any similar   provision of state,   local or

non-U.S.   Tax law   that   relates   to the   assets   or   operations   of MAI and its

Subsidiaries, (B) has made a change in method of accounting for a taxable period

ending   on or   prior   to   the   Closing   Date,   or (C)   has   sold   assets   on the

installment method.

 

            (iv) There are no liens or security   interests   on any of the assets

of MAI and its Subsidiaries that arose in connection with any failure or alleged

failure to pay any Tax other than for Taxes which are not yet delinquent.

 

            (v) Neither MAI nor its Subsidiaries is a party to an agreement that

provides   for the   payment of any   amount   that would   constitute   a   "parachute

payment" within the meaning of Section 280G of the Code.

 

            (vi)   Neither MAI nor its   Subsidiaries   has made an election   under

Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply

to any disposition of a subsection (f) asset (as such term is defined in Section

341(f)(4) of the Code) owned by MAI and its Subsidiaries.

 

            (vii) Neither MAI nor its Subsidiaries is a party to, is bound by or

has any obligation under any tax sharing agreement,   tax indemnity   agreement or

similar agreement or arrangement.

 

            (viii) Neither MAI nor its   Subsidiaries has any liability for Taxes

under Treas.   Reg. ss.   1.1502-6,   or any similar   provision of state,   local or

non-U.S.   law,   except   for   Taxes of the   affiliated   group of which MAI is the

common parent corporation,   within the meaning of Section 1504(a)(1) of the Code

or any similar provision of state, local or non-U.S. law.

 

            (ix)   Neither   MAI   nor its   Subsidiaries   has   participated   in any

international boycott within the meaning of Section 999 of the Code.

 

            (x) Except as disclosed on Section   3.01(j)(x) to the MAI Disclosure

Letter,   neither MAI nor its Subsidiaries   has had a permanent   establishment in

any foreign country,   as defined in any applicable treaty or convention   between

the United States and such foreign country.

 

 

<PAGE>

 

 

            (xi) Neither MAI nor its   Subsidiaries has been a United States real

property holding corporation within the meaning of Section 897(c)(2) of the Code

during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

 

            For   purposes   of this   Merger   Agreement,   "Taxes"   shall   mean all

federal, state, local, non-U.S. and other taxes, charges, fees, levies, imposts,

duties,   licenses or other assessments,   together with any interest,   penalties,

additions to tax or additional amounts imposed by any taxing authority.

 

      (k) Employee Matters; ERISA.

 

            (i) Benefit Plans.   Section   3.01(k)(i) to the MAI Disclosure Letter

contains   a true and   complete   list and   description   of each of the   following

items: each employee benefit plan,   program or arrangement   covering any current

or former officer,   director,   employee or independent   contractor of MAI or its

Subsidiaries   or any   of   their   dependents   or   beneficiaries   (each,   an   "MAI

Beneficiary")   including, but not limited to, any "employee benefit plan" within

the meaning of Section 3(3) of the Employee   Retirement   Income   Security Act of

1974, as amended   ("ERISA"),   whether or not terminated or covered by ERISA,   if

MAI or its   Subsidiaries   could have   statutory or   contractual   liability   with

respect thereto on or after the date hereof. The items described above, together

with each management,   employment,   deferred compensation,   severance, change in

control,   bonus or other contract for personal services with or covering any MAI

Beneficiary,   whether or not terminated,   if MAI or its Subsidiaries   could have

statutory or   contractual   liability   with respect   thereto on or after the date

hereof, are referred to collectively herein as the "MAI Benefit Plans."

 

            (ii)   Contributions   and   Payments.    All   contributions   and   other

payments   required   to   have   been   made   by MAI or any   entity   required   to be

aggregated   therewith   pursuant to Code   Section 414 (an "MAI ERISA   Affiliate")

with   respect to any MAI   Benefit   Plan (or to any person   pursuant to the terms

thereof) have been or will be timely made and all such amounts   properly accrued

through   the   date of this   Merger   Agreement   have   been   reflected   in the MAI

Financial Statements.

 

            (iii)   Qualification;   Compliance.   Each MAI   Benefit   Plan   that is

intended to be   "qualified"   within the meaning of Code Section   401(a) has been

determined   by the IRS to be so   qualified   or the   applicable   remedial   period

applicable to the Plan will not have ended prior to the Effective   Time,   and no

event or condition   exists or has occurred that would   reasonably be expected to

result in the revocation or denial of any such determination   which would have a

Material   Adverse   Effect on MAI. With respect to each MAI Benefit Plan, MAI and

each MAI ERISA   Affiliate are in compliance   with, and each MAI Benefit Plan and

related source of benefit   payment is and has been operated in compliance   with,

all   applicable   laws,   rules and   regulations   governing   such plan or   source,

including,   without   limitation,   ERISA,   the   Code   and   applicable   local   law

(including   non-U.S.   law), except for violations that would not have a Material

Adverse   Effect on MAI.   No MAI Benefit   Plan is subject to any   ongoing   audit,

investigation or other   administrative   proceeding of the IRS, the Department of

Labor, or any other federal,   state or local governmental entity or is scheduled

to be subject to such an audit, investigation or proceeding.

 

 

<PAGE>

 

 

             (iv)    Liabilities.    With    respect   to   the   MAI   Benefit    Plans,

individually and in the aggregate, to Stockholder's   Knowledge,   there exists no

condition   or set of   circumstances   that   could   subject   MAI or any MAI   ERISA

Affiliate to any liability arising under the Code, ERISA or any other applicable

law (including,   without limitation,   any liability to or under any such plan or

to the Pension Benefit   Guaranty   Corporation   ("PBGC"),   or under any indemnity

agreement to which MAI or any MAI ERISA Affiliate is a party),   which liability,

excluding   liability for benefit claims,   funding obligations and PBGC insurance

premiums,   each payable in the ordinary   course,   would have a Material   Adverse

Effect on MAI. No claim,   action or litigation   has been made,   commenced or, to

Stockholder's   Knowledge,    threatened,    by   or   against   MAI   or   any   of   its

Subsidiaries   with   respect to any MAI Benefit   Plan (other than for benefits or

PBGC premiums payable in the ordinary course).

 

            (v) Retiree   Welfare   Plans.   No MAI Benefit Plan that is a "welfare

plan"   (within the meaning of ERISA   Section   3(1))   provides   benefits   for any

retired or former   employees   (other than as required   pursuant to ERISA Section

601).

 

            (vi)   Payments    Resulting    from   Merger.    The    consummation    or

announcement of any transaction   contemplated by this Merger   Agreement will not

(either   alone or upon the   occurrence   of any   additional   or   further   acts or

events)   result in (A) any   payment   (whether   of   severance   pay or   otherwise)

becoming due from MAI or any of its   Subsidiaries   to any MAI   Beneficiary or to

the   trustee   under any "rabbi   trust" or similar   arrangement,   (B) any benefit

under   any   MAI   Benefit   Plan   being   established   or   increased,   or   becoming

accelerated, vested or payable (except as provided in Section 2.01(g)(i)) or (C)

any payment that would not be deductible under Section 280G of the Code.

 

            (vii) Funded Status of Plans.   Each MAI Benefit Plan that is subject

to either the minimum   funding   requirements of ERISA Section 302 or to Title IV

of ERISA has assets that,   as of the date   hereof,   have a fair market value not

less than the present value of the accrued benefit   obligations   thereunder on a

termination basis, as of the date hereof, based on the actuarial methods, tables

and assumptions   utilized by such plan's   independent   actuary in preparing such

plan's most recently prepared actuarial   valuation report,   except to the extent

that applicable law would require the use of different actuarial   assumptions if

such   plan was to be   terminated   as of the date   hereof,   in which   case   those

different   assumptions shall apply for purposes of this representation.   MAI and

its Subsidiaries have no unfunded liabilities, as determined under local funding

requirements,   with   respect to any MAI Benefit   Plans that cover such   non-U.S.

employees.

 

            (viii)   Multiemployer   Plans.   No   MAI   Benefit   Plan   is   or   was a

"multiemployer   plan"   (within   the   meaning   of ERISA   Section   4001(a)(3)),   a

multiple employer plan described in Code Section 413(c), or a "multiple employer

welfare   arrangement"   (within the meaning of ERISA Section 3(40)).   Neither MAI

nor any MAI ERISA   Affiliate has been   obligated to contribute   to, or otherwise

has or has had any liability with respect to, any multiemployer   plan,   multiple

employer plan, or multiple employer welfare arrangement.

 

      (l)   Labor   Matters.   Except as set forth in   Section   3.01(l)   to the MAI

Disclosure Letter,

 

            (i)   neither   MAI nor   any of its   Subsidiaries   is a   party   to any

collective   bargaining agreement or other current labor agreement with any labor

union or   organization,   and there is no current   union   representation   dispute

involving employees of MAI or any of its Subsidiaries nor does MAI or any of its

respective   Subsidiaries   know   of any   activity   or   proceeding   of   any   labor

organization (or   representative   thereof) or employee group (or   representative

thereof) to organize any such employees;

 

 

<PAGE>

 

 

            (ii) there is no unfair labor practice   charge or grievance   arising

out of a collective   bargaining   agreement or other grievance   procedure against

MAI or any of its Subsidiaries pending or threatened;

 

            (iii) there is no   complaint,   lawsuit or proceeding in any forum by

or on behalf of any present or former employee,   any applicant for employment or

any classes of the foregoing   alleging breach of any express or implied contract

of employment,   any law or regulation   governing   employment or the   termination

thereof or other discriminatory, wrongful or tortious conduct in connection with

the employment   relationship   against MAI or any of its Subsidiaries   pending or

threatened;

 

            (iv) there is no strike, dispute, slowdown, work stoppage or lockout

pending or threatened against or involving MAI or any of its Subsidiaries;

 

            (v) To   Stockholder's   Knowledge,   MAI and its   Subsidiaries   are in

compliance   with   all   applicable   laws   respecting   employment   and   employment

practices,   terms   and   conditions   of   employment,   wages,   hours   of work   and

occupational   safety and health that otherwise would not have a Material Adverse

Effect on MAI or its subsidiaries; and

 

            (vi) There is no proceeding,   claim,   suit,   action or   governmental

investigation pending or, to Stockholder's   Knowledge,   threatened in respect to

which any current or former director,   officer,   employee or agent of MAI or any

of its Subsidiaries is or may be entitled to claim   indemnification   from MAI or

any of its Subsidiaries (A) pursuant to their respective charters, agreements or

bylaws, (B) as provided in any indemnification   agreement to which MAI or any of

its Subsidiaries is a par